San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Monday, June 15, 2015

The Slippery Slope That Is Greece

I check the stock market every day.  Usually I will go to cnbc.com to find out what happened in the stock market by the close of business each day.  At cnbc.com I am always treated to the reason for why the stock market did what it did that day.  One day last week the market was up about .5% and I was told that it was because of Greece.  The next day the stock market was down .5% and I learned that was due to Greece as well.  At the end of the week the stock market ended mostly flat and I was instructed that was a result of Greece.  I tuned into the website this morning to see that the stock market is sharply down, .82% on the S & P 500, and guess what?  Today's opening drop is also attributed to Greece.  Wow, I thought to myself, Greece must really be an economic powerhouse to be able to impact the SDA stock market so dramatically day after day.
A couple of years ago we went through a similar period of time. Maybe you remember it.  The crisis in Greece made daily headlines and the stock market went through wild swings of value on a daily basis.  I remember wondering how such a small country in a far-away place could so dramatically impact the stock markets of the Socialist Democracy of Amerika.  I awakened this morning to this headline, "Dow drops 150 points into the red for the year as Greece weighs..."  Well there you have it.  The SDA stock market is negative this year because of something that is happening in Greece.  Who would have thunk it?
All of this got me to thinking....why is Greece so important to the economy and stock markets of the SDA?  So I did a little checking into the matter and here is what I discovered:
 
  • The total market capitalization of SDA stocks is $18 trillion.  The market capitalization of all stocks in Greece is $45 billion.  That means that the total market capitalization of all Greek stocks equals .25% of the size of the SDA stock market.  It is hard to see how even the utter annihilation of Greece could have more than a tiny impact upon the economy and stock markets of the SDA.
  • A 1% drop in the SDA stock market represents a loss of $180 billion in total equity value.  A 1% drop in SDA stocks is equal to four times the total value of all stocks sold in Greece.  So even if there is a direct correlation between Greek stocks and the SDA, which there is not, then a total destruction of Greece should result in a one time 1% drop in SDA stock values.  
  • Next I thought about the nature of SDA exports and imports.  Maybe Greece controls SDA stock markets because it is such an important trading partner.  The SDA exported $773 million worth of goods to Greece in 2014.  The SDA  imported $1 billion worth of goods from Greece in 2014. In 2014 the SDA imported $1.6 trillion worth of goods from around the world.  Greek imports therefore represented .05% of all SDA imports.  Also in 2014, the SDA exported $2.3 trillion worth of goods worldwide, making Greece a receiver of .04% of all SDA exports.  So much for my theory that Greece is an important trading partner.
  • Maybe Greece is important to SDA stock markets because it is an economic juggernaut.  I went in search of Gross Domestic Product numbers in order to find out.  What I discovered is that the GDP  of the SDA is $18 trillion.  The GDP of Greece is $238 billion, or 1.3% of the SDA GDP.  It is hard to see how a country with an economy roughly the size of 1.3% of the SDA economy could ever have an economic impact upon the SDA.
  • I concluded that the complete annihilation of the Grecian economy would equal 1.3% of the US GDP and 1.3% of the total US stock market capitalization. Clearly Greece is irrelevant when it comes to economic issues.  I have to look elsewhere to find out why events in Greece so dramatically impact SDA stock values.
As I pondered economic reality it suddenly occurred to me that I was looking in the wrong place for answers about how Greece can dominate economic news and cause wild swings in value in SDA stocks.  I realized that the stock market goes up and down on a daily basis primarily because of the activities of the day traders.  Day traders, often using sophisticated computer programs to try and guess the future direction of stock prices, are responsible for determining the direction the stock market will go each day.  And, being what they are, day traders don't give a hoot about economic fundamentals or the real world.  All they care about is their predictions about the sentiments of other day traders for the next hour or so while the stock exchanges are open for business.   When day traders believe that other day traders are going to be selling, they will sell.  Conversely, when day traders believe that other day traders might be buying, they will buy.  They try to be one step in front of each other. 
How do the day traders come to their conclusions about the sentiments of their fellow day traders?  They scan economic and financial news outlets and try to guess what item is going to be the object of obsession that day.  They often get stuck in a rut and the same news ends up determining what they are going to do for weeks.  A month or so ago the day traders were obsessing about bonds.  Every day the stock market would go up or down by a percent or so and the reason given for the daily change was always the same....bonds.  At various times day traders have obsessed on gold, oil, platinum, OPEC, Iraq and political events in Argentina as they seek to read the tea leaves spread out before them and make their trades for the day.
I will let you in on a little secret.  Day traders are idiots.  They understand nothing about economics and most of them end up losing money in the long term.  Despite myriad of technical charts about the stock market they have no idea what is going on in the real world.  They are like a pack of dogs, running around sniffing each others bums in a vain attempt to figure out who might do what next.  Unfortunately for those who do not understand these things, news about what the day traders believe is what makes up 95% of the daily financial news.  That means that 95% of what spews out of the mouths of financial reporters and financial news networks is worthless.  Don't believe what you hear from the pundits.  Don't believe what you hear from the air-headed financial news reporters.  They have no clue what is going on and what they do believe is happening is so far removed from the real world it is laughable.  Let me assure you, beyond any possible doubt, even the complete annihilation of the geo-political area known as Greece would not have any long term impact upon the value of your stock holdings.  So when you hear about how things in Greece are going to drive us all to financial ruin, go out and play a round of golf and work on correcting your slice.  That is a far more valuable way to spend your time.

2 comments:

  1. Dear Welshy,

    Greece is a joke in my neck of the jungle. Every day after checking the market I remark to my wonderful, hairy, little wife, Mata, "People aren't happy about Greece today" or "People sure are happy about Greece today."

    Personally, I think C.H.U.M.P. has set up a headquarters in Athens, and are using a sophisticated computer to manipulate world stock markets for their gain.

    The end of the world is near. Not even the jungle is safe!

    Lancelot

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    1. Mr. Link:
      I had no idea you had access to the stock exchanges in your neck of the jungle. Here is a stock tip for you....buy Chiquita!
      Your sophistication as an investor is obvious since you also recognize the utter irrelevance of Greece and the absolute necessity of grease. Well done.
      MW

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