The article I wrote on Business Cycles in June 1999 is one of the most popular articles. This article also made people notice us worldwide and we receive many queries relating to the subject. We are giving below, in italics, the correspondence exchanged with one of our readers from Singapore and the same is self explanatory.
Dated April 14, 2001
Dear Joyce,
Thank you for your appreciation on the write-up on "Business Cycles". Now coming to stock market, you have raised very sensitive questions. I am so disgusted with stock markets; I have stopped looking at them. Now that you have asked the question, my comments are given below:
The very basic assumption is that all players are honest, law abiding and have good intentions. We will also assume that Laissez faire and free market principles apply. However, in reality it is not so. But then we are discussing theories.
1. Among all theories "market efficiency theory" also called "market pricing theory" gives a fairly accurate picture under various constraints the stock markets operate. Under this theory, the law of supply and demand will meet the equilibrium at some point that is acceptable to both buyers and sellers. The problem is liquidity of stocks, its availability, knowledge of competitor’s information, similar stocks, dividends, future earning potential,P/E ratios all come into play. At any situation, we compare performances of listed companies only. There may be number of unlisted companies which are better managed in the same industry. The stock market always goes by the anticipated future earnings and this is the biggest malady, as this leads to speculation by unscrupulous people. The Bulls and the Bears come into play. This is what is meant by behavior of stock market. In a system that is well regulated like USA, where SEC is very powerful, this operates fairly well. Even in USA, what happened in respect of dotcoms and other hi-tech stocks in the past is the result of greed and avariciousness of promoters and VCs. When people become greedy, all logic and good sense goes overboard. Some lucky guy becomes a billionaire or multi-millionaire and other fools rush in, where angels fear to tread.
2. I am not very clear on this question. Any corporation which desires to go for IPO has to avail the services of the stock markets.
3. The question is wrong. The stock market does not impact Economy. The stock market is part of Economy. It is the state of Economy that impacts stock market. The stock market booms when the economy is booming and goes into a tailspin when there are recessions and collapses when you have depression.
Trust I have clarified your doubts. Please acknowledge receipt.
Best wishes,
Madhavan
----- Original Message -----
From: khekwei & Joyce
To: madhavan
Sent: Saturday, April 14, 2001 2:41 PM
Subject: Query
Madhavan,
Read your very useful information on the web about Business Cycle, may I ask you something on the stock market?
Read about Market Efficiency theory, but can't understand the correlation and impact or implication on the
a) Behavior of the Stock market
b) Stock market's function as a net source of net initial investment funds to corporations
c) The impact of Stock market on the performance of the economy
Need your enlightenment.
Thanks.
Joyce
Our reservations on the functioning of stock markets have been once again confirmed with the happenings in USA. Scandals involving analysts and fines paid by them are only tip of the iceberg. Everyday you read about scandals. I read in the New York Times a few years ago that the stock options factor led to the fancy prices of stocks and this has only confirmed my suspicion all along. You cannot have fancy prices for stocks of companies, which have never declared profits. The whole thing is beyond logic. You cannot blame the economy and recession, if things are not picking up. The average common man is shaken and has lost faith and trust in the system. It is for the respective Governments to bring it back through proper governance. Unfortunately, when things get lost in a morass of greed and corruption, it becomes too unpleasant to dig, as more dirt comes out and hits the roof. Under such circumstances the normal tendency in most human beings is to let the sleeping dogs lie and stop digging. I remember my friend Michael James 'Jim' Edwards, a Welshman with his difficult to grasp accent, who used to work in India way back in 1983 as a technical advisor. He used to tell me that people should always protest, if they want things to improve. Strangely, only miniscule percentage of people is willing to protest, and as a result, some people get away with blue murder in broad daylight. Who is going to bell the cat ?
© Copyright. Written on June 7, 2008. Without prejudice. All rights reserved
Impact of Business Cycles on Stock Markets - To learn more about this author, visit Madhavan T Gopalachary's Website.
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Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name
/mtg.html;
mmgconsu
lting.biz/
Madhavan's articles can be accessed at www.madgopes.com
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