‘A long time ago in a galaxy far, far away…., the global financial and asset markets used to trade differently, but that ended when the Evil Empire of central banks and paper speculators took over the trading.” Welcome to planet Vuca. The term “vuca” was first used by the American military to describe on the ground conditions in Afghanistan and Iraq—volatility, uncertainty, complexity and ambiguity.
In other words, no one really knows what is going on, or how to react to changing conditions that do not make sense in a rational universe.
It was not too long ago—although many do not remember—that things were a lot different. Stocks traded on ideas like valuation, based on revenues and profits. Commodity prices were primarily influenced by the old-fashioned concepts of producer supply and end-user demand. Financial instruments like debt and corresponding interest rates were priced using risk and return as the determining factors.
Breaking news was considered for importance, digested as to significance, and adjusted to by examining the short- and long-term impact on the markets.
This past Thursday, the Dow Jones Industrial Average (Dow) moved 2,250 points up and down within 30 hours to close unchanged from the prior day’s opening. Over four days, the Dow had daily price movements of 211 points, 288 points, 362 points and 173 points. The opening price on the first day was 15,921, and the fourth-day closing price was 15,944 for a net change of 23 points, or a gain of 0.14 percent.
Remember, the Dow is composed of supposedly the largest and most stable corporations on the planet.
On Friday the Bank of Japan announced that it would change its policies to include an NIRP, or negative interest-rate policy, but that it would not increase its version of quantitative easing. The Japanese stock index—the Nikkei 225—immediately went up 4 percent, down 4 percent and then up 4 percent in two hours.
The Japanese traders and investors must be very smart thinkers to have figured out the future impact on corporate value so quickly. But then, they changed their minds to trade as the policy change was a now corporate negative. And yet again, they decided just as quickly that it was a long-term positive.
The trading price for a barrel of West Texas Intermediate grade crude oil closed on January 20 at $26.55, and was 27 percent higher this past Friday, nine days later. The news is that Russia and Saudi Arabia are talking about oil prices. No change in production and no change in demand, but prices went up 27 percent. But, actually, that is not the price of a barrel of crude oil. That is the price of a speculative futures contract bought and sold by people who have probably never seen a barrel of oil. The cash price for actually buying crude oil is like the price of a T-shirt in Baclaran market. There is “The Price,” and then there is the price when money is on the table.
The relation of trading prices and any connection to the real economic world is merely a coincidence in 2016.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.