Markets

[MTF]

Because share price and dividend yield have a similar inverse relationship. I think.

Ceteris paribus, yes a share price decrease means a larger dividend yield. But if the share price decrease reflects an expectation of lower future profits (the fundamental reason for share price changes, ex-market sentiment) because future dividends are related to future profits, future dividends will probably be smaller than previously expected. The yield might be stable, lower... maybe even higher.

But mostly its because bond prices have a strict mathematical relation to yields. Excluding defaults, you know the price of a bond at expiration with certainty. Current price is therefore only a function of yield. The larger part of future value in stocks is not the dividend flow.

 

[711]

Ceteris paribus, yes a share price decrease means a larger dividend yield. But if the share price decrease reflects an expectation of lower future profits (the fundamental reason for share price changes, ex-market sentiment) because future dividends are related to future profits, future dividends will probably be smaller than previously expected. The yield might be stable, lower... maybe even higher.

But mostly its because bond prices have a strict mathematical relation to yields. Excluding defaults, you know the price of a bond at expiration with certainty. Current price is therefore only a function of yield. The larger part of future value in stocks is not the dividend flow.

Thanks, I suppose it seems odder to someone like me who only holds bonds in funds, so doesn't see individual expiries.

 

[GloryHunter07]

Seeing as how there are bond traders and pros about, a quick question:

When bond prices fall the headline is always 'yields have risen', and never 'bond prices have fallen'.
But when stocks fall it's never 'dividend yields have risen', it's always 'stocks have fallen'.

Is this just to make it all a bit more mysterious than it is or have I cocked up again?

My simple explanation would be:

• Bonds are (generally) interest bearing investments so it makes sense to talk about yield to maturity
• You dont know the divi far in advance so you cant really talk about shares in the same way

 

[711]

My simple explanation would be:

• Bonds are (generally) interest bearing investments so it makes sense to talk about yield to maturity
• You dont know the divi far in advance so you cant really talk about shares in the same way

Thanks also.

 

[Jippy]

It depends on timing doesnt it. You read stories about fund managers who correctly called the dotcom bust, but were a year or so too early and ended up going bust because investors pulled their money out as all their peers were raking it in rising the bubble higher. So being right doesnt mean anything if you dont time it correctly. As the saying goes, the markets can be irrational for longer than most investors can stay solvent.

Yeah being early can crucify you too. Next to no-one can get directional and timing calls right though, too many variables, as you say.
A lot of people dine out for a career on getting one massive call right though, but even Buffett lost 50% the other year.

 

[100]

I think this is a daft question(I have little to no knowledge of the stock market, as you’re about to see), but the thing I’ve never understood with shares, crypto etc. - are there not points where you’re unable to find buyers or sellers? Assuming at points there is lots of people selling/buying - does one often not outweigh the other? Or is this what dictates the price?

 

[Adebesi]

I think this is a daft question(I have little to no knowledge of the stock market, as you’re about to see), but the thing I’ve never understood with shares, crypto etc. - are there not points where you’re unable to find buyers or sellers? Assuming at points there is lots of people selling/buying - does one often not outweigh the other? Or is this what dictates the price?

Exactly. The price is the point at which buyers and sellers balance. Ie if there are more sellers than buyers the price falls to the point at which buyers are enticed back in. If there are more buyers the price rises to the level at which people are tempted to sell.

 

[Cait Sith]

Closing at +570

Invested at the right time.

 

[MTF]

I think this is a daft question(I have little to no knowledge of the stock market, as you’re about to see), but the thing I’ve never understood with shares, crypto etc. - are there not points where you’re unable to find buyers or sellers? Assuming at points there is lots of people selling/buying - does one often not outweigh the other? Or is this what dictates the price?

That's why day-traders / high-volume traders / algo strategies, whilst they seem to provide no real value to society (they're not providing permanent capital to companies), provide value to fundamental investors and therefore the market. At a certain time of day you might, after enjoying owning Facebook shares for 4 years, decide you like the growth elsewhere. And you might even be a sizeable investor for whom there is no immediate buyer of your size. But the short-term strategies will provide you liquidity to get your sell done without pressuring the price too much.

On a simpler note, as @Adebesi said, the price moves to balance buyers and sellers. If you ever try to trade heavy volume in an illiquid stock, you'll see that your pressure as an enthusiastic buyer/seller can quickly move the price several percentage points. This is also why on certain news stocks or the market as a whole can move in seconds. That's when all the buyers or sellers that were willing to do business at a certain price quickly take away their bids/offers, whilst the opposite side of the trade quickly increase/lower their own bids/offers.

 

[Member 5225]

Fascinating

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[Raoul]

Fascinating

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If only people had a long term view. $10,000 in an index fund in the mid 60s would likely be worth a fortune today.

 

[Jippy]

If only people had a long term view. $10,000 in an index fund in the mid 60s would likely be worth a fortune today.

I'm a bit late with the news, but just reading about those Vix ETF blow ups. Up over 100% last year then wiped out in a single night! That's like crypto!

https://www.ft.com/content/ccd278c6-0af5-11e8-8eb7-42f857ea9f09

 

[11101]

I'm a bit late with the news, but just reading about those Vix ETF blow ups. Up over 100% last year then wiped out in a single night! That's like crypto!

https://www.ft.com/content/ccd278c6-0af5-11e8-8eb7-42f857ea9f09

They should have seen it coming to be fair. The markets have been suffering from cripplingly low volatility for a while now, one of the brokers here was moaning about it at lunch today as it happens. There's no money flowing for them especially in the US. There's so much data available now every possible occurence is priced in... until it's not. Then all hell breaks loose

If these flash crashes keep happening I could see algo trading being forced off exchange at some point in the future.

 

[Jippy]

They should have seen it coming to be fair. The markets have been suffering from cripplingly low volatility for a while now, one of the brokers here was moaning about it at lunch today as it happens. There's no money flowing for them especially in the US. There's so much data available now every possible occurence is priced in... until it's not. Then all hell breaks loose

If these flash crashes keep happening I could see algo trading being forced off exchange at some point in the future.

Well looks like we have a combo higher inflation, rates and vol on the horizon.
Blocking algos would be unworkable wouldn't it? Surely if you pushed them off the exchanges, they'd still create distortions as their buying patterns would be mirrored in the market, albeit at a slower pace.

 

[Adebesi]

If these flash crashes keep happening I could see algo trading being forced off exchange at some point in the future.

Thatd be one hell of a u turn given they've spent the last ten years trying to move as much as possible on exchange.

 

[11101]

Well looks like we have a combo higher inflation, rates and vol on the horizon.
Blocking algos would be unworkable wouldn't it? Surely if you pushed them off the exchanges, they'd still create distortions as their buying patterns would be mirrored in the market, albeit at a slower pace.

In theory no. If they all moved to dark pools and off exchange venues the market would not see the trades until well after the fact. A lot of block orders are already done this way for that reason.

Thatd be one hell of a u turn given they've spent the last ten years trying to move as much as possible on exchange.

Probably never happen, just my speculation really, but if they keep triggering these crashes something will have to change. No-one ever thought they would ban prop trading either.

 

[Adebesi]

Probably never happen, just my speculation really, but if they keep triggering these crashes something will have to change. No-one ever thought they would ban prop trading either.

Its a really interesting idea. I just think its a bit different to banning prop trading. As I said it would be an admission that the entire direction of travel in regulation has been wrong, which would be one hell of an admission. More than that, it would contradict the general belief in the sanctity of liquidity. If the market is a religion, liquidity is like its Jesus or Mohammad. I cant think of a single person I know in finance who doesnt preach the wondrous, healing, life affirming power of liquidity. Certainly among bankers and fund managers, but regulators as well. If they took algos off exchange what would happen to liquidity? What would happen to prices? Wont someone please think of the children?

 

[GloryHunter07]

Its a really interesting idea. I just think its a bit different to banning prop trading. As I said it would be an admission that the entire direction of travel in regulation has been wrong, which would be one hell of an admission. More than that, it would contradict the general belief in the sanctity of liquidity. If the market is a religion, liquidity is like its Jesus or Mohammad. I cant think of a single person I know in finance who doesnt preach the wondrous, healing, life affirming power of liquidity. Certainly among bankers and fund managers, but regulators as well. If they took algos off exchange what would happen to liquidity? What would happen to prices? Wont someone please think of the children?

I read an article, i think on the FT, about the fact that Algos dont really provide liquidity (just churn) in difficult conditions whereas in the past market makers would generally step in.

 

[11101]

Its a really interesting idea. I just think its a bit different to banning prop trading. As I said it would be an admission that the entire direction of travel in regulation has been wrong, which would be one hell of an admission. More than that, it would contradict the general belief in the sanctity of liquidity. If the market is a religion, liquidity is like its Jesus or Mohammad. I cant think of a single person I know in finance who doesnt preach the wondrous, healing, life affirming power of liquidity. Certainly among bankers and fund managers, but regulators as well. If they took algos off exchange what would happen to liquidity? What would happen to prices? Wont someone please think of the children?

All true. However for every algo that's built another few market makers, brokers etc are taken out of the business, and those are the guys whose job it is to fill orders when things go south. Algos will just sit there until something triggers them. I have no idea if one is big enough to outweigh the other.

 

[Member 5225]

If only people had a long term view. $10,000 in an index fund in the mid 60s would likely be worth a fortune today.

I still think modern finance is a house of cards. The crazy valuations, stocks and all other instruments surging in last few decades, national debts and deficits - something just has to give IMHO.

 

[Adebesi]

I still think modern finance is a house of cards. The crazy valuations, stocks and all other instruments surging in last few decades, national debts and deficits - something just has to give IMHO.

On the one hand, I think it has always been a bit like that. Valuations have probably always felt a bit crazy to some people, if you look at the long term charts they are always high by historic standards. Debt has been high for generations, certainly since the world wars - the debt raised to pay for WW1 was only fully repaid a few years ago. There has always been layering of debt upon debt. If you are wrong and things carry on as normal, debt and stock market valuations will be unimaginably high and today's levels will look modest, the way the levels from the 60s and 70s look modest now.

Having said all that I do get the same feeling you do. QE is a bit of a game changer, it has accelerated things. And even bankers regularly use the "addiction" metaphor when they talk about the impact it has had on the financial system - an interesting advance on the "life support" metaphor they tended to use straight after the crisis. You can see why they do. The financial system is like a person who had a bad injury, took a load of pain killers and is now a heroin addict. The fact we have these "taper tantrums" every time people think rates might start to go up really is a problem. It suggests the debt levels may now actually be unsustainable if people have to actually pay to service it. Everybody accepts the stock market is where it is because QE money has been pumped straight into it.

So yeah, I do see where you are coming from. Im torn between worrying the whole thing is a house of cards on the one hand, but having complete confidence that banks and central banks will do whatever it takes to keep the show on the road on the other. If we didnt solve the problems from 2007-08, but just kicked them down the road, it will be really interesting to see if governments actually have it in them to respond again. If QE stops working I dont know what they do next. But for sure there are some creative economic minds out there, Im sure someone will have an idea.

 

[Member 5225]

On the one hand, I think it has always been a bit like that. Valuations have probably always felt a bit crazy to some people, if you look at the long term charts they are always high by historic standards. Debt has been high for generations, certainly since the world wars - the debt raised to pay for WW1 was only fully repaid a few years ago. There has always been layering of debt upon debt. If you are wrong and things carry on as normal, debt and stock market valuations will be unimaginably high and today's levels will look modest, the way the levels from the 60s and 70s look modest now.

Having said all that I do get the same feeling you do. QE is a bit of a game changer, it has accelerated things. And even bankers regularly use the "addiction" metaphor when they talk about the impact it has had on the financial system - an interesting advance on the "life support" metaphor they tended to use straight after the crisis. You can see why they do. The financial system is like a person who had a bad injury, took a load of pain killers and is now a heroin addict. The fact we have these "taper tantrums" every time people think rates might start to go up really is a problem. It suggests the debt levels may now actually be unsustainable if people have to actually pay to service it. Everybody accepts the stock market is where it is because QE money has been pumped straight into it.

So yeah, I do see where you are coming from. Im torn between worrying the whole thing is a house of cards on the one hand, but having complete confidence that banks and central banks will do whatever it takes to keep the show on the road on the other. If we didnt solve the problems from 2007-08, but just kicked them down the road, it will be really interesting to see if governments actually have it in them to respond again. If QE stops working I dont know what they do next. But for sure there are some creative economic minds out there, Im sure someone will have an idea.

Great post, thanks.

I think we're saying the same thing.

However, I disagree with your 'on one hand overvalued vs Central banks will do whatever it takes' (bold) - it's the same thing in my eyes and the root cause (if not an exasperation) of the problem! That's what genuinely worries me.

From a stone cold investor perspective though, sure, pile in and the Govts, central banks etc will do whatever it takes to keep the party going - but at what cost and till when is what I mean.

 

[Adebesi]

They seem to genuinely think they'll be able to manage their way out of this situation in an orderly way. They do seem ready to concede that there's been a paradigm shift in terms of the neutral IR, so they won't ever go as high as they did in the old days (clearly they think because we don't have an inflation problem now we never will again.) But beyond that it's just a case of softly softly catchy monkey, if we are gradual enough the markets won't notice as we remove the drugs, debt will fall and everything goes back to normal.

In this case I'm torn between thinking its hopelessly naive, or that central bankers are much of intelligent and financially literate than me so the fact it seems crazy is probably my failure.

 

[Drifter]

Plunging again

 

[Raoul]

We are down 600 again today. Said it the other day....most of the real estate is still to the downside since the S&P has incurred significant technical damage as a result of Friday's 1150 point plunge. It is now stuck between the 50 (purple line on my chart) and 200 day EMAs (blue) and with momentum to the downside, it will likely test the 200 in the coming days.

Spoiler: 1

 

[Raoul]

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[Raoul]

Down another 1000 today and now officially in correction territory. This is definitely not normal.

 

[Pexbo]

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Nail, meet head.



@Rado_N

 

[Rado_N]

Goddamit.

 

[MTF]

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Tbf, after about 8 years Obama would tout the value of the market also when people questioned if he wasn't "bad for business", no? Of course, after that kind of run its pretty safe to claim that "win". Never claim the short term.

 

[Raoul]

Tbf, after about 8 years Obama would tout the value of the market also when people questioned if he wasn't "bad for business", no? Of course, after that kind of run its pretty safe to claim that "win". Never claim the short term.

I'm sure he referenced it from time to time....but never with the knee jerk triumphalism as Trump has.

 

[marktan]

It's nice to see a drop but it's a bit meaningless really.. all it's done is take us to November 2017 levels. The Dow, S&P and Nasdaq all gained 20-25% in 2017 alone so we'd need to retrace a lot more it for it to even get close to erasing last years gains. Right now we've just had a long long bull run, and a very minor pull back. The Dow at 26k is close to double the level it was at in 2013, which is a pretty solid bull run with very few pull backs. As is expected really given no major issues in the global markets and decent growth.

But what is worrying is that the P/E ratio of the S&P was 25, now 24 after the pull backs, which is historically on the high end and far higher than the average of 15. Which suggests to me that the markets are a bit overheated.

 

[Raoul]

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[Raoul]

Another rough day. A bunch of big stocks are either on the 200EMA or below it (FB, AAPL etc) as is the S&P.

 

[utdalltheway]

A good time to buy?
I bought a few today and while not killing it now I expect to do ok in the next few weeks/month. Unless there’s more blood to be shed, then I’ll have to wait longer to gain.

 

[LawCharltonBest]

I don't get the stock market.

Tell me simply. If I bought a share in Apple or Amazon or United.. And I left it for 5 years. Would I be guaranteed a profit?

 

[Sied]

I don't get the stock market.

Tell me simply. If I bought a share in Apple or Amazon or United.. And I left it for 5 years. Would I be guaranteed a profit?

No.

 

[Raoul]

I don't get the stock market.

Tell me simply. If I bought a share in Apple or Amazon or United.. And I left it for 5 years. Would I be guaranteed a profit?

The time to get into stocks is at the beginning of the next business cycle after the next recession. At that point, your chances of making big profit are much higher.

 

[Nikhil]

Is it a period of sell offs? The Dow's been down this week a lot with almost all major equities down. Or is it because of Facebook?

Sheryl Sandberg was sent by facebook to talk to CNBC. Such a meaningless empty apology. "We need more transparency blah blah".

 

[SwansonsTache]

Is it a period of sell offs? The Dow's been down this week a lot with almost all major equities down. Or is it because of Facebook?

Sheryl Sandberg was sent by facebook to talk to CNBC. Such a meaningless empty apology. "We need more transparency blah blah".

Most likely because of Trump's potential trade war.