In a way yes. That is because analyzing a financial statement implies a pair of assumptions, one concerning what the statement tells you about the company and one about what this data says about the market.
The assumption that the market will be viable to compute this internal company data is vital, as the crisis has produced a market which does not seem to work in a traditional investing sense.
Hardanalytics.com has argued that keeping interest rates low may have hurt this process. But that re-functionalizing seems to be a consequence of processes in the forex market, if looked at in a computational sense.
Thus the question arises, is it possible to look at companies to determine movements in the forex market, that is for forex, company health is something static to look at, just as it is for the equity market.
I would argue that it certainly will show you structural information about the forex market. It will tell you whether growth processes are strong or weak. And that may show whether the equity market is being effectively re-functionalized by interest rates via forex. The assumption is that any economic growth in the market right now is a computation on companies, especially those with a creative moat of some kind.
The crisis can be described as a process of destructuring, but it did not seem to remove the way companies are keyed into the market. That process seems very hard wired. The reason I say this is because of an examination of the way companies reacted to the crisis, in terms of share price.
I grouped companies into a series of classes, the best maybe 30 or better percent reduction, a good set at 50 percent and so on. There were distinct classes.
An examination of share price afterwards showed a change in the slope of their trajectories, for the very best, of a relatively small amount. In fact it might be argued that there is some evidence that it did not really hurt these companies it simply took the slope to a more realistic trajectory.
This suggests that what was happening in forex at the time was a re-computation of some kind, a correction in the true sense, but more particularly the market itself making a re-optimization.
As I suggested in my most recent post, there are internal processes of optimization in the forex and equity markets, or more particularly nested in the forex market for both markets. Perhaps the source of this is the long term valuations of analysis and investors and the market has simply made it an internal program, but one investors and traders have to contend with.
This is like AI, though emergent programs, but such phenomenon are not unknown in complex systems, and the Dow is perhaps the most complex non-natural system in the world (and perhaps the most complex system, apart from the human brain). It might be argued that the effect of the crisis was to make the forex market primary, that is that EUR/USD could float the stock market.
The re-emergence of growth processes from companies in the US though may be re-establishing this primacy of the stock market, expressed in the re-emergence of USD, particularly against JPY. That has been a contention of Hardanalytics.com for a long time. It is perhaps expressed in a closer syncing between the markets and USD/JPY and less evidence of structure breaking in USD/JPY when the market tanks.
What might one expect to happen in a recovery from the crisis. Well, firstly, I would not say this is a recovery from the crisis. The crisis was the recovery, if one wants financial markets to reflect accurate valuations. But it was a different kind of revaluation from irrational exuberance, for example.
Well, why should one want markets to reflect accurate valuations. Let us say markets are forced to reflect inaccurate values. That is a market of mis-pricing. One would have to gut the market, remove those programs and those people who try and find accurate valuations over time.
To do that one would have to remove the forex market, imagine trying to trade there and ignoring pricing accuracy or exchange currency and ignore pricing.
The reason one would have to gut the market, is that precisely this was the case in the run up to the crisis, not mis-pricing as such, but mis-priced assets. The market revalued them. That was the crisis.
So experience suggests that the markets will not allow asset mis-pricing over time. If they do, the correction would make one wish they had been accurately priced, with all that implied. Now interestingly, it may be the case that assets were accurately priced before the crisis, in terms of future valuations.
But if so it was a valuation based on a present valuation. One of the mechanisms of the market seems to be to collapse present valuations to true values. That is exactly looking at the bottom line and deducing those future income streams may not happen. Is that what happened in the crisis.
It was something further than that. It was more like looking at what lies behind income streams, that is the values of assets. That is the true nature of the crisis, asset revaluation, in the light of the reversal of assets into liabilities (which they may have always been). This asset revaluation had the practical effect of generating margin calls.
What triggers a share price being grounded in present income streams. Normally it is a drop in sales, thus the projection of sales into the future changes radically. That is the way the future price is computed changes, since analysts normally use an algorithm of some kind. It is normally not about revaluing assets.
Share prices re-computed the first way can easily recover, and it could be argued that market corrections are normally like this, the market recovers and the share price makes new, but corrected highs.
One could even argue that it is necessary, as those future projections could not be sustained. But why, well, it would essentially need a vast expansion of asset values, to generate these sales, if one views the company as an entity producing equity.
So what the crisis did was totally remove that belief from the market, by essentially removing the assets to believe in. One might say when it comes back, the market will recover as a device for expanding equity. Does USD reflect asset values, perhaps.
It is an interesting view of USD/JPY as JPY still contends with sunken assets. I would suggest the creative dynamo in the US would save the US from this fate. However companies with a creative moat, do not necessarily need such an expansion of assets.
But is there a better way. Well, a market which is more accurate, more sensitive at predictive valuations for future share prices. A necessary condition for this is accurate asset valuations, well this has happened. But the cheap money pumped again and again into the market reverses this, unless the market is carefully processing this (which it might be, perhaps with the forex market).
This is the concept of Future Markets which I discussed in that post. But it is as well the concept of a restructuring of the way the market computes. That is, instead of backstopping valuations with assets, sidestepped by a projection into the future of income generated by these assets, one lets the market compute value (what forex traders try and do).
What is this exactly, it is functional investing, it extends trading out into the far distance. Long term investing needs only those processes deep in the heart of the Dow to survive. But the sensitivity of such analytics could maybe be increased.
Such techniques usually need retuning and each time you do this you take a risk because the causality of the market is unclear. In some sense this moves investing into the forex market. That is one needs to take account of currency movements and how they reflect changes in the structure of the markets.
This is how one makes adjustments to investing instruments over time. But one has to wait for the action to happen, for example warnings of tides of money flow from RSI. But perhaps one can look for the changes that make the tides. It is not prediction, it is more sensitive reading of structure, to gauge its function in terms of market directionality. If a market is more attuned to creative moats, it may be that such a sensitivity is necessary.
© 2011 Guy Barry - All Rights Reserved.
