The benchmark Standard & Poor's 500 index ended at a five-year high on Friday, lifted by reports showing employers kept up a steady pace of hiring workers and the vast services sector expanded at a brisk rate. The gains on the S&P 500 pushed the index to its highest close since December 2007 and its biggest weekly gain since December 2011.Comment: My prediction for the year is 1490!
What Do Ancient Spice Traders and the Modern Financial Industry Have in Common?
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In the ancient world, the Arabs controlled most of the spice trade. They ran secret trade routes from the Indies and other eastern countries. The spices they gathered were then sold and traded for extremely high prices to the Greeks and Romans in Alexandria, the Wall Street of its time. The Europeans knew many of the spices came from the Indies, but they weren’t exactly sure where the Indies were and how to find the actual spices. This allowed the Arab traders to capitalize on the lack of information.
According to Herodotus in some of his fifth-century B.C. writings, the Arabs led the Greeks and Romans to believe gathering cinnamon was a matter of life or death. The story was told that Arab traders and merchants had to dress in full body suits of ox-hide to protect themselves from terrible winged creatures. They would have to leave a sacrificial cow to lure the winged monster bird off of its nest made of, wait for it…cinnamon. As the Arabs told the story, the winged creature would inevitably knock portions of their nest on the earth below as it flew to claim its offering. The merchants would then risk their life to grab the few pieces of cinnamon stick nests they could gather before the winged creature attacked them.
Herodotus also recorded stories of the Arabs regarding frankincense and ginger. According to the legends, frankincense grew in the tops of trees and was guarded by flying snakes. Arab traders would then cheat death by driving the flying snakes from the treetops while other merchants would quickly gather the frankincense they could. Ginger supposedly washed from the Garden of Eden.
What was the purpose of these ridiculous fantasies? Not only did the Arabs control the supply, they also manipulated the perceived value of their product and services by controlling all of the information of their origins. But the barriers of information in the spice trade began to fall around 120 B.C.
According to Tom Standage, business editor at The Economist, here’s how it went down: In 120 B.C., a ship wrecked in the Red Sea. One survivor was found and taken to the court in Alexandria. He told them he was on a ship traveling between India and the Red Sea and it went off course and wrecked. The court sat speechless because as far as they knew, there was no direct route from the known western world to India. (Common belief at the time was that to reach India, ships would have to hug the shore, sail all the way around the Arabian Peninsula, up the Persian Gulf, and back down towards India, past Persia and Pakistan.) The stranded Indian trader bargained to show the Alexandrian court this “secret” direct route if they give him a ride home.
Within a few years the new, shorter routes are known to all of the Europe, and the fantasy stories were found to be nothing but myths used to inflate prices and scare away those who may want to find the spices themselves. In time, the Romans industrialized the spice trade and flooded the market with spices. This changed peppercorn from a spice you could pay a month’s rent with, to something that is given away free is small paper packets in fast food restaurants today.
25 Years to Bounce Back? Try 4½
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HISTORICAL stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn.
But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.
When Stock Prices Drop, Where's the Money?
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Have you ever wondered what happened to your socks when you put them into the dryer and then never saw them again? It's an unexplained mystery that may never have an answer. Many people feel the same way when they suddenly find that their brokerage account balance has taken a nosedive. So, where did that money go? Fortunately, money that is gained or lost on a stock doesn't just disappear. Read to find out what happens to it and what causes it.
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So, if you purchase a stock for $10 and then sell it for only $5, you will (obviously) lose $5. It may feel like that money must go to someone else, but that isn't exactly true. It doesn't go to the person who buys the stock from you. The company that issued the stock doesn't get it either. The brokerage is also left empty-handed, as you only paid it to make the transaction on your behalf. So the question remains: where did the money go?
The most straightforward answer to this question is that it actually disappeared into thin air, along with the decrease in demand for the stock, or, more specifically, the decrease in investors' favorable perception of it.
But this capacity of money to dissolve into the unknown demonstrates the complex and somewhat contradictory nature of money. Yes, money is a teaser - at once intangible, flirting with our dreams and fantasies, and concrete, the thing with which we obtain our daily bread. More precisely, this duplicity of money represents the two parts that make up a stock's market value: the implicit and explicit value.
On the one hand, money can be created or dissolved with the change in a stock's implicit value, which is determined by the personal perceptions and research of investors and analysts. For example, a pharmaceutical company with the rights to the patent for the cure for cancer may have a much higher implicit value than that of a corner store.
Depending on investors' perceptions and expectations for the stock, implicit value is based on revenues and earnings forecasts. If the implicit value undergoes a change - which, really, is generated by abstract things like faith and emotion - the stock price follows. A decrease in implicit value, for instance, leaves the owners of the stock with a loss because their asset is now worth less than its original price. Again, no one else necessarily received the money; it has been lost to investors' perceptions.
Now that we've covered the somewhat "unreal" characteristic of money, we cannot ignore how money also represents explicit value, which is the concrete worth of a company. Referred to as the accounting value (or sometimes book value), the explicit value is calculated by adding up all assets and subtracting liabilities. So, this represents the amount of money that would be left over if a company were to sell all of its assets at fair market value and then pay off all of liabilities.
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For instance, in February 2009, Cisco Systems Inc. had 5.81 billion shares outstanding, which means that if the value of the shares dropped by $1, it would be the equivalent to losing more than $5.81 billion in (implicit) value. Because CSCO has many billions of dollars in concrete assets, we know that the change occurs not in explicit value, so the idea of money disappearing into thin air ironically becomes much more tangible. In essence, what's happening is that investors, analysts and market professionals are declaring that their projections for the company have narrowed. Investors are therefore not willing to pay as much for the stock as they were before.
So, faith and expectations can translate into cold hard cash, but only because of something very real: the capacity of a company to create something, whether it is a product people can use or a service people need. The better a company is at creating something, the higher the company's earnings will be and the more faith investors will have in the company.
In a bull market, there is an overall positive perception of the market's ability to keep producing and creating. Because this perception would not exist were it not for some evidence that something is being or will be created, everyone in a bull market can be making money. Of course, the exact opposite can happen in a bear market.
To sum it all up, you can think of the stock market as a huge vehicle for wealth creation and destruction.
