13 June 2010

Qualitiative Markets

The financial crisis had an effect on share values even in non-financial sectors (one reason for saying equity investing is highly risky). The engineering company JEC was worth $95 in December 2007. It has been rattling around $40 since the huge drop. Why cannot this company lift off ?

What went from such a company, was it something intrinsic to its balance sheet or something wider with the market. A premise in my blog is something changed with the computational nature of the market.

The company's sales are down and its income is down. Its bottom line has been hit, but not that hard. Share value is supposed to represent a future summation of expected income streams. By the way, Financial Analysis may look numerical but it is classically qualitative reasoning (this was one of my research areas), partly because it deals with future estimations which are inherently qualitative.

Anyway taken by itself JEC's share valuation is too low. It is like there is no belief in a recovery. JEC is valued at its valuation before the huge lift off in its shares in 2007.

Basically JEC has been sent back in time, to a state before the surge 2007-2008. What is happening is company values are being valued at the present state of the company more or less (mostly less), there is no belief in a future positive valuation. I have seen this across many companies (the same comments go almost in lockstep for another fave of mine and many others, EME).

A future belief in expected income streams represents a vast calculation across companies valuing companies over time. This calculation, inherent to the market has maybe changed. This calculation itself brings shares up to the inherent value of a company as it is not based on the future, it is based on a past and present qualitative analysis of the effectiveness of a company in increasing its stream of cash outputs, with numerical data.

The problem may be problems with the debt markets as this is a key way a company increases its equity. But debt tends to be discounted. The problem may be technical. The fractal nature of the market suggests patterns evident at very low levels are evident at high levels as well. A huge drop tends to be followed by a retracement correction upwards (which happened) and then a consolidation.

All these dampen down the market. But it can be said as well, the market in recent times has not been that big on future projections, and the surge in 2007-2008 may have simply been that irrational exuberance again. Thus the market may have fundamentally changed anyway. This may be a result of the tech boom and bust.

Irrational exuberance is really a big belief in big income streams in the future. A recovery surging back will surely re-ignite this, but a tech stock slump is possible as well.

The reason I think perhaps it is not a tech stock situation, is they were filled with hot air and JEC and EME never were, there bottom line was genuinely growing during their surge. Whether a recovery surge this happens or not will maybe indicate whether the market is or is not what it was !

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