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Old 06-20-2007, 12:21 PM
 
Location: By the sea, by the sea, by the beautiful sea
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Many would have us believe the stock market is a reliable indicator of a nation's economic health. I'd like to hear the explanation for the following scenario:


XYZ Inc manufactures widgets with a skilled, older, well paid work force. Management learns they can outsource widget supply to China with a 70% cost reduction, they lay off 10,000 workers who are a poor fit for today's job market but XYZ stock soars on increased profits and management votes themselves large bonuses. Replicate this a number of times and we have a booming market with tens of thousands out of work or accepting jobs that pay far less than their previously jobs and thus have much less buying power.

How does this booming market indicate things are really great on Main St.?
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Old 06-20-2007, 12:46 PM
 
Location: Happy wherever I am - Florida now
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It doesn't.

What will show up is that the company is making a higher profit margin. If corp offices are based in the US for tax purposes, without loopholes, there is a degree of benefit in that regard. This increased profit margin is what people count on who purchase stocks.

What a booming stock market indicates is that more people are putting their money into stocks in hopes of a return based on possibilities, as opposed to putting it in the RE market as was recently popular.

This type of market, the financial one, is more closely based on intl factors when you're considering ROI. At present our country comes out strong due to the stability of it's democracy and our various resources. You can do wonders with statistics and pegging things and unpegging them to other factors. This is where the disconnect comes in.
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Old 06-20-2007, 01:34 PM
 
Location: By the sea, by the sea, by the beautiful sea
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Quote:
Originally Posted by Sgoldie View Post
It doesn't.

What will show up is that the company is making a higher profit margin. If corp offices are based in the US for tax purposes, without loopholes, there is a degree of benefit in that regard. This increased profit margin is what people count on who purchase stocks.

What a booming stock market indicates is that more people are putting their money into stocks in hopes of a return based on possibilities, as opposed to putting it in the RE market as was recently popular.

This type of market, the financial one, is more closely based on intl factors when you're considering ROI. At present our country comes out strong due to the stability of it's democracy and our various resources. You can do wonders with statistics and pegging things and unpegging them to other factors. This is where the disconnect comes in.
Thanks for the reply, it seems for most of my life I've heard politicians on both side of the aisle conveniently point to a good stock market by itself as an indicator that all's right with the world, I have yet to see much that convinces me that by itself the market is much more than smoke and mirrors.

I coud imagine another scenario where drug stocks soar as insurance companies pay high prices for their goods while the uninsured go untreated, it would certainly look good on the financial reports but good for the country?
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Old 06-20-2007, 02:00 PM
 
Location: Happy wherever I am - Florida now
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All right with their world, is the telling statement.
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Old 06-20-2007, 08:21 PM
 
Location: Los Angeles, Ca
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The market doesn't correlate much with economic growth.

If you look at the past 100 years, the market has had a few "super bull markets", and some long, drawn out bear markets. It wildly overshoots in both directions.

The market from '66-82 went nowhere, the DOW didn't move an inch, but GDP was up by X number of percent in that time.

It's funny what politicans will say to get elected. The market doesn't tell you about wages, it doesn't tell you if one person can support a family or if it takes two working overtime, or the quality of jobs.
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Old 06-21-2007, 05:30 AM
 
Location: By the sea, by the sea, by the beautiful sea
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Quote:
Originally Posted by John23 View Post
It's funny what politicans will say to get elected. The market doesn't tell you about wages, it doesn't tell you if one person can support a family or if it takes two working overtime, or the quality of jobs.

What I really don't understand is why so many are apparently willing to accept what the politicos tell them at face value.
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Old 06-21-2007, 02:14 PM
 
Location: Los Angeles, Ca
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Originally Posted by burdell View Post
What I really don't understand is why so many are apparently willing to accept what the politicos tell them at face value.
Sure beats me.

The government always says inflation is "low", yet the things that cost the most for people....healthcare, college, gas, food, housing...they've exploded upwards.

I'm only in my 20's, but I know it use to take just 1 person to support a household (hard to believe), and now it takes two working crazy, stressed out hours just to scrap by. Sure, people have bigger houses, bigger cars, more gadgets. But it seems like alot of "inflation" to me over that time.

About XYZ manufacturer, how about GM as a case study.

BigCharts - QuickCharts

The stock has been flat for 30 years, but I imagine wages, benefits, pensions and the quality of life in Detroit have taken a nose dive since then.

BigCharts - QuickCharts

Fords stock is "up", but their marketshare has dropped tremendously and life on "main street" probably isn't quite so rosy.

Any opinions, thoughts?
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Old 06-22-2007, 04:01 PM
 
Location: Sacramento
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Long term stock market investor here. Investing in US and foreign markets.

The statements about the market not reflecting reality are only partially true. The market operates on anticipation of events, and then alters for reality. Multiple factors impact the market, exclusive of company performance. The most significant of these involves anticipated inflation and interest rates.

In the outsourcing example used, the company is viewed as a financial animal, and the evaluation is viewed on the profit potential. If they laid off these highly skilled employees and replaced them with cheaper outsourced labor, their cost of goods sold would decrease, and assuming they can retain their current prices this would boost profit (all other things being equal, and the outsourcing also has a secondary shipping cost). Now, if the outsourcing subsequently caused the quality of the finished products to decline, sales could decline and so could market share, resulting in price cutting and reduced profits. This could subsequently drive the stock price down.

In Ford's case there could be three factors propping up stock prices although the current performance is dismal. First off, financial analyst may view favorably products in the pipeline, anticipating increased future sales and revenue. Second, they may view Ford as having future products involving lower manual labor (and cost) needed to produce each vehicle. Third, worldwide sales may be on the rise, and the future profit picture viewed favorably by financial analyst providing buy and sell recommendations.
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Old 06-27-2007, 12:14 PM
 
Location: By the sea, by the sea, by the beautiful sea
58,199 posts, read 41,051,541 times
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Quote:
Originally Posted by NewToCA View Post
In the outsourcing example used, the company is viewed as a financial animal, and the evaluation is viewed on the profit potential. If they laid off these highly skilled employees and replaced them with cheaper outsourced labor, their cost of goods sold would decrease, and assuming they can retain their current prices this would boost profit (all other things being equal, and the outsourcing also has a secondary shipping cost). Now, if the outsourcing subsequently caused the quality of the finished products to decline, sales could decline and so could market share, resulting in price cutting and reduced profits. This could subsequently drive the stock price down.

And if the quality of the finished product doesn't decline?

I'm old enough to remember when a "Made in Japan" label was cause to snicker, not too many laughing at Lexus, Toyota, Nissan, et al any longer.
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Old 06-27-2007, 10:07 PM
 
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The big shot financial people in NYC are making gobs of money and then making sure the press talks up what a great stock market we have and therefore great economy so us little guys will keep putting our money in and keep spending money we don't have and those financial people can continue making the big bucks.

Sortof like when Hurricane Katrina came and I was listening to talk radio and the national news guy at the top of the hour said everything was under control according to this or that govt person and then a few minutes later the local talk radio guy would get a NOLA resident on the phone and what they were describing was totally different. The reality was different from the spin.

Or like in the last year when the housing numbers came out and they are terrible, but the real estate industry announces, "Nothing is wrong, just a blip" and later "That was the bottom it's over" and then "No, now, *that* was the bottom, it's over..."
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