How the Stock Market Really Works?

chillibreeze writer — Chandra Mouli

Bingo, the markets are up again. All the gullible, greedy and “we’ll never learn” investors please awake, the party has begun. ‘This bull is for real’; ‘this is based on sound fundamentals’; ‘the corporate world is awakening to real numbers.’ The head lines stream across from the litany of papers, to catch the attention of readers who are all suddenly economically and financially literate; or so they think as they head towards their brokerage houses. This bubble will burst like all others in the past. If the market doesn’t undergo a total fall, which may result in a bust, it will undergo what is called a correction – a massive one and then many an innocent investor will be caught without their shirts. Now how does this frenzy happen and how come we never seem to learn? Or is it we have been genetically coded to be doomed, which in turn is but a necessary result of our greed? Here is a fictitious scenario of how this all can unfold.

The markets are down, sentiments are bad and the morale of the investor low; nobody is touching anything with a barge pole. Mr.Fradula De Thefto, the head of the equity research and brokerage firm, LOUTOH, is biting his nails. His friends, Mr.Uno Chetau of the pharmaceutical company BBD and Mr.Falsio de Reporte of the famous business magazine Financial Adviser are also worried; all for different reasons though.

“Something has to be done and done real quick. If not I am going to be out of business,” said Mr.Thefto, after they sat down to have their dinner at an elite hotel.

“Not just you, the same applies to me too,” said Mr.Reporte

“Well, as of me, I am ok. I just about have finished taking out my part of the equity in one form or the other after the FI had put up their portion. But that does not mean I am not game for a few quick bucks” said Mr.Uno Chetau

“Lucky you,” grumbled Mr.Thefto

“Let us see if we can work out something where all of us can stand to gain a little. I have a game plan. Now there is this WTO meeting that is happening in some place. I heard my son mention that they will be deciding not to apply the patent laws to developing countries and that some of the critical care drugs can be sold without paying the royalty. Very honestly I did not understand all the implications of this.

But I can smell an opportunity,” said Mr.Reporte

“What and how?” asked Thefto

“Well, do you make any of these critical care drugs?” Reporte asked Chetau

“I don’t even know what they are and I am sure we don’t make them. Wait a minute, I think I remember one of my R&D guys mention that we make some kind of intermediate which may go into one of these” said Chetau. “This is a wild guess, OK”

“Good enough!” Reporte almost shouted. And before they could ask him anything he said, “I am going to carry a series of articles in my magazine. And you Chetau will figure on the cover page of the first issue in this series. I will go on to extol how companies like yours are in a position to leverage this great opportunity presented by WTO or whatever.”

“But you think I am in a position? I mean do you think our company is in a position to leverage this opportunity?” asked Chetau innocently

“Hey who cares!” replied Reprote. “Half the people who read this article won’t know about the pharma industry and the other half won’t know about WTO, so no sweat.”

“But what do I stand to gain?” groaned Thefto

“Thefto, all you need to do is participate in that article and give me some meaningless graphs about how you think a host of companies can benefit from this process. Make sure you put all the bright colors to right use. Also ensure that the arrows in the graphs are all pointed upwards; even if it means plotting between unrelated parameters. Most people don’t read articles; they are usually carried away by graphs and numbers. And then see your phone ring itself off the hook”

“OK great,” replied Thefto

So the series began. Mr.Chetau and his company BBD and a host of other unknown companies suddenly were reported to have “good growth potential”, “higher revenue stream scopes”, “excellent future prospects”, and what not, which the investor thought meant good news. So they came rushing in, the investors that is, they begged, they borrowed, and they put their money in and innocently saw their “paper” value go up, till one day it crashed, as it was destined to. Reporte immediately wrote in his magazine, “the market was over valued and over heated; it was bound to go in for a correction, as many of the companies did not warrant such valuations and were not based on fundamentals” . He also added in his erudite report, other bits of news; possible conflict in Jaffna because of changed Government and how that may impact sea cargo movement and the possibility of lower temperatures for Russia in the upcoming winter. The reader never understood the linkages, nor did Reportee, for that matter. Reporte was hailed for his clinical diagnostic capabilities and accurate reporting and was presented the NeoEconomist Outstanding Journalism Award.

Thefto was moved to another developing market to enlist more investors. It was not that he could not pull his trick in developed markets, people are the same every where, it is just that the company found that “the cycle times” in developing markets were shorter. So, if the guys on the Street wanted rosy quarterly results, it was necessary for professionals like Thefto to move to developing markets.

Chetau bought his new Mercedes convertible; he sold his over valued stocks, as the company continued to make losses. The Financial Institutions which gave Chetau his loans began preparations for making appropriate provisions in their balance sheets for an NPA (Non Performing Asset).

The investor sold his land, since he had taken a loan against it, which he had bought in an installment scheme and moved into a smaller rented apartment. His dream for his own independent house would have to wait till the next party began.

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—About our writer:

Chandra writes for chillibreeze.

How the Stock Market Really Works?

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