Stock Stuff

"The public be damned. My loyalty is to my stockholders." -- William H. Vanderbilt, 19th Century railroad president.

   It has been claimed that the stock market, and the Dow in particular, is a barometer of general economic health. 'Tain't necessarily so. Many say it's not a leading indicator, but lagging. One thing to keep in mind is that the most frequently cited Dow average is that of the industrial component. The problem is that there are only 30 corporations in the Dow Jones industrial average, and these are blue-chip companies. That may not be enough for a good picture. The Standard & Poor's average has 500 stocks in its setup, so it's a bit better.
   The stock market is doing well; the Dow on Tuesday soared 120 points soon after opening, going well past its 2007 record close of 14,164.53, as well as its previous intraday high of 14,198.10.
   At the end of the trading day, the average was up more than 125 points, closing at 14,198.10, a new record high.
   This can be seen as a sign of a booming economy, if the barometer mavens are right, or it's a bubble about to burst, as it did several times in the past. Stock prices can be as much symptomatic of investor confidence and exuberance as of company health and growth prospects. Prices respond to the Law of Supply and Demand at least as much as they reflect corporate and -- secondarily -- general economic health.
   However, while corporations report record earnings and profits, thus driving up the share price, unemployment remains high. So is the overall economy really doing well, or is it that management is rewarding shareholders?
   The prime goal of many managers is to "increase shareholder value," meaning increased dividends and rising stock prices. There are two main ways to boost profits -- increase sales and/or reduce costs. One way to reduce costs is trim wages, and if pay can't be cut, hiring can.
   In any case, what investors should be concerned about is the performance of the company whose stock they own. The performance of any other company, or the average prices of stocks in other firms, are not relevant.
   A company sells shares in order to raise money for whatever purpose managers choose. And once out there, the stock can be bought and sold on the open market. To that extent, the law of demand and supply operates. If a stock is popular, for whatever reason (rational or otherwise) the price goes up (demand-driven). And the supply is limited to the number of shares the company has issued. But the company is free to issue more shares, thus increasing the supply and, assuming demand is constant, the price goes down. Many companies, when their stock price is so high as to interfere with trading, will split their stock, for example doubling the number of shares available, and thus reducing the price so more investors can participate. The hope is that the price will then resume its rise.
   When someone buys stock, that person becomes a part owner of the company, so the hope is that a prospering business will drive up the price and/or increase the dividend paid. Unlike bonds, however, there are no guarantees. A bond is a promise to repay, with a specified amount of interest.
   As for institutional investors, yes, they do try to influence management to drive up the stock price and/or increase the dividend. This is what they do.
   Whether a certain policy is good for the company is a secondary issue for them. Senior management, those with large stock holdings, do the same thing. Their outlook is short term, focused largely on quarterly earnings and stock prices.
   Or as Billy Vanderbilt, son of Cornelius Vanderbilt, the commodore, put it in 1883, railroads are not run for the benefit of the public, but for the investors.
   Small investors, on the other hand, are more interested in long term growth and the prosperity of the company. But being relatively small in the number of shares they own, they do not have much influence.
   Fair? Unfair? I don't know. Yes, senior managers and outside major stockholders do try to manipulate the numbers and influence the stock price, and there are many governmental regulations now in place to at least minimize the extent of manipulation that goes on. But it still happens, though not to the extent it did in the 19th Century or before the Great Crash of 1929.
   One good thing that came out of the Crash was the separation of commercial banks and investment banks. That, however, ended in 1999 when the Glass-Steagall Act of 1933, which separated the two, was repealed. Commercial banks then became free to indulge in the investing business -- again -- and investment banks got involved in deposits and lending -- again. The remixing of the two caused more problems -- again. Can you say bank failures and the Great Recession? Technically, major banks didn't "fail" because they were bailed out by the government. They were considered "too big to fail," so taxpayer money rescued them. Can you say bank "failures" and the Great Depression? Again?

   We know of at least one man who worked on the floor of the New York Stock Exchange for many decades, starting as a runner at the age of 16. But he never bought any shares of stock in any company.
   He did, however, play the ponies. The stock market, he felt, was too much of a gamble.