STOCK MARKET WATCH -- Tuesday, 5 June 2012

[Demeter]

2. In praise of equity By Sell on News, a macro equities analyst. ANALYSIS THEORY

http://www.nakedcapitalism.com/2012/06/in-praise-of-equity.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

The stock market fate of Facebook has focused attention on the state of the public equity markets. Already, the company is being sued for allegedly misleading investors about the state of its business. There is much hand wringing about the problems of being publicly listed — the onerous burden of regulation, the public scrutiny, the short-termism of professional investors. It’s not easy being a billionaire these days. Chief amongst the hand wringers is The Economist, which ran a cover story on the demise of the public company. And there is certainly evidence of a problem:

The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in America each year. In 2001-09 that number fell to 30. Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do little to offset the long-term decline.

This has probably had a lot to do with the poor returns in global stock markets in the wake of the GFC, but The Economist is entirely correct to be worried. The reasons given for the concern are that public companies create jobs, they “let in daylight” and they allow the public to invest in companies. I would add two others. First, big stock markets tend to distribute economic power. This is more of a political point, but in countries with large stock markets, the extremely rich are not as powerful. Gina Rinehart may be the world’s richest woman at $29 billion. It sounds a lot. But compare that with the ASX $1.4 trillion of public companies. It is drawfed by BHP’s $160 billion market capitalisation, or Rio’s $100 billion. That works against the concentration of power that extreme wealth can catalyse. In countries in South America, for instance, there is no such counterbalance and rich families have a much greater influence. This is not to argue that it is democratic or shares power; it patently does not. The owners, superannuants, usually don’t even know what they own. But it is a useful limit.

Second, public stock markets, and to a lesser extent bond markets, can be re-priced in a way that bank debt cannot. Big swings in share prices act like a shock absorber when there is a financial crisis. Bonds can also be repriced, although because debt has to repaid the shock absorber effect is less pronounced. Banks, on the other hand, are extremely vulnerable to repricing. They only have to have a small number of defaults on their loan book for it to result in collapse. So when economies largely depend on bank debt, they are far more vulnerable to financial crises than countries that have a balance between bonds and equities. In America Japan, the balance between bonds, equities and bank deposits is about equal. In Europe, there are smaller stock markets and more bonds, but there is a reasonable balance. In Asia (ex-Japan), there is a heavy bias towards bank debt. So much so, McKinsey is anticipating a $12.3 trillion “equity gap” in Asia by the end of the decade...To a large extent, big equity markets are an English language phenomenon. I would love to know why, so if any readers out there have any references please tell me. It is doubly strange given that the bourse was largely a French idea. It seems to be linked to non-conformist groups in the north of England during the rapid period of industrialisation in the nineteenth century: mutual funds such as Manchester Unity which invested in shares. Australia was an early entrant with its innovations in health funds. Of course, many of those non-conformists went to America, perhaps taking the practice with them. But that is a very sketchy guess; its historical origins are worth studying closely

MUCH MORE--YOU REALLY OUGHT TO READ THIS ONE--IT EXPLAINS SO MUCH AND OPENS WINDOWS OF POSSIBILITY