Showing posts with label stock. Show all posts
Showing posts with label stock. Show all posts
Friday 22 December 2023
Sunday 15 May 2022
Sunday 3 April 2022
Friday 29 October 2021
Tuesday 2 May 2017
This is how the price of shares is really decided
Satyajit Das in The Independent
Equity investors – who have enjoyed strong gains over the past eight years – are unlikely to question the merits of stocks as an investment. US stock markets have tripled in price since 2009. In nominal terms the Dow Jones Index is up 70 per cent from its peak in January 2000. But 17 years later it is up only 19 per cent in real (inflation-adjusted) terms.
Investors rarely scrutinise the driver of equity returns. In reality stock markets have changed significantly over recent decades, driven by artificial factors that result in manipulated and unsustainable values.
The traditional functions of the stock market include facilitating capital-raisings for investment projects, allowing savers to invest and providing existing investors with the ability to liquidate their investments when circumstances require. Unfortunately, a number of factors now undermine these functions.
First, equity markets have increasingly decoupled from the real economy. Equity prices now do not correlate to fundamental economic factors, such as nominal gross domestic product or economic growth, or, sometimes, earnings.
Second, equity markets have become instruments of economic policy, as policymakers try to increase asset values to generate higher consumption driven by the “wealth effect” – increased spending resulting from a sense of financial security. Monetary measures, such as zero-interest-rate policy and quantitative easing, distort equity prices. Dividend yields that are higher than bond interest rates now drive valuations. Future corporate earnings are discounted at artificially low rates.
Third, the increased role of HFT (high frequency trading) has changed equity markets. HFT constitutes up to 70 per cent of trading volume in some markets. The average holding period of HFT trading is around 10 seconds. The investment horizon of portfolio investors has also shortened. In 1940 the average investment period was seven years. In the 1960s it was five years. In the 1980s it fell to two years. Today it is around seven months. The shift from investing for the long run has fundamentally changed the nature of equities, with momentum trading a larger factor.
Fourth, the increasing effect of HFT has increased volatility and the risk of large short-term price changes, such as that caused by the 7 October “flash crash”, discouraging some investors.
Fifth, financialisation may facilitate market manipulation, with the corrosive impact of insider-trading and market abuse eroding investor confidence.
US federal investigators found a spider’s web of insider-trading exploited by a small group of funds that benefited twice: from both trading profits and artificially enhanced returns. These, in turn, generated more investments and higher management fees. The investigations revealed expert network firms, which provided “independent investment research”. Redefining the concept of expertise, these firms seemed to specialise in matching insiders with traders hungry for privileged information, routinely allowing access to sensitive information on sales forecasts and earnings.
Regulators suggested that the practice was so widespread as to verge on a corrupt business model. Reminiscent of the late 1980s investigations into Drexel Burnham Lambert, Ivan Boesky and Michael Milken, the clutch of prosecutions has created an impression that a small golden circle of traders have an information edge, disadvantaging other, especially smaller, investors.
Finally, alternative sources of risk capital, the high cost of a stock market listing, particularly increasing compliance costs, increased public disclosure and scrutiny of activities including management remuneration as well as a shift to different forms of business ownership, such as private equity, have changed the nature of equity market. New capital raisings are increasingly viewed with scepticism as private investors or insiders seek to realise accreted gains, subtly changing the function of the market. The problems are evident in both the primary markets (lower numbers of initial public offerings of new shares) and in the secondary markets (reduced market turnover).
The recent Snapchat IPO illustrates the trend. Snap, a young, still unprofitable company, saw its shares soared 44 per cent on its first day of trading, although it fell sharply subsequently. Shareholders providing capital will not be able to control the company, as company insiders have not given common stockholders voting rights, which is inconsistent with conventional corporate governance models. In technology-intensive sectors, for example, entrepreneurs, such as those associated with Snap, now use IPOs to either facilitate exits for venture capitalists and founders, create a currency in the form of listed shares to compensate or finance acquisitions, or raise cash to fund shortfalls between revenue and expenditure.
The declines are symptomatic of the problems of excessive financialisation. Financial instruments, such as shares and their derivatives, are intended as claims on real businesses. Over time, trading in the claims themselves have become more rewarding, leading to a disproportionate increase in the level of financial rather than business activity. Longer term, the identified developments threaten the viability of the stock market as a source of capital for businesses and also as an investment, damaging the real economy.
Equity investors – who have enjoyed strong gains over the past eight years – are unlikely to question the merits of stocks as an investment. US stock markets have tripled in price since 2009. In nominal terms the Dow Jones Index is up 70 per cent from its peak in January 2000. But 17 years later it is up only 19 per cent in real (inflation-adjusted) terms.
Investors rarely scrutinise the driver of equity returns. In reality stock markets have changed significantly over recent decades, driven by artificial factors that result in manipulated and unsustainable values.
The traditional functions of the stock market include facilitating capital-raisings for investment projects, allowing savers to invest and providing existing investors with the ability to liquidate their investments when circumstances require. Unfortunately, a number of factors now undermine these functions.
First, equity markets have increasingly decoupled from the real economy. Equity prices now do not correlate to fundamental economic factors, such as nominal gross domestic product or economic growth, or, sometimes, earnings.
Second, equity markets have become instruments of economic policy, as policymakers try to increase asset values to generate higher consumption driven by the “wealth effect” – increased spending resulting from a sense of financial security. Monetary measures, such as zero-interest-rate policy and quantitative easing, distort equity prices. Dividend yields that are higher than bond interest rates now drive valuations. Future corporate earnings are discounted at artificially low rates.
Third, the increased role of HFT (high frequency trading) has changed equity markets. HFT constitutes up to 70 per cent of trading volume in some markets. The average holding period of HFT trading is around 10 seconds. The investment horizon of portfolio investors has also shortened. In 1940 the average investment period was seven years. In the 1960s it was five years. In the 1980s it fell to two years. Today it is around seven months. The shift from investing for the long run has fundamentally changed the nature of equities, with momentum trading a larger factor.
Fourth, the increasing effect of HFT has increased volatility and the risk of large short-term price changes, such as that caused by the 7 October “flash crash”, discouraging some investors.
Fifth, financialisation may facilitate market manipulation, with the corrosive impact of insider-trading and market abuse eroding investor confidence.
US federal investigators found a spider’s web of insider-trading exploited by a small group of funds that benefited twice: from both trading profits and artificially enhanced returns. These, in turn, generated more investments and higher management fees. The investigations revealed expert network firms, which provided “independent investment research”. Redefining the concept of expertise, these firms seemed to specialise in matching insiders with traders hungry for privileged information, routinely allowing access to sensitive information on sales forecasts and earnings.
Regulators suggested that the practice was so widespread as to verge on a corrupt business model. Reminiscent of the late 1980s investigations into Drexel Burnham Lambert, Ivan Boesky and Michael Milken, the clutch of prosecutions has created an impression that a small golden circle of traders have an information edge, disadvantaging other, especially smaller, investors.
Finally, alternative sources of risk capital, the high cost of a stock market listing, particularly increasing compliance costs, increased public disclosure and scrutiny of activities including management remuneration as well as a shift to different forms of business ownership, such as private equity, have changed the nature of equity market. New capital raisings are increasingly viewed with scepticism as private investors or insiders seek to realise accreted gains, subtly changing the function of the market. The problems are evident in both the primary markets (lower numbers of initial public offerings of new shares) and in the secondary markets (reduced market turnover).
The recent Snapchat IPO illustrates the trend. Snap, a young, still unprofitable company, saw its shares soared 44 per cent on its first day of trading, although it fell sharply subsequently. Shareholders providing capital will not be able to control the company, as company insiders have not given common stockholders voting rights, which is inconsistent with conventional corporate governance models. In technology-intensive sectors, for example, entrepreneurs, such as those associated with Snap, now use IPOs to either facilitate exits for venture capitalists and founders, create a currency in the form of listed shares to compensate or finance acquisitions, or raise cash to fund shortfalls between revenue and expenditure.
The declines are symptomatic of the problems of excessive financialisation. Financial instruments, such as shares and their derivatives, are intended as claims on real businesses. Over time, trading in the claims themselves have become more rewarding, leading to a disproportionate increase in the level of financial rather than business activity. Longer term, the identified developments threaten the viability of the stock market as a source of capital for businesses and also as an investment, damaging the real economy.
Tuesday 21 October 2014
‘Cleansing the stock’ and other ways governments talk about human beings
Those in power don’t speak of ‘people’ or ‘killing’ – it helps them do their job. And we are picking up their dehumanising euphemisms
To blot people out of existence first you must blot them from your mind. Then you can persuade yourself that what you are doing is moral and necessary. Today this isn’t difficult. Those who act without compassion can draw upon a system of thought and language whose purpose is to shield them – and blind us – to the consequences.
The contention by Lord Freud, a minister in the UK’s Department of Work and Pensions, that disabled people are “not worth the full wage” isn’t the worst thing he’s alleged to have said. I say “alleged” because what my ears tell me is contested by Hansard, the official parliamentary record. During a debate in the House of Lords, he appeared to describe the changing number of disabled people likely to receive the employment and support allowance as a “bulge of, effectively, stock”. After a furious response by the people he was talking about, this was transcribed by Hansard as“stopped”, rendering the sentence meaningless. I’ve listened to the word several times on the parliamentary video. Like others, I struggle to hear it as anything but “stock”.
If we’re right, he is not the only person at his department who uses this term. Its website describes disabled people entering the government’s work programme for between three and six months as “3/6Mth stock”. Perhaps this makes sense when you remember that they are a source of profit for the companies running the programme. The department’s delivery plan recommends using “credit reference agency data to cleanse the stock of fraud and error”. To cleanse the stock: remember that.
Human beings – by which I mean those anthropoid creatures who do not necessarily receive social security – often live in families. But benefit claimants live in “benefit units”, defined by the government as “an adult plus their spouse (if applicable) plus any dependent children living in the household”. On the bright side, if you die while on a government work programme, you’ll be officially declared a “completer”. Which must be a relief.
A dehumanising system requires a dehumanising language. So familiar and pervasive has this language become that it has soaked almost unnoticed into our lives. Those who do have jobs are also described by the function they deliver to capital. These days they are widely known as “human resources”.
The living world is discussed in similar terms. Nature is “natural capital”. Ecological processes are ecosystem services, because their only purpose is to serve us. Hills, forests and rivers are described in government reports as “green infrastructure”. Wildlife and habitats are “asset classes” in an “ecosystems market”. Fish populations are invariably described as “stocks”, as if they exist only as movable assets from which wealth can be extracted – like disabled recipients of social security. The linguistic downgrading of human life and the natural world fuses in a word a Norwegian health trust used to characterise the patients on its waiting list: biomass.
Those who kill for a living employ similar terms. Israeli military commanders described the massacre of 2,100 Palestinians, most of whom were civilians (including 500 children), in Gaza this summer as “mowing the lawn”. It’s not original. Seeking to justify Barack Obama’s drone war in Pakistan (which has so far killed 2,300 people, only 4% of whom have since been named as members of al-Qaida), Obama’s counter-terrorism adviser Bruce Riedel explained that “you’ve got to mow the lawn all the time. The minute you stop mowing, the grass is going to grow back.” The director of the CIA, John Brennan, claimed that with “surgical precision” his drones “eliminate the cancerous tumour called an al-Qaida terrorist while limiting damage to the tissue around it”. Those who operate the drones describe their victims as bug splats.
During its attack on the Iraqi city of Falluja in November 2004, the US army used white phosphorus to kill or maim people taking shelter in houses or trenches. White phosphorus is fat-soluble. Even small crumbs of it bore through living tissue on contact. It destroys mucous membranes, blinding people and ripping up their lungs. Its use as a weapon is banned by the Chemical Weapons Convention, as the US army knows: one of its battle books observes that “it is against the law of land warfare to employ WP against personnel targets” (personnel targets, by the way, are human beings). But never mind all that. The army has developed a technique it calls Shake ‘n Bake: flush people out with phosphorus, then kill them with high explosives. Shake ‘n Bake is a product made by Kraft Foods for coating meat with breadcrumbs before cooking it.
Terms such as these are designed to replace mental images of death and mutilation with images of something else. Others, such as “collateral damage” (dead or wounded civilians), “kinetic activity” (shooting and bombing), “compounds” (homes) and “extraordinary rendition” (kidnapping and torture by states), are intended to prevent the formation of any mental pictures at all. If you can’t see what is being discussed, you will struggle to grasp the implications. The clearest example is “neutralising”, which neutralises the act of killing it describes.
I doubt many people could kill and wound if their language accurately represented what they were doing. It is notable that those who are most enthusiastic about waging war are the least able to describe what they are talking about without resorting to metaphor and euphemism. Few people have nightmares about squashing insects or mowing the lawn.
The media, instead of challenging public figures to say kill when they mean kill, and people when they mean people, repeats these evasions. Uncontested, their sanitised, trivialised, belittling terms seep into our own mouths, until we also talk about “operatives” or “human capital” or “illegal aliens” without stopping to consider how those words resonate and what they permit us not to see. I wouldn’t be surprised if there are dehumanising metaphors in this article that I have failed to spot.
If we wish to reclaim public life from the small number of people who have captured it, we must also reclaim the language in which it is expressed. To know what we are talking about: this, in more than one sense, is the task of those who want a better world.
Tuesday 12 November 2013
Twitter IPO: why the wrong people ended up with the money
If you think the social media company's stockmarket flotation is an advert for starting your own hi-tech company, just look at what happened to the founders
Twitter founder Jack Dorsey. Photograph: Rex Features
Every time a Silicon Valley name goes to Wall Street and raises billions, you hear a creation myth. You heard it again last Thursday, as Twitter floated on the stock exchange.
It comes in many flavours, but the ur-myth runs thus: a young man with more ideas than dollars hides in his parents' garage, has a eureka moment and devises some new gadget or program that changes the world – or at least distracts swaths of its population. Then comes the glorious denouement, where our startup hero goes to the stock market and cashes in big. And that, dear reader, is why we have Bill Microsoft, Mark Facebook, and Larry and Sergey Google. The end.
This is capitalism's version of The X Factor.
In the X-Factor economies of Britain and America, you may no longer be able to count on a decent job, affordable home or moderate pension, but still you are offered visions of outlandish success – whether in singing (for the glamorous) or business (for the rest of us). Doctoral theses will some day be written on how, as the arteries of social mobility hardened, the BBC served up ever more versions of the minted entrepreneur: Dragons' Den, Gerry Robinson, The Apprentice. The assumptions are easy to tease out: collective bargaining may be dead, but heroic labour can still earn the individual a string of zeroes.
The story of Twitter, as told over the past few days, snaps perfectly into this bigger jigsaw. A band of T-shirted young men (tick), coding in a flat (tick), come up with a crazy new software application (tick), which soon becomes a global phenomenon. Within seven years is floated on the stock market at a value of $34.7bn – more than most of the companies in the S&P 500. Cue details about how the founders are now paper billionaires, the employees are sitting on options that will make some of them millionaires, and the entire San Francisco HQ celebrated with an "overflowing tower of doughnuts" (tick, tick, tick).
Except the more you look at what has actually happened with Twitter, the more it comes to look like the opposite of the heroic earnings of a few hard-workers. Many of the billions will go to a select group, many of whom have put hardly any work into the company or taken comparatively little risk. That is true of the stock market flotation, of Twitter itself and of its entire business model.
Let's start with what happened last Thursday, when Twitter went to the stock market. On the first day of trading, the company's shares soared 73% – implying that they had been sold for over a billion dollars below what they could have got. By way of comparison, shares in Royal Mail jumped over 40% on opening, forcing Vince Cable to do some explaining.
Yawning gaps between offer price and true value are hardly unusual in flotations: they're often referred to as "leaving cash on the table" – the cash being for the investment banks managing the sale and their mates at other banks and funds who buy some of the shares. If an estate agent asked you to sell your house for £100,000 less than it was really worth, so that they could offer it around their mates in the building trade, you'd probably be straight on the phone to Watchdog. Yet when it comes to flotations, I am still waiting for the BBC report that notes how much the bankers scooped alongside the founders.
Let's also look at the company's story. I spent my weekend reading Hatching Twitter, by Nick Bilton, a biography of the business based on hundreds of hours of interviews with key participants. One of Bilton's achievements is to show how the credit for the idea can be split several ways. First, Jack Dorsey floated the notion of updating friends on one's whereabouts, while Noah Glass championed it and gave the application its name, then Biz Stone was asked to help with building the program by a still-reluctant Evan Williams. Yahoo! tells the minnow team that it's "simply just a messaging service" and a "few engineers could do the same thing in a week".
Look at which of the Twitter team did best from the flotation and the answer is: Evan Williams, who, in Bilton's telling, initially had least to do with the program, and Jack Dorsey. Those two are now worth over a billion dollars apiece. But the other members of the fab four are not even listed as major recipients of company stock. Who is? Typically, finance guys who took big stakes in the business when they could see how it might pay off.
And none of the founders are now anywhere near managing the company: within a few years of it getting off the ground, they'd all been cleared out for managers from big business. I'm not playing a violin for the four founders; but Twitter is hardly an advertisement for the rewards of starting up your own company.
Finally, look at Twitter's business. Or rather, look at its own assessment of its business, as stated in its S-1 stockmarket filing. Early on comes the delicious admission: "Our success depends on our ability to provide users of our products and services with valuable content, which in turn depends on the content contributed by our users." Read that again: Twitter is in the business of selling us to us – our news and views and idle banter. Without those, without us, it is nothing. As with Facebook and Tumblr and all the other social media, we're also part of Twitter's workforce. But I bet you haven't seen any stock options, either.
Tuesday 24 January 2012
Only a maximum wage can end the great corporate pay robbery
Corporate wealth is being siphoned off by a kleptocratic class that has neither earned nor generated it
The business secretary, Vince Cable. Photograph: Martin Argles for the Guardian
The income of corporate executives, which the business secretary Vince Cable has just failed to address, is a form of institutionalised theft, arranged by a kleptocratic class for the benefit of its members. The wealth that was once spread more evenly among the staff of a company, or distributed as lower prices or higher taxes, is now siphoned off by people who have neither earned nor generated it.
Over the past 10 years, chief executives' pay has risen nine times faster than that of the median earner. Some bosses (British Gas, Xstrata and Barclays for example) are now being paid over 1,000 times the national median wage. The share of national income captured by the top 0.1% rose from 1.3% in 1979 to 6.5% by 2007.
These rewards bear no relationship to risk. The bosses of big companies, though they call themselves risk-takers, are 13 times less likely to be sacked than the lowest paid workers. Even if they lose their jobs and never work again, they will have invested so much and secured such generous pensions and severance packages that they'll live in luxury for the rest of their lives. The risks are carried by other people.
The problem of executive pay is characterised by Cable and many others as a gap between reward and performance. But it runs deeper than that, for three reasons. As the writer Dan Pink has shown, it's not just that there is currently no visible link between performance and pay; but high pay actually reduces performance. Material rewards incentivise simple mechanistic jobs: working on an assembly line, for example. But they lead to the poorer execution of tasks which require problem-solving and cognitive skills. As studies for the US Federal Reserve and other such bolsheviks show, cash incentives narrow people's focus and restrict the range of their thinking. By contrast, intrinsic motivators — such as a sense of autonomy, of enhancing your skills and pursuing a higher purpose — tend to improve performance.
Even the 0.1% concede that money is not what drives them. Bernie Ecclestone says: "I doubt if any successful business person works for money … money is a by-product of success. It's not the main aim." Jeroen van der Veer, formerly the chief executive of Shell, recalls, "if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse". High pay is both counterproductive and unnecessary.
The second reason is that, as the psychologist Daniel Kahneman has shown, performance in the financial sector is random, and the belief of traders and fund managers that they are using skill to beat the market is a cognitive illusion. A link between pay and results is a reward for blind luck.
Most importantly, the wider consequences of grotesque inequality bear no relationship to entitlement. Obscene rewards for success are as socially corrosive as obscene rewards for failure. They reduce social mobility, enhance plutocratic power and allow the elite to inflict astonishing levels of damage on the environment. They create resentment and reduce the motivation of other workers, who see the greedy bosses as the personification of the company.
Cable has announced four main policies: more transparency, a requirement that companies should "report" on boardroom diversity, a mechanism for clawing back pay settlements not justified by the company's performance, and granting shareholders binding powers to block excessive rewards. They are likely to be almost useless – or worse. Pay transparency, while of general interest, can create the perverse result that executives discover how much their rivals are getting, and use the information to demand more. The clawback mechanism will be inserted into the corporate governance code. This is voluntary, and its existing provisions are widely ignored.
Shareholder power is likely to be illusory. As Prem Sikka has shown, the proportion of stock owned by individuals fell from 47% in 1969 to 10% in 2008, while the percentage in foreign hands has risen from 7% to 42%. Why should oil sheikhs care about social justice in the UK? And most traders hold shares too briefly to take an interest in the inner workings of a company. As Rob Taylor, formerly the chief executive of Kleinwort Benson, points out, if shareholders don't like the way a company is run, they don't hang around to change it; they sell up and move on.
Labour's policies seem designed to sound tough but change little. Like Cable, its spokesman Chuka Umunna talks of transparency and simplicity (which are both worthy aims) but not of holding down pay. Labour has based its policy on the findings of the High Pay Commission, which have been widely hailed as revolutionary. I've read the commission's final report, and can find no justification for this description. Its recommendations are, to be frank, pathetic. With the possible exception of employee representation on pay committees, the 12 measures it proposes are likely to make only a marginal difference. Nowhere does it suggest anything resembling the obvious means of capping executive pay: namely, er, capping executive pay.
So what should be done? The UK government imposes a minimum wage, and even the neoliberal coalition appears to accept that this is a necessary intervention in the market. So why should it not impose a maximum wage?
I'm not talking about ratios or relative earnings. Various bodies have proposed that there should be a fixed ratio of the top earnings within a company to either the median or lowest salaries. But as a report on this issue by the New Economics Foundation shows, the first measurement quickly becomes complex and opaque, the second creates an incentive to contract out the lowest paid work. I'm talking about an absolute maximum, applied nationwide.
Let's say £500,000 a year, a figure that includes bonuses, share options, pensions and benefits. It will rise with inflation, but no faster than that. If you want to make more, you can invest in a risky venture of your own or someone else's. If you want to make more money as a salaried worker – in other words while other people carry the risks – you can go abroad, and good riddance to you. Another country, incautious enough to set no cap, can deal with the consequences of your destructive greed.
The feeble measures proposed by the government will do nothing to prevent the great pay robbery. If Vince Cable intended to limit executive pay, he would limit it. But he knows who his masters are, and the policies he has announced are intended to create only a semblance of action.
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