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Japanese stock market at 26 year low

Chaotic42

Lifer
Jun 15, 2001
33,854
957
126
This may be a stupid question, but is this economic crisis at least partially self-fulfilling? If everyone got on TV tomorrow and predicted that the Dow Jones would hit 12,000 by the end of the week, would it?
 

StageLeft

No Lifer
Sep 29, 2000
70,150
2
0
Originally posted by: Chaotic42
This may be a stupid question, but is this economic crisis at least partially self-fulfilling? If everyone got on TV tomorrow and predicted that the Dow Jones would hit 12,000 by the end of the week, would it?
It would, yes. The stock market is very self-fulfilling, more so perhaps than the rest of the economy. Still, 12k may be overvalued by classical measures, but just as it's fallen quickly it could in theory rise quickly simply on investor confidence.

 

Mark R

Diamond Member
Oct 9, 1999
8,513
13
81
To an extent, predictions on stock values are self fulliling. The price of a stock is the market's opinion on its price taking into account all information about future earnings, risk, etc. that is available at the time.

If someone big makes a prediction that the dow is going down, people will sell in response to that. Indeed, the opposite happens, when Jim Cramer tips a stock on CNBC, that stock will spike as people take his advice and buy.

The thing is that there are limits to how far it will go, most people are interested in the longer term and welcome brief dips as it gives them an opportunity to stock up, provided that they blieve the fundamentals are right (good profits predicted, good dividends, low risk business model, etc.). So if a bunch of speculators hear 'The dow is crashing' they may well bail out, only for the big-boy long-term investors come in at the bottom and hoover up their shares.

The problem we have at the moment is one of fundamentals - the economy is slowing, less money is available in the economy, foreclosures are spiking, unemployment is going, the currency is spiking (killing export companies) - and almost every day, the predicitions get worse. Pretty much every major prediction of how the economy will develop has been absurdly overoptimistic compared to what has actually happened, so as events unfold things progressively begin to appear worse and worse for the long term.

This has deteriorated in the last few weeks as the crisis has gone worldwide with no country safe. Multiple countries having to ask the international monetary fund for a bailout. Evidence that the nationalised icelandic banks have missed repayments on their loans, suggesting that the icelandic government is bankrupt, stock market and credit market catastrophes in emerging markets like Russia, Latin America, India, etc.

The finally you have buying on margin - this was done by huge numbers of hedge funds using massive amounts of money. When you buy on margin, you make a down payment, and you get a loan to buy stock (a bit like how you might buy a house). Trouble is, that if the stock drops, you will be required to make an extra payment so that your loan won't go underwater. If you can't make the payment, you must sell all your stock. The result is that if you get a big move in the stock market it will tend to continue as people who have bought on margin get forced to sell.
 

Thump553

Lifer
Jun 2, 2000
12,015
1,366
126
Good explanation Mark R. Now add to that explanation hedge funds could buy on margin up to 30 times their capital (ie, a fund having $1,000,000 can buy $30,000,000 in securities), add to that larger than expected number of hedge fund cusotmers withdrawing their money (thus both shrinking the fund's capital and boosting demand for cash at the same time) and it is pretty clear why the market has dropped so rapidly in such a quick time.

Hedge funds can delay payout to the investors for a specified period of time, but from what I've heard a lot of those delay periods are expiring the end of October.

Couple with that actual bad economic news, like all the large layoffs starting to occur now and this thing may have quite a way more to drop.

OTOH, there are companies not in trouble at all, with great balance sheets, plenty of cash and solid business prospects, that are also being driven way below their true value. Sooner or later those have to bounce up.
 

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