Showing posts with label Economy. Show all posts
Showing posts with label Economy. Show all posts
Bubbles: Are we in a Market Bubble?
What is a bubble? Was the recent run of the Philippine Stock Market a bubble? Did this bubble just burst? In "10 Market Bubbles That Could Soon Burst", author Charles Wallace listed Emerging Market Stocks as one of those 10 market bubbles that could soon burst. Although the Philippine Stock Market wasn't specifically mentioned, it definitely is part of this group being the top performer in Asia just a couple of weeks back. With the recent decline of the PSEi for the past 6 days, can we conclude that indeed we were in a bubble and that the bubble has just bursted?
Investopedia.com defines a speculative bubble (some may refer to it as a market bubble, economic bubble, price bubble, etc.) as "a spike in asset values within a particular industry, commodity, or asset class." It went on to say that the driving forces usually involve fundamental and psychological forces. It stated that "in the beginning, attractive fundamentals may drive prices higher, but over time behavioral finance theories suggest that people invest so as to not "miss the boat" on high returns gained by others. When the artificially high prices inevitably fall, most short-term investors are shaken out of the market after which the market can return to being driven by fundamental metrics."
Just basing it on this definition, then I would say that indeed the Philippine Stock Market was in some sort of a market bubble. With analysts coming out with forecasts predicting the market to produce hefty returns for the next year, some even arguing that it would last for the next 3 to 5 years, investors rushed to get in the market so as not to be left behind. This caused the market to appreciate in value in a very short time, forming a bubble of some sort. (Believe it or not, ALFM Growth Fund is already oversubscribed. They would have to wait for SEC approval to be able to add shares before they can accommodate new investors.)
However, I would have to say that the current market is backed by very strong fundamentals. Just this week alone we've had around 10 companies reporting double-digit returns. Some even reporting net incomes more than double that of the previous year. In this regard, I'd like to think that it was just a small bubble worth at least a week or 2 of decline. In effect, a healthy correction that was very much needed by the market. And as the last sentence in that definition indicates, the Philippine stock market will soon be ready to be driven by fundamental metrics again.
As to whether the Philippine market and other emerging market stocks would definitely turn into a bubble, i guess only time will tell.
Along with emerging market stocks, Charles Wallace also included the following in his list: Gold, Real Estate in China, Alternative Energy, Commodities, Apple (No, not the fruit but the company that makes iPhones and iPods), Social Networking, Small-Tech Companies, the U.S. Dollar, and the US Government Debt. If you have the time, read the article. It's very interesting.
Keep on attracting money, Money Magnets! Let's achieve our GOALS in life together! (^o^)/
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Signs of An Economic Recovery
I am a Money Magnet! We are Money Magnets!
Have you ever wondered how analysts determine whether the economy is doing good or not? I bet you have. Those who are investing in the stock market most especially. It is a known fact that the stock market follows the economic outlook. But sometimes it could all be just based on the sentiments of the investors. So what factors do persuade these investors? If we were to just look at the GDP (Gross Domestic Product) as we learned in Economics, then the factors to look at would be Consumption, Gross Investments, Government Spending, Exports, and Imports. Understanding the economy however, is not that easy. It is both a science and an art. There are other factors that affect investor sentiments. To help us all Money Magnets, here's an article I found from investopedia.com. Enjoy!
The 6 Signs of an Economic Recovery
- Employment It is difficult to talk about an economy in recovery if people are not getting back to work. There are such things as "jobless recoveries", where there is enough economic activity to get businesses moving again, but not enough to stimulate hiring.
In most other cases, however, investors are right to correlate an improving economy with people getting back to work. The reported unemployment rate, then, is often given a great deal of weight by observers. Keep in mind, though, that unemployment data is not always reliable in the early stages of a recovery - the quirks of the statistical method's use exclude those who have abandoned the search for work, but when a recovery seems plausible, some of these people resume their search and count once again among the unemployed.
Non-farm payroll is another valuable measure - it gives a somewhat clearer sense of how many people companies are hiring. Along with the number of people added (or subtracted) from payrolls, investors can see where these workers are going and where wages are trending.
Along with metrics like unemployment and non-farm payrolls, investors can also follow the lesser-known ASA Staffing Index. This index measures activity in the temporary staffing industry; often when employers seek to add workers, they add temporary workers first so as to avoid the commitments and expenses of adding full-time employees ahead of a confirmation that business has improved. As such, a climbing ASA Staffing Index can signal that a recovery is underway.
- Consumer Spending For better or worse, the U.S. economy is driven by consumer spending. Consequently, it is difficult to imagine a recovery that does not include rebounding consumer spending. Longer term, consumers may realize that they should save more and spend less, but that sort of restructuring does not occur overnight. Look for consumers opening their wallets as a sign of a recovery. (For further reading on economic indicators, check out our Economic Indicators Tutorial.)
- Consumer Sentiment Perhaps it is a testament to the power of positive thinking, but sentiment indicators like the Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index do seem to correlate with reality more often than not. These surveys ask people how they feel about the economy in near-term and their own individual or family prospects.
Ultimately, sentiment is somewhat of a self-fulfilling prophecy; if there is a constant drumbeat of how bad things are, people often become more conservative in their spending habits. Lower spending will then more or less make the economic soft patch happen. When people are more optimistic, though, they are more likely to spend money, start or expand small businesses, and otherwise act in ways that are good for economic growth.
- Business Indicators How consumers feel about the economy is all well and good, but it has to be matched by optimism and expansion in the business community. The Purchasing Managers' Index (PMI) surveys whether businesses are seeing new orders, higher production levels, timely deliveries from suppliers and increasing inventories and employment, all areas where a recovery will show itself.
Inventories, however, are harder to correlate as many businesses will look to run down inventories before committing to an expansion of production. This choppiness is often an issue in early economic recoveries as businesses do not want to miss the turn in the economy (and let their rivals capture share), but they do not want to overextend themselves either. - Bank Lending While public companies are not entirely dependent upon banks to grow their businesses, most small non-public businesses are. Without banksunderwriting new loans, small businesses do not grow, and without that growth it is difficult to see higher employment and a stable recovery.
The Federal Reserve provides regular information on bank lending activity, and investors can perhaps also look to the new Thomson Reuters/PayNet Small Business Lending Index to see whether small businesses are seeking (and getting) the funds to expand their businesses. (To find out more about the actions of the Federal Reserve, check out our Federal Reserve Tutorial.)
- Shipping Activity Shipping activity is a bit harder to read than other indicators, but the basic idea is straightforward - since most people buy things that come from "someplace else", overall economic activity is correlated with the movement of goods across the continent. Notable indexes here include the Cass Freight Index and the American Trucking Association's Truck Tonnage Index. (This index can provide insight into economic growth and production, but it has its critics. To learn more, see The Baltic Dry Index: Evaluating An Economic Recovery.)
None of these indicators are foolproof, or even all that useful in isolation. Every economic cycle is a little different than prior cycles, so investors should be careful about automatically applying old rules to new data. There is a certain amount of common sense that should guide investors. Economic growth means certain things - namely increasing production, increasing consumption (or savings), increasing employment, and increasing activity in areas like construction and transportation. By keeping a careful eye on whether businesses are preparing for growth, whether consumers feel comfortable about spending, and whether money and goods are moving through the economy, investors can get a sense of whether the next recovery is real.
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Of Crashes and Bubbles
Let's beef up our vocabulary! Do you know the difference between a crash, a bubble, a depression, and a correction? We often hear these terms in business news and it can get quite confusing at times. Read on to enrich your vocabulary.
Bubbles
A bubble is a type of investing phenomenon where in investors put so much demand on something, like a stock, that they drive the price up beyond its actual worth. It is likened to a soap bubble because like blowing bubbles, they appear as though they will rise forever, but since they are not formed from anything solid or substantial, they eventually pop. And when they do, money invested gets blown away in the wind as well.
Crash
A crash is a significant drop in the TOTAL VALUE of a market. It usually occurs after a bubble has popped. Once a bubble pops, majority of investors try to flee the market at the same time and consequently incur massive losses. And in order to prevent further losses, investors go into panic selling, contributing greatly to the decline of the market. The market then crashes affecting everyone. It is important to note that not all bubbles lead into a crash.
Typically, crashes in stock markets are followed by depression.
Correction
It is important to note the distinction between a crash and a correction. As a general rule, a correction should not exceed a 20% loss of value in the market. It is supposedly the market's way of slapping some sense into overly enthusiastic investors.
source: www.investopedia.com
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