Living with a probable bubble market.

Living with a probable bubble market

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.73).

#bubble, #market, #speculate, #bankrupt,

Living with a probable bubble market.

Please note that this blog is only a sharing of life experience. This blog does NOT give any FINANCIAL ADVICES.
Whether it is a house for living in or a government bond with positive (and hopefully inflation compensated, if you can still find them) interest for incomes, or some shares of a listed company on your local share markets for gambling thrill plus income for few years, you don’t want to buy that when it is priced in a bubble market.
The following shows how to spot the signs of a bubble market.

1. A bubble market can badly burn your business plan.

A bubble market is one where the prices are too high for any long term plan and those prices are predicted to fall down to level afforded by buyers.

If you buy too high in a bubble market you will not be able to pay bank interests on your business loans and suffer an asset loss when the bubble bursts. You yourself may go bankrupt.

Even for a speculator planning to sell to a greater fool, there is still a real chance that he will be the last one holding the speculated stock !

2. Common excuses from sellers/marketers in a bubble market.

2a. “The economy is different this time”:
The dotcom’s excuse that clicks are more important than incomes in its “New Economy” has been an expensive lesson to many speculators.
The FUNDAMENTAL PRINCIPLE of economiccs is forever UNCHANGED: Money earned minus money spent is the left over in the cash box.
2b. The whole nation is asleep with only your seller and you staying awake to do the half baked financial analysis:
This childish reasoning is not for reasonable investors.
2c. The seller is sharing privileged information with you:
If the information turns out to be false you will have no financial recourse to recover your money.
2d. A different plan is coming from the government this time and it will alter all financial planning !
However all government plans do follow the same method and the government has to uphold accountability. History should be a guide to those plans.
All companies also want to avoid their plans revealed causing their unjustified expenses. Is your seller a good anticipator of their moves?

3. Characteristic of a bubble market.

1. Price increases in a bubble market are not in line with historical records. The effects of any excuses given by sellers are still too small for the jump in prices.
2. The supplies and demands are one sided in a bubble market: The manipulators of the market have bought most available stocks before starting the game.
They then increase the current purchase prices on the market to send up the value of their existing stocks to obtain even more loans from the banks. They then would off-load all their stocks at high price and realize their profits before any crash.
3. There are not a variety of sellers. This makes it easier for someone to manipulate the market.
4. The register of current owners has no increase in long term investors/businesses: Only speculators own the stocks and their prices are not justified by the benefit of ownership. All respectable investors have sold out their holdings when the prices have been high enough.
However, accessing the register may not be easy for ordinary investors.
5. If you can still comfortably operate your long term business in the market, facing all anticipated ups and downs, then that market definitely has NO BUBBLE to you and you may only just missed its cheapper period. On the other hand, if you cannot operate your long term business in the market then that market IS A BUBBLE MARKET

4. Any bubble market still has its own long term buyers.

Those people who just sold something into a bubble market can still immediately buy something else from it with that same amount of money.
There are also investors who have to realize their capital gains every year and they will sell shares from one account while simultaneously buying back on another account. They do it to smooth out their yearly income taxes.
For someone who has not sold anything into that bubble market he would be wise to GO FOR ANOTHER TYPE of investment and to come back to buy from that market only after the bubble has bursted. It may take a few year or even a very long while for the bubble to burst but by that time he would have made much more profit on the other type of investment.

5. Conclusion.

If there is any suspicion that a market has become a bubble and you have not been involved in that market for a long while then you should GO FOR ANOTHER TYPE of investment while researching on it.
If the benefit of ownership is MUCH MORE than the payment of the purchase then the market is definitely not a bubble market for you, you just missed its cheaper period: You can still execute your purchase despite all talks about the any bubble bursting.

References:

[1]. Greg Jericho, http://www.theguardian.com, April 06, 2017.

[2]. Michael Janda, http://www.abc.net.au, May 29, 2017.

[3]. Jackson Stiles, thenewdaily.com.au, June 02, 2017.

[4]. Lana Clements, thenewdaily.com.au, June 02, 2017.

[5]. Shane Hickey, http://www.theguardian.com, June 17, 2017.

[5]. Shane Hickey, http://www.theguardian.com, June 17, 2017.

Added after 2018 May 04:

[6]. http://us-issues.com/2018/05/04/the-crisis-next-time/

[7]. https://usawatchdog.com/global-debt-a-parabolic-ponzi-scheme-craig-hemke/

[8]. http://www.goldtelegraph.com/the-dark-cloud-of-global-debt-the-perfect-storm-looms/

[9]. https://www.zerohedge.com/news/2018-07-10/global-debt-hits-record-247-trillion-iif-issues-warning

[10]. https://www.mauldineconomics.com/frontlinethoughts/the-debt-train-will-crash

[11]. https://hat4uk.wordpress.com/2018/07/23/gold-why-rationing-and-price-destruction-foretell-crash2/

[12]. https://mikeyy.org/2018/07/29/anthony-migchels-how-money-rules/

[13]. https://johnib.wordpress.com/2018/07/30/regional-lenders-chinas-most-dangerous-banks/

[14]. https://us-issues.com/2018/08/13/bankruptcy-soars-as-the-country-grapples-with-an-unprecedented-debt-problem/

Added after 2018 Nov 10:

REAL COMPANIES VERSUS HEDGE FUNDS

Understanding the disconnect between an actual company on the stock market, and the bets for and against that company stock, helps to understand what can happen when fiscal policy is geared toward the underlying company (Main Street MAGAnomics), and not toward the bets therein (Investment Class).

[15]. https://theconservativetreehouse.com/2018/11/10/peter-navarro-warns-wall-street-globalists-stand-down-or-else/

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A satirical guide to signs of an impending crash for small investors

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Gold for storing wealth, posted on 28 April 2017
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A satirical guide to signs of an impending crash for small investors

A satirical guide to signs of an impending crash for small investors

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.50).

#crash share market, #investment, #market crash, #share market, #signs of crash.

As a small investor (or gambler ?) you can also pick up the warning signs of an impending share crash.

To possess that ability a small investor has to have a realistic knowledge on how some listed companies crash and on how such crash can generate a market wide crash. This posting is my a short guide to picking the signals.

1. The operation of a company listed on a share market.

Let us be simple about it.

A company on a share market is just a business, a money making machine. Its value depends on its anticipated income and its trade name plus net tangible asset backing (liquidated values).

A company listed on the share market has to bear the extra burden of extravagant salaries and bonus to directors, showmen, corporate executives (who all seem NOT KNOWING the business which they are overpaid for), external advisers, external consultants (to advise, with absolutely NO liability, the directors and executives!), snake oil salesmen (to sell to clients what they don’t need and can barely afford).

When you buy shares in that company, you are entitled to share a percentage of the profit and loss of that business (or show?).

Essentially, directors, executives, external advisors, external consultants (see reference [1] for some type of consultancy no one needs) are playing a game of passing the buck by separating duties of care and liabilities. The show is set up to PREVENT share holders like you SUING any of them.

You have been WARNED!

2. Long con by Pump and Dump Operators.

Vested interests always want to inflate the values of companies for their higher salary, bonus, commissions, fees and stamp duties.

They will pump and dump shares in the company. The (typically six years plus) long con of pumping is hard to detect (a lie told for long enough will be believed). It makes people believe in the (hyped up) “long term growth” of the company. (See reference [2] for a typical pumping of share prices from in 2011 to 2017).

New shares will be issued at “premium” to the nominal value of the shares. The money collected is then used to pay for expenses to keep the company going until another new share issues (but not for paying dividends to existing share owners) !

The last buyers (believing that there would be bigger fools) buy in at many times the worth of the company. When the eventual dumping comes they would lose all their hard earned money.

After each share crash there is no actual change in the production capacity of the company. Only its ownership, clients, suppliers and bankers change. The crash in the bigger market and the recession in the even bigger economy only comes due to the actions of those people.

Australian government also encourages (since about the year 2000) the Long Pump Con with its Income Tax policy (on loss of franking credit when holding “put options”): If you invest in shares, you can claim your share of the income tax paid by that company (currently at a flat rate of about 30%) as your personal tax already paid by the company on your behalf; it is called “income tax franking credit from your dividend”. However if you also bet that the price of those shares will fall you will lose all that tax credit while if you bet that the price of those share will rise, you can keep all your dividend franking credits!

It is understandable as the government collects more stamp duties on share transfers when share prices have been pumped up.

3. Causes of a crash of a single company

crystalcompanyc70.jpg

Figure: List of single sufficient causes for a company crash. Any single cause in this list can cause a company to go bankrupt.

a/- Its banker does not want to be its easy going, friendly banker anymore. (The bank knows more than you do about the imminent cash flow of the company; see also [11]).

b/- Its clients can buy cheaper elsewhere.

c/- Its suppliers have switched to new clients (with no cash flow problem) who pay more promptly after each delivery.

d/- The company has run out of new subscribers for its new share issues (which is a substantial source of income providing for its yearly expenses).

e/- If the company cannot pay its debt installments and expenses on any due date, it is required by laws to be liquidated.

4. Events in a company crash.

a/- Directors resign as they want to wash their hands more than 6 months ahead of the official liquidation. Why should they risk being investigated while there are extravagant pays for other shows elsewhere?

b/- Share holders realize that they have bought only thin air hyped up company shares and they all want to sell to the next fools or to anyone else to stop their own bleeding.

c/- The share market suspends the trading of that company’s shares and may even de-list it to bury the embarrassment.

d/- The last batch of share holders practically lose all their money: EVERY HYPE HAS TO END.

5. Traditional signs pointing to a market crash.

Figure: Signs of crash for share markets. You cannot expect any crystal ball to change its colour to warn you of an imminent share market crash but you can notice yourself the signs prior to such a crash.
The share market is where people buy and sell shares in (market) listed companies. People buy and sell according to their perception of the sustainability of the finance conditions in the country of the companies.

The finance conditions stand on top of one another to build a tower to the sky ! It only needs the agitation of some big investors to make the tower tumble causing a market wide crash.

Prior to a share market crash there are few signs as given in the following:

a/- There is an increase in the Price/Earning ratios of companies (Investors hope for bigger fools) while their operation is not profitably expanding and their Net Tangible Assets remain nearly unchanged. (see the ref.[13] added on 10May2017). Before buying you have to work out the number of years to get back your capital if there is no bigger fool.

The P/E ratio should be inverted to give you a comparison to the interest rate of government bonds which has little chance of being wiped out.

b/- There is an increase in merger and acquisition activities with the illusion that bigger is better for profits (An admission that many companies are not well managed. The lives of companies are stretched on the hope that they can reduce their overhead or get better under new managements !).

c/- There are a lot of initial public offers (IPO’s) of new companies (on the share markets) with unclear, questionable earning capabilities (Institutions want to benefit from people’s greed !).

People buy on hope into any company to be in the herd. The whole market goes up much faster than the national GDP and GNI.

According to reference [2], “S&P 500 stock index edged up… market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies!” .

d/- There are a lot of margin lending (by banks to investors who bet that short term market dips are very unlikely but if any dip does come they usually lose their investment/bet and usually most of their savings). There are also a lot of “Call Warrants”, which are effectively shares bought on borrowed money, with deposits and dividends assigned to the lender.

Any temporary dip will force Margin Lenders to sell shares of Margin Borrowers resulting in an amplification of the temporary small dip into a longer lasting and more serious dip which may force out even more Margin Borrowers and the market index keeps on falling. The situation will be further aggravated if there are also at that time large derivatives (betting) contracts leading to contagious defaults by many of the bet takers.

Currently the ratio of margin lending to capitalization of the Australian market is only about 1%. If the same also holds true for other markets then margin lending cannot cause much damage in the current condition.

(Note added on 1 April 2017: On Feb 2017, margin loans on shares reached 0.528trillions [6, 7] while capitalization of S&P 500 shares reached 20trillion [10]. Margin loans in US thus stand at nearly 2.5% in Feb 2017).

e/- Short-term interest rates are much higher than long term ones for Reserve Bank loans and Treasury Notes (People run out of real wealth making ideas for the long term and can only play the short term games of passing the buck with borrowed money in existing unsustainable structure. In the 2008 crisis, Citi group had used Short term available money and foreign money to bet on the up or down of various financial indices; the betting led to the required rescue by tax payers’ money [12]).

f/- Uneven development of different sectors of the economy resulting in unsustainable economic condition (for example a construction boom in areas with no jobs, no roads, no people to pay for the newly built buildings leading to heavy debts by builders caused by production of unwanted goods).

g/- Everyone talks and seems to know everything about investment on the share markets (People knows that passing the buck makes much more money than doing real manufacturing/servicing. Herd mentality is obviously in action here, see also reference [10]).

6. Events in a market crash.

Greed and fear and herd mentality cause a market wide crash.

When fear overcomes greed, they all want to sell out at the same time, at any cost to cut loss.

The gamblers, the uniformed investors, the loose bankers, creditors all lose their money. The market will usually be suspended immediately by a computer after any deep loss.

The patient investors may pick up good investment during crashes. The time window for a big dip is only about 10 minute wide and you must be a regular client of some friendly stoke brokers or possess a reliable internet trading software to have your order processed in that hectic time. I have seen my friends doing it.

Then everyone still not burnt will want to invest in real estate instead only for some of them to get burnt again in that ensuing property (new type of) bubble!

7. Avoiding getting burnt

a/- Remember that no one wants to sell a money making machine. If it is sold to you for cheap, there must be some problems.

b/- Use your money to pay out all your debts, their interest payment is usually HIGHER than any after tax return on any listed company investment.

c/- If you still have spare money, set up your own business or investment property. You will know the “true and fair” value of your business. You can hire and fire. Your voice can be heard. You also avoid paying extravagant salaries to directors and snake oil salesmen. With this type of experience, you may begin to make judgement on the values of listed companies.

d/- Don’t invest in any company whose activities you cannot fully understand. If you cannot understand their way of making money then probably they CANNOT make money. Don’t think that extravagantly paid directors will solve the impossible problems for such a company.

e/- Only gamble on the share market with what you can afford to lose. There are always new types of traps invented to catch you.

f/- If you cannot sleep at night with an investment then you cannot afford to lose: Cut the loss and get out.

Being alert to the signs may help you getting burnt. It has certainly helped me and my friends.

References

(have been augmented after 29 Apr2017)

[1]. Ex-HBOS banker ‘sold his soul for swag’, bbc new, http://www.bbc.com/news/business-38842723, 2 February 2017.

[2]. Wolf Richter, S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since, Straight Line Logic , https://straightlinelogic.com/2017/02/19/sp-500-earnings-stuck-at-2011-levels-stocks-up-87-since-by-wolf-richter/

[3]. Barry Ritholtz, Excessive CEO Pay for Dumb Luck, bloomberg.com, https://www.bloomberg.com/view/articles/2017-03-06/excessive-ceo-pay-for-dumb-luck, accessed 07 Mar 2017.

[4]. Colin Twiggs, CEO pay is rigged | Barry Ritholz, Gold Stocks & Forex, https://wordpress.com/read/feeds/289142/posts/1366147221, 07 Mar 2017.

[5]. tonytran2015, Bankers given outrageous incomes by their boards, https://survivaltricks.wordpress.com/2016/12/22/bankers-given-outrageous-incomes-by-their-boards/, posted on December 22, 2016.

[6]. Mish Mishtalk, Margin debts hit record high-coinciding with extreme-consumer confidence, mishtalk.com, http://mishtalk.com/2017/03/30/margin-debt-hits-record-high-coinciding-with-extreme-consumer-confidence-analysts-say-dont-worry/, 30 March 2017.

[7]. stock-markets-sit-blithely-on-a-powerful-time-bomb, sentinel blog, http://sentinelblog.com/2017/04/22/stock-markets-sit-blithely-on-a-powerful-time-bomb/, accessed 22 April 2017.

[8]. https://lplresearch.com/2017/04/07/margin-debt-worry-or-overblown-anxiety/

[9]. Yashaswini Swamynathan, Reuters, The S&P 500 is worth $20 trillion for the first time, business insider, http://www.businessinsider.com/sp-500-market-cap-crosses-20-trillion-for-the-first-time-2017-2, Feb 13, 2017.

[10]. The last time this happened the market crashed, sentinelblog.com, https://sentinelblog.com/2017/04/22/the-last-time-this-happened-the-market-crashed/

[11].How Henry Walker Eltin imploded, https://www.crikey.com.au/2005/02/02/how-henry-walker-eltin-imploded/, 02 Feb 2005, accessed 05 May 2017.

[12]. http://wallstreetonparade.com/2016/08/bailed-out-citigroup-is-going-full-throttle-into-derivatives-that-blew-up-aig/

[13]. https://bonnerandpartners.com/u-s-stocks-are-disastrously-overvalued/

[14]. Michael Pento, curve-inversion-and-chaos-to-begin-by-december-2017, Re-Blogged https://us-issues.com/2017/06/10/curve-inversion-and-chaos-to-begin-by-december-2017/
By Michael Pento – Re-Blogged From PentoPort

[15]. Private Equity firms stuck in brick and mortar retailers, wolfstreet.com, http://wolfstreet.com/2016/05/03/fairway-group-bankruptcy-pe-firms-stuck-in-brick-and-mortar-retailers-albertsons-safeway-ipo/

Added after Sept 10, 2017:

[16]. https://blog.nader.org/2017/09/13/destructive-stock-buybacks-that-you-pay-for/

[17]. https://us-issues.com/2017/12/06/the-dumbest-dumb-money-finally-gets-suckered-in/

[18]. http://www.afr.com/news/economy/nab-options-trader-sued-over-bluechip-stock-spike-20160318-gnlwos

[19]. https://ukgovernmentwatch.wordpress.com/2018/01/09/black-swan-alert-simon-black-the-day-i-found-out-it-was-all-rigged/

[20]. https://venitism.wordpress.com/2018/02/24/mutual-fund-and-etf-asset-flows/

[21]. https://us-issues.com/2018/04/21/black-tuesday-october-29th-1929-revisited/

[22]. https://internationalman.com/articles/the-depression-playbook/

[23]. http://investmentresearchdynamics.com/the-yield-curve-is-the-economys-canary-in-a-coal-mine/

[24]. https://www.thestreet.com/investing/why-red-hot-ipo-market-will-soon-bring-financial-carnage-14665587

[25]. https://www.wsj.com/articles/blood-testing-firm-theranos-to-dissolve-1536115130?mod=hp_lead_pos1

A REAL ROAD SHOW

[26]. https://m.dw.com/en/tesla-shares-take-a-hit-after-elon-musk-smokes-marijuana/a-45401584

[27]. https://www.cbsnews.com/news/elon-musk-settles-with-sec-today-taking-tesla-private-420-tweet-step-down-board-chairman-2018-09-29/

Former star falling:

[28]. US retail giant Sears files for bankruptcy, 2018 Oct 15, https://www.bbc.com/news/business-45859722

[28b]. https://mobile.abc.net.au/news/2018-10-16/telstra-chairman-facing-first-strike-argues-ditching-exec-bonus/10381396?pfmredir=sm

…a massive protest vote from the company’s disgruntled investors, who have witnessed Telstra’s share-price more than halve since it post-GFC peak in 2015, while dividends have shrunk and likely to shrink more…

Almost 62 per cent of the shareholder votes were directed against the remuneration report, which outlines the salary and bonuses received by directors and senior executives…

CBA was humbled in late 2016 by it shareholders, when more than half voted down the remuneration report …

“This said, I personally believe that executive salaries are too high across the board, but changing this takes time and needs to be embraced by all of corporate Australia not just one company or one industry,…”

REAL COMPANIES VERSUS HEDGE FUNDS

Understanding the disconnect between an actual company on the stock market, and the bets for and against that company stock, helps to understand what can happen when fiscal policy is geared toward the underlying company (Main Street MAGAnomics), and not toward the bets therein (Investment Class).

[29]. https://theconservativetreehouse.com/2018/11/10/peter-navarro-warns-wall-street-globalists-stand-down-or-else/
[30]. https://mobile.abc.net.au/news/2018-10-16/telstra-chairman-facing-first-strike-argues-ditching-exec-bonus/10381396?pfmredir=sm

Telstra chair says execs are overpaid, questions bonuses, but…-Aus Broadcasting Coporation

…a massive protest vote from the company’s disgruntled investors, who have witnessed Telstra’s share-price more than halve since it post-GFC peak in 2015, while dividends have shrunk and likely to shrink more…

Almost 62 per cent of the shareholder votes were directed against the remuneration report, which outlines the salary and bonuses received by directors and senior executives…

CBA was humbled in late 2016 by it shareholders, when more than half voted down the remuneration report …

“This said, I personally believe that executive salaries are too high across the board, but changing this takes time and needs to be embraced by all of corporate Australia not just one company or one industry,…”

[31]. https://mobile.abc.net.au/news/2016-11-10/cba-remuneration-report-voted-down/8012454

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