World stock market falls : BBC
Post 1 of 6
How can you tell the difference between a boom and a bubble?
Stock markets around the world have been falling sharply on fears of rising interest rates and a credit crunch. What is causing the fall, and how will it affect the ordinary individual?
What has been happening to the world's stock markets?
The value of the world's major companies has taken a tumble as the world's stock markets have plunged in the past two days.
The move has wiped billions of dollars off the value of shares owned by individuals and institutions such as pension funds and insurance companies.
The fall started in the US, but then spread first to Europe and then to Asia..
Why are shares falling?
In recent years, stock markets have been boosted by a takeover boom.
Lots of companies have been bought at high prices by private equity firms, who borrowed the money to do so from rich individuals and banks.
This has increased the price of other companies' shares, in the hope that they could be next takeover target.
The banks have been more than willing to lend them to money at low rates - partly because global interest rates have themselves been at historically low levels, but also because they have been able to sell these debts on to others through credit markets.
And the low interest rates, in turn, have led to investors seeking higher returns for their money, further feeding the hunger to finance the loans behind takeover deals, as well as a range of more or less exotic investments.
But now the era of cheap money seems to be coming to a end, as lenders have suddenly realised how risky some of their investments in private equity firms might be.
The result is a rapidly-declining appetite among investors for underwriting this kind of lending - and thus the takeover boom may be coming to an end.
It also means that the banks and other financial institutions could be in trouble as they find themselves carrying much more of the private equity lending on their books than they expected to.
In the US, many such institutions are already exposed to losses on bad mortgage loans that were originally given to people with poor credit histories (so-called "sub-prime" lending).
What is the flight to quality?
When people with money to lend become worried about risks, they tend to put their money in safe investments.
So there has been a rush to invest in government bonds, like US Treasury bonds, and safe currencies, like the yen.
In contrast, people are now demanding much higher interest rates to lend to smaller companies or to the governments in developing countries.
And there is almost no market at the moment for the debt relating to sub-prime mortgages or leveraged buy-outs.
How long will it go on?
Stock market fluctuations are a normal part of stock market activity, and no one can say how far shares could fall or how long the slowdown could go on.
Markets have had quite a sharp rise in the past 18 months, and the current correction may simply return them to the previous level.
Broadly, company profits have been strong, and the world economy seems to be entering a period of revival, especially in Europe and Japan.
However, stock markets look at future expectations, so they may be concerned that corporate profits have already peaked.
And even if stock markets recover, it looks like the re-pricing of risk - making it more expensive to borrow for certain kinds of investments - is here to stay.
And the world's major central banks - with the exception of the US Federal Reserve - look set to continue to raise interest rates to combat inflationary fears.
What will it mean to you?
Many individuals own stocks and shares - around half of all US households, and around one-quarter in the UK.
If the stock market falls continue, they may feel less wealthy - and be less likely to buy goods and services, slowing the economy.
In addition, many pension funds own shares which make up part of their portfolio used to pay people's occupational pensions.
If shares fall, they may have less money to pay future pensions, and employee contributions may have to rise.
Already in both the UK and US many companies have closed company pension schemes to new employees.
Finally, the impact on businesses could be mixed.
Smaller, more risky ventures could find it more difficult to get funding, slowing the pace of innovation.
But big companies might become less vulnerable to takeovers, which could mean fewer job losses and restructuring costs as long as profits keep up.
Source: BBC
Stock markets around the world have been falling sharply on fears of rising interest rates and a credit crunch. What is causing the fall, and how will it affect the ordinary individual?
What has been happening to the world's stock markets?
The value of the world's major companies has taken a tumble as the world's stock markets have plunged in the past two days.
The move has wiped billions of dollars off the value of shares owned by individuals and institutions such as pension funds and insurance companies.
The fall started in the US, but then spread first to Europe and then to Asia..
Why are shares falling?
In recent years, stock markets have been boosted by a takeover boom.
Lots of companies have been bought at high prices by private equity firms, who borrowed the money to do so from rich individuals and banks.
This has increased the price of other companies' shares, in the hope that they could be next takeover target.
The banks have been more than willing to lend them to money at low rates - partly because global interest rates have themselves been at historically low levels, but also because they have been able to sell these debts on to others through credit markets.
And the low interest rates, in turn, have led to investors seeking higher returns for their money, further feeding the hunger to finance the loans behind takeover deals, as well as a range of more or less exotic investments.
But now the era of cheap money seems to be coming to a end, as lenders have suddenly realised how risky some of their investments in private equity firms might be.
The result is a rapidly-declining appetite among investors for underwriting this kind of lending - and thus the takeover boom may be coming to an end.
It also means that the banks and other financial institutions could be in trouble as they find themselves carrying much more of the private equity lending on their books than they expected to.
In the US, many such institutions are already exposed to losses on bad mortgage loans that were originally given to people with poor credit histories (so-called "sub-prime" lending).
What is the flight to quality?
When people with money to lend become worried about risks, they tend to put their money in safe investments.
So there has been a rush to invest in government bonds, like US Treasury bonds, and safe currencies, like the yen.
In contrast, people are now demanding much higher interest rates to lend to smaller companies or to the governments in developing countries.
And there is almost no market at the moment for the debt relating to sub-prime mortgages or leveraged buy-outs.
How long will it go on?
Stock market fluctuations are a normal part of stock market activity, and no one can say how far shares could fall or how long the slowdown could go on.
Markets have had quite a sharp rise in the past 18 months, and the current correction may simply return them to the previous level.
Broadly, company profits have been strong, and the world economy seems to be entering a period of revival, especially in Europe and Japan.
However, stock markets look at future expectations, so they may be concerned that corporate profits have already peaked.
And even if stock markets recover, it looks like the re-pricing of risk - making it more expensive to borrow for certain kinds of investments - is here to stay.
And the world's major central banks - with the exception of the US Federal Reserve - look set to continue to raise interest rates to combat inflationary fears.
What will it mean to you?
Many individuals own stocks and shares - around half of all US households, and around one-quarter in the UK.
If the stock market falls continue, they may feel less wealthy - and be less likely to buy goods and services, slowing the economy.
In addition, many pension funds own shares which make up part of their portfolio used to pay people's occupational pensions.
If shares fall, they may have less money to pay future pensions, and employee contributions may have to rise.
Already in both the UK and US many companies have closed company pension schemes to new employees.
Finally, the impact on businesses could be mixed.
Smaller, more risky ventures could find it more difficult to get funding, slowing the pace of innovation.
But big companies might become less vulnerable to takeovers, which could mean fewer job losses and restructuring costs as long as profits keep up.
Source: BBC
28 Jul 2007 21:53
Post 2 of 6
Replying to [Ganapathie]: Very nice thought out article. However, in the lending industry companies have taken very large stock price drops even though many have returned dividends per share far beyond speculation. The lending institutions that are in dire straits are not those that actually made loans to less credit worthy individuals but because. They themselves got into a credit war offering APR's with no sustainable margin and neglecting the signs of huge build ups of goods. This has been more than a correction it has been an absence of economists good judgement in recognizing the the signs of the build ups. Volitility in stock markets can be good at times but this volatility started six months ago and has never stopped. When economists start looking at how many low paying jobs have been originated instead of how many high paying jobs have been lost there will be a problem. What is hurting the lending institutions is the fact that the people they lent $250,000.00 + mortages to have almost 4 times as many new forclosures as those that recieved loans of $70,000.00 - $125,000.00
The fact is that how the US markets go so goes the world markets because of their investments in American Corporations. High costs for Crude oil and what people are paying for refined products in the West is yet another reason. The holidays observed in the Westeren nations will be upon us soon and many retailers are not looking to build up huge supplies of goods in their distribution centers or warehouses. I recently returned from a Eurasian business trip where these sentinments were stated by both distributors and retailers as well.
Best regards,
Ranger
The fact is that how the US markets go so goes the world markets because of their investments in American Corporations. High costs for Crude oil and what people are paying for refined products in the West is yet another reason. The holidays observed in the Westeren nations will be upon us soon and many retailers are not looking to build up huge supplies of goods in their distribution centers or warehouses. I recently returned from a Eurasian business trip where these sentinments were stated by both distributors and retailers as well.
Best regards,
Ranger
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02 Aug 2007 18:17
Post 3 of 6
Replying to [Ranger]: Ranger, it was a good reply. My question is...if the financial institutions' stock are forming a small chunk of overall stock market, why it is taking a toll on entire market?
Have mutual funds also pumped in money to these financial institutions that gave loans to sub-prime customers...
Have mutual funds also pumped in money to these financial institutions that gave loans to sub-prime customers...
05 Aug 2007 17:57
Post 4 of 6
Replying to [Ganapathie] ...if the financial institutions' stock are forming a small chunk of overall stock market, why it is taking a toll on entire market?
It is not only the financial institutions which plays role in the stock market but there are several other factors also which trigger the fall in the stock market. Let me analyse this way:
Stock markets basic characterstic is Speculation. When the countrys economy is booming, and industries doing their bests, this speculation yields good returns on investment, sometimes beyond imaginations 200% to 400%. More the return from the stock market, more the people start getting attracted towards speculations. They prefer to invest in speculative stock markets instead of holding it as their savings in banks. For balanced growth and development, countrys saving should be equal to Investments. But when speculation becomes more attractive, savings gets adversely affected and gets diverted towards unproductive stock market.
Financial insititutions need money to finance companies.Companies need money to introduce new investments for new technologies for their survivals. But there is no sufficient savings in the economy to support new technologies as the common man prefers to invest in unproductive speculative stock market. Companies in order to avail funding from the financial insititutions and from the public overrate their companies in the stock markets. And if there is an imbalances in the distribution of income in an economy of any country, it adds the fuel to fire. In this situation, companies face difficulty in selling their products /goods as there are limited percentage of people with enough purchasing power who can afford to buy the latests. Whatever they buy on credit, get stuck for next 2-3 years with the finance companies unless they repay the whole. They are not in position to buy new products every now and then. This way, new products manufactured by the companies start getting accumulated with the companies in the coming years. Financial institutions in an effort to be aggressive in financing due to credit wars ( also known as cut throat competition in economic terms) prefer to ignore the huge stock build ups of manufactured goods and keep offering credits on easy interest rates - not covering their own risks. (Ranger has referred above - neglecting the signs of huge stock build ups).
The moment the stock prices start falling, it has a cascading effect on the whole stock market. Since speculative motive plays an important role, people, in fear, start selling all their shares and want to encash as much as possible at the earliest. And this leads to the continuous fall in the entire stock market. With the fall in the stock market, people have less money in hand are not in a postion to buy new products of the companies. Again companies sales performance goes down affecting their profitabilty and financial soundness advesrely which again leads to further fall in their shares in the stock market. It is a vicious circles taking the entire market into the grip. So it hardly matters if there is small chunk of stocks of financial institutions.
So I feel, in nutshell, there are four main factors which are responsible for the fall in stock market::
(1) Fear
(2) Excessive Credit on easy terms without taking into account the risk factor.
(3) Imbalances in the distribution of income in an economy.
(4) Selective growth in industrial development., i.e. growth in a few specific types of
industries and their anciallaries.
Only today there is news on the internet that Asian stocks plunged as fall out spread from global market turmoil set off by concerns about credit weakness in the U.S. Link: http://news.yahoo.com/s/ap/20070810/ap_on_bi_ge/world_markets
Here also we see it is the "Fear" of "Credit weakness" amongst the investors.
It is not only the financial institutions which plays role in the stock market but there are several other factors also which trigger the fall in the stock market. Let me analyse this way:
Stock markets basic characterstic is Speculation. When the countrys economy is booming, and industries doing their bests, this speculation yields good returns on investment, sometimes beyond imaginations 200% to 400%. More the return from the stock market, more the people start getting attracted towards speculations. They prefer to invest in speculative stock markets instead of holding it as their savings in banks. For balanced growth and development, countrys saving should be equal to Investments. But when speculation becomes more attractive, savings gets adversely affected and gets diverted towards unproductive stock market.
Financial insititutions need money to finance companies.Companies need money to introduce new investments for new technologies for their survivals. But there is no sufficient savings in the economy to support new technologies as the common man prefers to invest in unproductive speculative stock market. Companies in order to avail funding from the financial insititutions and from the public overrate their companies in the stock markets. And if there is an imbalances in the distribution of income in an economy of any country, it adds the fuel to fire. In this situation, companies face difficulty in selling their products /goods as there are limited percentage of people with enough purchasing power who can afford to buy the latests. Whatever they buy on credit, get stuck for next 2-3 years with the finance companies unless they repay the whole. They are not in position to buy new products every now and then. This way, new products manufactured by the companies start getting accumulated with the companies in the coming years. Financial institutions in an effort to be aggressive in financing due to credit wars ( also known as cut throat competition in economic terms) prefer to ignore the huge stock build ups of manufactured goods and keep offering credits on easy interest rates - not covering their own risks. (Ranger has referred above - neglecting the signs of huge stock build ups).
The moment the stock prices start falling, it has a cascading effect on the whole stock market. Since speculative motive plays an important role, people, in fear, start selling all their shares and want to encash as much as possible at the earliest. And this leads to the continuous fall in the entire stock market. With the fall in the stock market, people have less money in hand are not in a postion to buy new products of the companies. Again companies sales performance goes down affecting their profitabilty and financial soundness advesrely which again leads to further fall in their shares in the stock market. It is a vicious circles taking the entire market into the grip. So it hardly matters if there is small chunk of stocks of financial institutions.
So I feel, in nutshell, there are four main factors which are responsible for the fall in stock market::
(1) Fear
(2) Excessive Credit on easy terms without taking into account the risk factor.
(3) Imbalances in the distribution of income in an economy.
(4) Selective growth in industrial development., i.e. growth in a few specific types of
industries and their anciallaries.
Only today there is news on the internet that Asian stocks plunged as fall out spread from global market turmoil set off by concerns about credit weakness in the U.S. Link: http://news.yahoo.com/s/ap/20070810/ap_on_bi_ge/world_markets
Here also we see it is the "Fear" of "Credit weakness" amongst the investors.
10 Aug 2007 05:42
Post 5 of 6
Replying to [Ganapathie]: What Vshanker said is true, but to add one more thing with the slow down of the house building market as well it effects all manufacturing companies with in the sector such as companies from China that supply Plywood, Pressboard and other laminates used in building and also used to making counter tops. Kitchen cabinets ect.... hardware and power handtools made by manufactures in Europe, UK and India. Paints and Varnish manufactures. The list is really quite endless when you think of all the materiaals that are used in construction of housing.
Best regards,
Ranger
Best regards,
Ranger
SIGNATURE:
About Our Company
Me Tech Supply
ME Tech Supply a D. B. A provides sourcing solutions for both small and medium sized businesses. We are members of the GSAA whose Agents have verified more than 2. 5 million companies World WideWe offer low cos...
More
13 Aug 2007 01:21
Post 6 of 6
Replying to [Ranger]:
There is also the fact that when the banks have to make room for what might become bad loans, they always tighten the rules for loaning more money. This has a follow-on effect of making money harder to come by, which means companies with expansion ready to happen many times can no longer get the funds they would have in a less tight market. That causes more domino effects throough an economy
There is also the fact that when the banks have to make room for what might become bad loans, they always tighten the rules for loaning more money. This has a follow-on effect of making money harder to come by, which means companies with expansion ready to happen many times can no longer get the funds they would have in a less tight market. That causes more domino effects throough an economy
13 Aug 2007 14:44
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