by tonytran2015 (Melbourne, Australia).
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(Blog No. 3xx).
#stock exchanges, #rip-off,
Western countries are proud of their stock exchanges. They claim that their Stock Exchanges are places where Entrepreneurs can get capitals from Investors to expand their successful companies. The reality is quite different.
1. Do Stock Exchanges match companies to investors?This is the only legitimate function of Stock Exchanges but sadly it is not well executed in practice.
Stock Exchanges and their associated Corporate Regulations Enforcement Agencies often fail to enforce rules on timely disclosure of informations, disclosure of financial matters, disclosure of interests.
Figure 1: A crystal ball is needed to determine if any company is a suitable, profitable investment.
The results are that small investors are often lured into loss making investments.
Where are now the old rules of having made many continuous years of profits before a company can be admitted to be traded on an exchange ?
There is no excuse for setting up a market to sell counterfeit products. There is also no excuse for setting up an exchange to market loss making companies.
There should have been clear warnings to investors on declining (dead wood) companies which are still traded after their admission.
Existing Exchanged listed Companies should be flagged by the Exchanges as loss making companies if they made losses in any of the last ten years even if they are allowed to trade on the exchanges.
Naturally there would be private companies trying to buy and delist loss making companies still traded on the Stock Exchange. Crown Casino (Melbourne) was taken of Australian Stock Exchange in Dec. 1998 in this way.
PBL said the merger offer represents a 32% premium on Crown’s share price, based on Crown’s and PBL’s weighted average share price during the last month of 45 cents per share and A$6.54 per share, respectively. Shares in both companies were suspended pending the announcement on Monday, but Crown closed Friday at 49 cents a share and PBL finished at A$6.14.
2. Stock Exchanges have floated non-viable companies to investors.
The infamous example of the float of One-Tel (One.Tel Limited (ACN 068 193 153) in 1997 on Australian Stock Exchange (https://en.m.wikipedia.org/wiki/One.Tel) have shown that Stock Exchanges can rip-off investors. The company had not had many continuous years of profits and was floated based solely on speculations.
The terrible thing is the Stock Exchange allowed the floating of non-viable new companies which had not had many continuos years of profits and was floated based solely on speculations. Loss making companies listed on the Exchange were bought in whole, stripped off their assets, loaded with even more debts, even higher operational costs and floated back into the exchange for naive instestors to buy. They are known by analysts as zombie companies.
After committing equity of $450 million in 2006, the consortium was paid distributions of $560 million in 2007 (after the sale of the Melbourne property). With float investors paying $4.10 per share, the consortium has now turned its $450 million original investment into around $2 billion. Not bad for three years’ work.
The US-based owners, private equity groups TPG and Blum Capital, decided to sell all of their shares “to satisfy some of the excess demand at the final price of $4.10.”
3. Stock Exchanges Indices have been used by Governments as their false economic indicators to boast about their own performance.
The economy of a country comprises of many components. Companies listed on “honest” Stock Exchanges only represent a part of the larger scale economic activities. In details, the full economy consists of activities from:
– Exchange listed (traded) companies,
– Private companies that are not traded on Stock Exchanges,
– Non company business entities owned by families and sole traders,
– Cash-in-hand, unregistered, undeclared entities (like street vendors, street service providers).
– Labor cooperatives (like mutual child minding groups, mutual house servicing groups, communal kitchen groups, car pooling groups).
In countries like Italy or Greece, Exchange Listed Companies form only a component of the economy.
Greece’s “shadow economy” was estimated at 24.3% of GDP in 2012, compared with 28.6% for Estonia, 26.5% for Latvia, 21.6% for Italy, 17.1% for Belgium, 14.7% for Sweden, 13.7% for Finland, and 13.5% for Germany, and is certainly related to the fact that the percentage of Greeks that are self-employed is more than double the EU average (2013 est.).
Greek and Italian shadow economy are estimated by IMF to be respectively 30% and 27% in 2016 (https://www.imf.org/en/Publications/WP/Issues/2019/12/13/Explaining-the-Shadow-Economy-in-Europe-Size-Causes-and-Policy-Options-48821)
From this consideration it is clear that the Indices of Stock Exchange do NOT represent economic performance of countries.
However governments, including US govermment, intentionally use easy-to-manipulate Stock Exchange Indices as their economic indicators. This allow them to boast about their own performance. The market had cried out:
The stock market is not the economy.
Rarely has that adage been as clear as it is now.
4. Stock Exchanges Indices have been manipulated by Governments to boast its economic performance.
The US Federal Reserve have created a “moral hazard” by lending more money to the largest “too big to fail” financial companies listed on US Stock Exchanges. It successfully kept the Indices from crashing.
In 1998, William J. McDonough, head of the New York Federal Reserve, helped the counter-parties of Long Term Capital Management avoid losses by taking over the firm. This move was criticized by former Fed Chair, Paul Volcker and others as increasing moral hazard… Fed Chair, Alan Greenspan, while conceding the risk of moral hazard, defended the policy to orderly unwind Long Term Capital by saying the world economy is at stake.
Australian Government goes even further by confiscating the “imputation credits” of investors who day-trade or prudently “go short” on their shares. That means investors in Australia should neither day-trade nor lock-in the resale values of their shares.
The effect is Australian investors investing in Australian Exchange Listed Companies have to sit on their investment irrespective of the sudden decline in performance of their companies.
The holding period rule requires shares to be held ‘at risk’ for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.
… Also excluded are days where the financial risk of owning the shares is materially diminished. For example, the financial risk may be reduced through arrangements such as hedges, options and futures.
The main point is that government may concentrate on artificially pushing up Stock Exchange Indices through loans to listed companies while neglecting the economy at large.
5. Stock Exchanges have been used by Governments to entrench their economic and superannuation/pension policies.
Australian goverment also steers Self-Managed Superannuation Funds to invest in companies listed on Australian Stock Exchange.
If the asset is a listed security, then there is a definite market value at the time of transfer, hence the exception in s66 (2) (a) Superannuation Industry (Supervision) Act 1993 No. 78, 1993.
s66 (2): Subsection (1) does not prohibit a trustee …acquiring an asset from a related party of the fund if: (a) the asset is a listed security acquired at market value…
For a typical Australian Prudential Regulation Authority (APRA) regulated Industrial Superannuation fund members are also steered to investment in exchamged listed companies or cash.
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In this way the government increase investments in Exchange Listed Companies. At the same time, the government also claims that the high amounts of investment makes the Australian Stock Market less risky! There may be some truth in that but the government is then bound to make the Stock Exchange Indices steadily increasing to preserve its reputation and retain the political votes from superannuation participators.
Exchange Listed Companies can really go bankrupt due to their outrageous payments to their extractive Management Class and to the outrageous Management Contracts with their Floaters (described in Section 2).
6. Desired features of Stock Exchanges
Stock Exchanges should install the following features to regain trusts in non-sophisticated investors.
There should be separation between established, profit making (tax paying) companies and declining companies (that failed to make profit on a 10 year moving average) so that unsophisticated investors can clearly distinguish them. That is companies should be tagged as “blue chip” or not. Non sophisticated investors would then be able to direct their investments to only “blue chip” companies.
Companies which are not established, profit making (tax paying) should not be traded on the Stock Exchanges.
Companies that have been taken over should be delisted as any desired improvement on their performance can also be carried out by majority share holders with full public disclosure and their share prices can still be continuously monitored and “debt traps” can be avoided for companies.
Zombies companies should not be readmitted as listed companies.
Rules on continuous, timely disclosures should be more rigorously enforced.
All abnormal price movements on share prices due to derivatives trading (which are more obvious on option days) should be explained by the Exchange Houses of Derivative Contracts.