"The downtrodden are the great creators of slang.'
‑Anthony Burgess (English,
1917-1993)
Word
for the day
Malfeasance (n)
The performance by a public official of an act that is legally
unjustified, harmful, or contrary to law; wrongdoing
Malice
towards none
Many
"intellectuals" who are frequently visible on TV and social media, do
not appear to be much intelligent.
Wisdom is something, that
has not even touched them.
First random
thought this morning
The government has shown remarkable resolve in sustaining the dismantling
of control of transportation fuel and cooking gas. The highest ever single rise
in LPG prices, when the UP elections are in critical phase, clearly demonstrate
this.
Why economists like former Prime Minister Manmohan Singh and
Amartya Sen; and politicians like P Chidambaram fail to mention it when they
criticize the government on economic failure. This prejudice and partisanship
is making even their valid criticism incredulous.
Markets not in equilibrium
In my view, a combination of
following six factors determines the movement of stock markets, under any given
circumstance.
1. Macro outlook
2. Earnings outlook
3. The quality and quantum
of flows (liquidity)
4. Valuations
5. Positioning vis-à-vis
alternatives like debt, real estate, gold etc.
6. Market technical
(demand and supply equilibrium)
In the state of equilibrium of these six factors, the markets are
calm; and average returns are closure to nominal GDP growth, usually higher
than the risk free rate.
In this state usually the premium for alpha generation
(outperformance of individual stock return over average return) is not great,
as stable macro conditions, adequate liquidity, steady flows, reasonable
valuations, and balanced market technical allow most businesses to grow in
tandem and there is little case for unusually premium valuations of some
businesses over most others.
On the contrary, when these key factors are not in equilibrium,
i.e., one or more factors are far away from the mean position, the divergence
in stock performance is significant and thus the premium for alpha generation
is much higher.
From this viewpoint, if I analyze the market performance of past
couple of years, it is clear that the divergence in performance of stocks is
unusually high. Especially, many small and midsized companies have outperformed
their large size peers massively. The premium for alpha generation has been
accordingly significant.
Historically, whenever, the key factors impacting the stock
markets have remained in the state of inequilibrium for longer period, the
corrections needed to revert to the state of equilibrium have been sharper,
deeper and painful.
If the correction occurs from bottom to mean, the pain occurs from
missing the move. If the correction occurs from the top to mean, the severe
erosion in prices causes the pain.
This makes me conclude two things:
(a) The phenomenal rise in
the assets under management of institutional investors like mutual funds,
pension funds and portfolio managers may be related to the premium for alpha
generation. This becomes even more clear, if we consider the stupendous rise in
the asset under management of portfolio managers who invest in broader markets.
(b) The key factors that
impact the market are not in equilibrium. This essentially implies that we
shall soon see the correction - this time top to mean, via bottom.
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