22 March 2011

Equity and Forex

One element of a set of financial statements that is regarded as important for showing a possibility of share growth in the short term, is dynamic changes in cash. That is, there is an important sensitivity to the output of money flow in a company in terms of its relationship to the set of companies.

The set of companies is dynamic, but it may be related to forex. The set of companies is those companies for whom the company in question can be regarded as a money flow set. That is, money flow should be regarded as a set in terms of its function in equities, not as flow in any sense of the matter.

So what is it one sees in forex, where money flow is highly important in terms of valuations. That is, to what extent is the function of money flow in equities transposed into forex. Can one track by function. That is an interesting question. One might expect it would depend on the extent of the transposition.

But what is this transposition. Well, it is not about exchange related activity, which is the problem with the anti-predictive value of such fundamentalist analysis in forex. It is about investing/trading, that is about the active investors and traders and their pursuit of value differentials.

So what is it that is being transposed as investors and forex traders tend to be separate. Well, the hedge funds. That is the transposition is a trading method by those who can make investing and trading the same. That is the functional symmetry.

The markets only tolerate such symmetries for a short time, this is part of the flash nature of forex. Symmetries are broken fast in forex. Are they in equities. That is, does the nature of the equity market inherently provide stability for those essential symmetries.

Not if it is like the forex market, that is money flow with growth added, rather than growth with money flow added. But in general yes, perhaps in terms of the frequency of infusions of growth into forex. High frequency infusions means more structured trading moments.

However that transposition is to an extent forced, and the markets do function mostly seperately at the level of day trading anyway. One sees plenty of movements in forex that are not in sync with equities.

But that seems to be the norm and the fact that these moments of syncing exist and that they exist in a structured way suggests to me that they are internal as well as being a feature of very big structured trading.

What I am suggesting is the way companies compute on cash is not compatible with forex and this lack of compatibility creates movement in forex as well as being the basis for the lack of symmetry.

Equities cannot escape from companies, but forex can. The fundamental computation of equities is the value of company equity, but forex is a complex optimization over value itself. This suggests that what happens to equity valuations in forex is that they are abstracted. Which suggests that one cannot track companies in forex. But one can see generalized effects of the set of companies.

But perhaps one can see less general consequences in the kinds of sets one looks at in financial analysis, that is the set of companies to which there is a sensitivity in terms of cash flow, for a given company.

The troubling feature of equities though is how the movement of the Dow is now especially based on money being moved about, rather than from the exciting and wealth creating and Dow energizing way, of equity growing from creative action in companies.

But I do think this is happening anyway. As I have noted before the remarkable feature of the US economy is that it can grow in dark economic circumstances, indeed great movements have been made this way. But one might expect it would obscure the transfer of readable information between markets.

However these effects have been the case for a long time, and a full restoration of information transfer might require a new wave of company growth.

Why might one want such transfer of information, well because the more precisely valued companies are, the better for a functioning equity market, the assumption here is that fine grained processes in forex are part of this valuing process.

It is that same process, the essence of trading, that even if one can make the market move one always wants something that the market want to go with. That is one wants awareness of process to reduce the risk of one's trades.

The concept of speculators pushing the forex market is not entirely tenable, because the market resists this just like equities resist upping the valuations of a share that is hyped up. And by resist I mean retracements in both markets.

I suggest if you use equity investing and forex trading together you are syncing with the way the markets interact. It suggests a fundamental rationale for the effectiveness of financial analysis, especially the granular methods used by Graham and his followers.

And it suggests the importance of the forex market for computing that value in equities to great heights. Riding the markets suggests awareness of process, even if highly intuitive and the more explicit this is the safer the ride.

This makes less necessary the need to force the market to accept valuations and dealing with the computational consequences of trying to do this. This applies to the equity market on a large scale (i.e. the crisis) and to forex on a fine grained scale.

© 2011 Guy Barry - All Rights Reserved.