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Technical Analysis of GBPUSD

Technical Analysis of GBPUSD

The pair has fell to strong support area near a cluster of support defined by the 100 bar MA on the 4-hour chart, the 200 hour MA and the 100 hour MA.  The three moving averages come in at 1.3161, 1.3165 and 1.3171 respectively.   The low for the day bottomed at 1.3162. We suggest a long position at 1.3195 with stop loss at 1.3170 and take profit order at 1.3272.

 

Read Also:

How to Draw Trend Lines

Support and Resistance Lines

Forex Trend Trading

 

ATTENTION

The information is not an offer, no promotion, no consultation and no advice to buy or sell stocks, indices or currencies.  Trading stocks, indices or currencies is not only a chance, there is always a risk to lose money. Please only trade currencies if you are able to compensate possible losses. Please note that high profits always also contains a high risk. Please also trade with money that you dont need for daily costs.  Interferences with availability over the internet, availability of email deliverability or other software problems are further possible risks when trading with currencies.

Disclaimer: Trading foreign exchange (“Forex”), Commodity futures, options, CFDs and SpreadBetting on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange (“Forex”), Commodity futures, options, CFDs or SpreadBetting you should carefully consider your monetary objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your deposited funds and therefore you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange, Commodity futures, options, CFDs and SpreadBetting trading, and seek advice from an independent advisor if you have any doubts. Past returns are not indicative of future results.

 

Marissa Mayers email to employees after Yahoo-Verizon Deal

Marissa Mayers email to employees after Yahoo-Verizon Deal

 

 

Dear Yahoos,

Moments ago, we announced an agreement with Verizon to acquire Yahoo’s operating business. This culminates a rigorous, thorough process over many months, and yields a great outcome for the company. Today’s announcement not only brings us an important step toward separating Yahoo’s operating business from our Asian asset equity stakes, it also presents exciting opportunities to accelerate Yahoo’s transformation. Among the many entities that showed interest in Yahoo, Verizon believed most in the immense value we’ve created, and in what a combination could bring our users, our advertisers, and our partners.

This is a good moment to reflect on Yahoo’s journey to date.

Yahoo is a company that changed the world.  Before Yahoo, the Internet was a government research project. Yahoo humanized and popularized the web, email, search, real-time media, and more.

What really sets Yahoo apart is the shared passion to create great products for our 1B+ users, and in doing so, transforming the world for the better. You can clearly see that spirit, that commitment, that fight in the work we’ve done together over the past few years. We set out to transform this company – and we’ve made incredible progress. We counteracted many of the tectonic shifts of declining legacy businesses, and built a Yahoo that is unequivocally stronger, nimbler, and more modern. We tripled our mobile base to over 600 million monthly users, we invested in and built Mavens from basically zero in 2011 into $1.6B of GAAP Revenue in 2015, we streamlined and modernized every aspect of our consumer products, and, with Gemini and BrightRoll, we dramatically improved our advertiser products. This only scratches the surface of what we’ve achieved… and we all know how much hard work it took to get here.

It’s because of that hard work and resilience, that Yahoo will realize amazing opportunities in its next chapter.

This sale is not only an important step in our plan to unlock shareholder value for Yahoo, it is also a great opportunity for Yahoo to build further distribution and accelerate our work in mobile, video, native advertising, and social. As one of the largest wireless and cable companies in the world, Verizon opens the door to extensive distribution opportunities. With more than 100 million wireless customers, a shared view of the importance of mobile and video ad tech, a deep content focus through AOL, Verizon brings clear synergies to the table. And with their aggressive aims to grow global audience to 2B users and $20B in revenue within the mobile-media business by 2020, Yahoo’s products and brand will be central to achieving these goals. Joining forces with AOL and Verizon will help us achieve tremendous scale on mobile. Imagine the distribution challenges we will solve, the scale we will achieve, the products we will build, and the advertisers we will reach now with Mavens – it’s incredibly compelling.

The strategic process has created a lot of uncertainty, but our incredibly loyal and dedicated employee base has stepped up to every challenge along the way. Through the first half of the year, we met our operational goals and overachieved on plan. But, further, there are things that you cannot measure, like the passion of the people behind the products. The teams here have not only built incredible products and technologies, but have built Yahoo into one of the most iconic, and universally well-liked companies in the world. One that continues to impact the lives of more than a billion people. I’m incredibly proud of everything that we’ve achieved, and I’m incredibly proud of our team. For me personally, I’m planning to stay. I love Yahoo, and I believe in all of you. It’s important to me to see Yahoo into its next chapter.



As we work to close this agreement in Q1 2017, it’s more important than ever that we come together as one global team to continue executing on our strategic plan through the remainder of the year. We have delivered the first half of the year with pride, achieving our goals. Now, it is up to us to make Yahoo’s final quarters as an independent company count.

Yahoo is a company that changed the world.  Now, we will continue to, with even greater scale, in combination with Verizon and AOL.

Thanks,

Marissa

 

Read also:

Digital Transformation – Digital Leadership

TD Ameritrade Holding Corporation (AMTD) SWOT Analysis

 

 

TD Ameritrade Holding Corporation (AMTD) SWOT Analysis

TD Ameritrade Holding Corporation (AMTD) SWOT Analysis

TD Ameritrade Holding Corporation provides securities brokerage services and related technology-based financial services to retail investors, traders, and independent registered investment advisors (RIAs) in the United States. Its products and services include tdameritrade.com Web Platform for self-directed retail investors; Trade Architect, a Web-based platform that enables active investors and traders identify opportunities and stay informed; thinkorswim, a desktop platform for traders; and TD Ameritrade Mobile, which allows on-the-go investors and traders to trade and monitor accounts from Web-enabled mobile devices.

AMTD Strengths

1.More than 120 branches covering 34 states
2. Approximately 5400 full time associates and 4500 independent RIA
3. Client base of 6 million and double digit net new client asset growth
4. Comprehensive investment products offering with access to equities, ETFs, bonds, CDs

5. Multiple credit rating upgrades from non investment grade to Single-A

6.High profitability and revenue
7.Monetary assistance provided




AMTD Weakness

1.Business activity exposes to operational risks
2. Credit risks arise from client margin lending and leverage activities
3. Dependency on market causes market risk and Clearing operations expose it  to liability for errors in clearing functions

4. Future debt rating
5.Investments in research and development
6.High loan rates are possible

 

SWOT Analysis: Walt Disney Company (NYSE: DIS)

SWOT Analysis for Twitter (TWTR)

BlackBerry Limited $BBRY

BAH Booz Allen Hamilton Holding Corporation (BAH) – NYSE Research

CA Technologies (CA) Profile and Research

Google GOOG

Intel Corporation (INTC) – SWOT Analysis

Twitter $TWTR

New stock market crash inevitable

New stock market crash inevitable

Every production phase or society or other human invention goes through a so-called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and and that a new stock market crash is inevitable.

 

When we consider the characteristics of the phases of a social transformation we may find ourselves at the end of what might be called the third industrial revolution. Transitions are social transformation processes that cover at least one generation (= 25 years). A transition has the following characteristics:

  • it involves a structural change of civilization or a complex subsystem of our civilization
  • it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other
  • it is the result of slow changes (changes in supplies) and fast dynamics (flows)

 

A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.

 

Four transition phases

When we consider the characteristics of the phases of a social transformation we may find ourselves at the end of what might be called the third industrial revolution.

The S curve of a transition

 

Figure: Four phases in a transition best visualized by means of an S – curve:
Pre-development, Take off, Acceleration, Stabilization.

In general, transitions can be seen to go through the S curve and we can distinguish four phases (see fig. 1):

  1. a pre-development phase of a dynamic balance in which the status does not visibly change
  2. a take-off phase in which the process of change starts because of changes in the system
  3. an acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  4. a stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

 

A product life cycle also goes through an S curve. In that case there is a fifth phase:

  1. the degeneration phase in which cost rises because of over capacity and the producer will finally withdraw from the market.

 

When we look back into the past we see three transitions, also called industrial revolutions, taking place with far-reaching effect:

  1. The first industrial revolution (1780 until circa 1850); the steam engine
  2. The second industrial revolution (1870 until circa 1930); electricity, oil and the
    car
  3. The third industrial revolution (1950 until ….); computer and microprocessor

 

The emergence of a stock market boom

In the development and take-off phases of the industrial revolution many new companies emerged. All these companies went through more or less the same cycle simulataneously. During the second industrial revolution these new companies emerged in the steel, oil, automotive and electrical industries, and during the third industrial revolution the new companies emerged in the hardware, software, consulting and communications industries. During the acceleration phase of a new industrial revolution many of these businesses tend to be in the acceleration phase of their life cycle, more or less in parallel.

Figure: Typical course of market development:  Introduction, Growth, Flourishing and Decline

 

There is an enormous increase in expected value of the shares of companies in the acceleration phase of their existence. This is the reason why shares become very expensive in the acceleration phase of a revolution.

There was also an enormous increase in price-earnings ratio of shares between 1920 – 1930, the acceleration phase of the second revolution, and between 1990 – 2000, the acceleration phase of the third revolution.

 

Figure:  Two industrial revolutions: Shiller PE Ratio (price / income)

Splitting shares fuels price-earnings ratio

 The increase in the price-earnings ratio is amplified because many companies decide to split their shares during the acceleration phase of their existence. A stock split is required if the market value of a share has grown too large, rendering the marketability insufficient. A split increases the value of the shares because there are more potential investors when they are cheaper. Between 1920 – 1930 and 1990 – 2000 there have been huge amount of stock splits that impacted the price-earnings ratio positively.

 

Date Company Split
December 31, 1927 American Can 6 for 1
December 31, 1927 General Electric 4 for 1
December 31, 1927 Sears, Roebuck & Company 4 for 1
December 31, 1927 American Car & Foundry 2 for 1
December 31, 1927 American Tobacco 2 for 1
November 5, 1928 Atlantic Refining 4 for 1
December 13, 1928 General Motors 2 1/2 for 1
December 13, 1928 International Harvester 4 for 1
January 8, 1929 American Smelting 3 for 1
January 8, 1929 Radio Corporation of America 5 for 1
May 1, 1929 Wright-Aeronautical 2 for 1
May 20, 1929 Union Carbide split 3 for 1
June 25, 1929 Woolworth split 2 1/2 for 1

Table 1: Share Splits before the stock market crash of 1929

 

Date Company Split
January 22,1990 DuPont 3 for 1
May 14,1990 Coca-Cola Company 2 for 1
May 22, 1990 Westinghouse Electric stock 2 for 1
June 1, 1990 Woolworth Corporation 2 for 1
June 11, 1990 Boeing Company 3 for 2
May 12, 1992 Coca-Cola Company 2 for 1
May18, 1992 Walt Disney Co 4 for 1
May 26, 1992 Merck & Company 3 for 1
June 15, 1992 Proctor & Gamble 2 for 1
May 5, 1993 Goodyear Tire & Rubber Company 2 for 1
March 15, 1994 AlliedSignal Incorporated 2 for 1
April 11, 1994 Minnesota Mining & Manufacturing 2 for 1
May 16, 1994 General Electric Company 2 for 1
June 13, 1994 Chevron Corporation 2 for 1
June 27, 1994 McDonald’s Corporation 2 for 1
September 6, 1994 Caterpillar Incorporated 2 for 1
February 27, 1995 Aluminum Company of America 2 for 1
September 18, 1995 International Paper Company 2 for 1
May 13, 1996 Coca-Cola Company 2 for 1
December 11, 1996 United Technologies Corporation 2 for 1
April 11, 1997 Exxon Corporation 2 for 1
April 14, 1997 Philip Morris Companies 3 for 1
May 12, 1997 General Electric Company 2 for 1
May 28, 1997 International Business Machine 2 for 1
June 9, 1997 Boeing Company 2 for 1
June 13, 1997 DuPont Company 2 for 1
July 14, 1997 Caterpillar Incorporated 2 for 1
September 16, 1997 AlliedSignal 2 for 1
September 22, 1997 Proctor & Gamble 2 for 1
November 20, 1997 Travelers Group Incorporated 3 for 2
July 10, 1998 Walt Disney Company 3 for 1
February 17, 1999 Merck & Company 2 for 1
February 26, 1999 Alcoa Incorporated 2 for 1
March 8, 1999 McDonald’s Corporation 2 for 1
April 16, 1999 AT&T Corporate 2 for 1
April 20, 1999 Wal-Mart Incorporated 2 for 1
May 18, 1999 United Technology Corporation 2 for 1
May 27, 1999 International Business Machine 2 for 1
June 1, 1999 Citigroup Incorporated 3 for 2
December 31, 1999 Home Depot 3 for 2

Table 2: Share Splits during the period 1990-2000

 

Share Splits keep letting the Dow Jones Index explode

The Dow Jones Index was first published on May 26, 1896. The index was calculated by dividing the sum of all the shares of 12 companies by 12:

Dow12_May_26_1896 = (S1 + S2 + ………. + S12) / 12

On October 4, 1916, the Dow was expanded to 20 companies; 4 companies were removed and 12 were added.

Dow20_Oct_4_1916 = (S1 + S2 + ………. + S20) / 20

On December 31, 1927, two years before the stock market crash in October 1929, for the first time a number of companies split their shares. With each change in the composition of the Dow Jones and with each share split, the formula to calculate the Dow Jones is adjusted. This happens because the index, the outcome of the two formulas of the two baskets, must stay the same at the moment of change, because there can not be a gap in the graph. At first a weighted average was calculated for the shares that were split on December 31, 1927.

The formula looks like this: (American Can, split 6 to 1 is multiplied by 6, General Electric, split 4 to 1 is multiplied by 4, etc.)

Dow20_dec_31_1927 = (6.AC + 4.GE+ ……….+S20) / 20

On October 1st, 1928, the Dow Jones grows to 30 companies.

Calculating the index had to be simplified at this point because all the calculations were still done by hand. The weighted average for the split shares is removed and the Dow Divisor is introduced. The index is now calculated by dividing the sum of the share values by the Dow Divisor. Because the index for October 1st, 1928, cannot suddenly change, the Dow Divisor is initially set to 16.67. After all, the index graph for the two time periods (before and after the Dow Divisor was introduced) should still look like a single continuous line.  The calculation is now as follows:

Dow30_oct_1_1928 = (S1 + S2+ ……….+S30) / 16.67

In the fall of 1928 and the spring of 1929 (see Table 1) 8 more stock splits occur, causing the Dow Divisor to drop to 10.77.

Dow30_jun_25_1929 = (S1 + S2+ ……….+S30) / 10.77

From October 1st, 1928 onward an increase in value of the 30 shares means the index value almost doubles. From June 25th, 1929 onward it almost triples compared to a similar increase before stock splitting was introduced. Using the old formula the sum of the 30 shares would simply be divided by 30.



Figure: Dow Jones Index before and after Black Tuesday

 

The extreme rise in the Dow Jones in the period 1920 – 1929 and especially between 1927 – 1929, was primarily caused because the expected value of the shares of companies that are in the acceleration phase of their existence, was increasing enormously. The value of the shares is strengthened further by stock splits and as icing on the cake this value of the shares was  enlarged again in the Dow Jones Index, because behind the scenes the formula of the Dow Jones was adjusted due to stock splits.



During the acceleration phase of the third industrial revolution, 1990 – 2000, history has repeated itself. In this period there have again been many stock splits, particularly in the years 1997 and 1999.

Year DJIA Sum 30

Shares in $

Dow

Divisor

Share

Splits

1990 2810 1643 0.586 5
1991 2610 1318 0,505 0
1992 3172 1782 0.559 4
1993 3301 1535 0.463 1
1994 3754 1675 0.447 6
1995 3834 1425 0.372 2
1996 5117 1770 0.346 2
1997 6448 2100 0.325 10
1998 7902 1985 0.251 1
1999 9181 2228 0.243 9
2000 11497 2317 0.201

Table 3: Summary DJIA, Dow Divisor and amount share splits between 1990-2000
The formula that was used on January 1, 1990 to calculate the Dow Jones:

Dow30_jan_1_1990 = (S1 + S2+ ……….+S30) / 0.586

The formula that was used on December 31, 1999 was to calculate the Dow Jones:

Dow30_dec_31_1999 = (S1 + S2+ ……….+S30) / 0.20145268

 

On December 31, 1999 on an increase of the 30 stocks again nearly three times as many index points, the same value increase on January 1, 1990.

Stock market indices are mirages

 

What does a stock exchange index like DJIA, S&P 500 or AEX mean?

The Dow Jones Industrial Average (DJIA) Index is the oldest stock index in the United States. This was a straight average of the rates of twelve shares. A select group of journalists from The Wall Street Journal decide which companies are part of the most influential index in the world market. Unlike most other indices the Dow is a price-weighted index. This means that stocks with high absolute share price have a significant impact on the movement of the index.

The S & P Index is a market capitalization weighted index. The 500 largest U.S. companies as measured by their market capitalization are included in this index, which is compiled by the credit rating agency Standard & Poor’s.

The Amsterdam Exchange index (AEX) is the main Dutch stock market index. The index displays the image of the price development of the 25 most traded shares on the Amsterdam stock exchange. From a weighted average of the prices of these shares, the position of the AEX is calculated.

In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive.

  • An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit.
    After a period of 25 years the value of the original set of apples is compared to the value of a set of pears. At the moment only 6 of the original 30 companies that made up the set of shares of the Dow Jones at the start of the acceleration of the last revolution (in 1979) are still present.
  • Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:
    Dow1985 = (S1 + S2 + ……..+S30) / 1

Dow2009 = (S1 + S2 + …….. + S30) / 0,15

In the nineties of  the last century many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed (which I think is wrong). An increase in share value of 1 dollar of the set of shares in 2015 results is 6.6 times more points than in 1985. The fact that in the 1990’s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 16000 points. If we used the 1985 formula it would be at 2400 points.

  • The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take-off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition.
    From 1980 onwards 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft) , the engines of the latest revolution, were added to the Dow Jones and 5 financial institutions, which always play an important role in every transition.
    This is actually a kind of pyramid scheme. All goes well as long as companies are added that are in their take-off phase or acceleration phase. At the end of a transition, however, there will be fewer companies in those phases. The last 18 years were 21 companies replaced in the Dow Jones, a percentage of 70%.

 

Overview modifications Dow Jones from 1997:

 

21 winners in  —   21 losers out, a figure of 70%

March 19, 2015: Apple replaced AT & T. In order to make Apple suitable for the Dow Jones, there was a share split of Apple seven for one on June 9, 2014

September 23, 2013: Hewlett-Packard Co., Bank of America Inc. and Alcoa Inc. replaced Goldman Sachs Group Inc., Nike Inc. and Visa Inc.
Alcoa has dropped from $40 in 2007 to $8.08. Hewlett- Packard Co. has dropped from $50 in 2010 to $22.36. Bank of America has dropped from $50 in 2007 to $14.48.
But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. have risen 25%, 27% and 18% respectively in 2013.

September 20, 2012: UnitedHealth Group Inc. (UNH) replaces Kraft Foods Inc.
Kraft Foods Inc. was split into two companies and was therefore deemed less representative so no longer suitable for the Dow. The share value of UnitedHealth Group Inc. had risen for two years before inclusion in the Dow by 53%.

June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors.
 Citigroup and General Motors have received billions of dollars of U.S. government money to survive and were not representative of the Dow.

September 22, 2008: Kraft Foods Inc. replaced American International Group. American International Group was replaced after the decision of the government to take a 79.9% stake in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed.

February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International.
Altria was split into two companies and was deemed no longer suitable for the Dow.
 Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow.

April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc. replace AT & T Corp., Eastman Kodak Co. and International Paper.
AIG shares had increased over 387% in the previous decade and Pfizer had an increase of more than 675& behind it. Shares of AT & T and Kodak, on the other hand, had decreases of more than 40% in the past decade and were therefore removed from the Dow.

November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck.

March 17, 1997:  Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation.
Figure: Changes in the Dow Jones over the last two industrial revolutions

Figure: Exchange rates of Dow Jones during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously.

 

Will the share indexes go down any further?

Calculating share indexes as described above and showing indexes in historical graphs is a useful way to show which phase the industrial revolution is in.

The third industrial revolution is clearly in the saturation and degeneration phase. This phase can be recognized by the saturation of the market and the increasing competition. Only the strongest companies can withstand the competition or take over their competitors (like for example the take-overs by Oracle and Microsoft in the past few years). The information technology world has not seen any significant technical changes recently, despite what the American marketing machine wants us to believe.

During the pre development phase and the take-off phase of a transition many new companies spring into existence. This is a diverging process. Especially financial institutions play an important role here as these phases require a lot of money. The graphs showing the wages paid in the financial sector therefore shows the same S curve as both revolutions.

Figure: Historical excess wage in the financial sector

 

Investors get euphoric when hearing about mergers and take overs. Actually, these mergers and take overs are indications of the converging processes at the end of a transition. When looked at objectively each merger or take over is a loss of economic activity. This becomes painfully clear when we have a look at the unemployment rates of some countries.

New industrial revolutions come about because of new ideas, inventions and discoveries, so new knowledge and insight. Here too we have reached a point of saturation. There will be fewer companies in the take off or acceleration phase to replace the companies in the index shares sets that have reached the stabilization or degeneration phase.

In a (threatening) recession, the central bank tries to stimulate the economy by lowering interest rates. Loans are thus cheaper, allowing citizens and businesses to spend more. In the event of sharply rising unemployment and falling prices, however, this does significantly less. This is also the case as the official interest rates are lower, or even fall to essentially zero. Regardless of the interest rate (big) loans are not concluded and expensive purchases will be delayed. Further rate cuts or even an interest rate of zero may not lead to an increase in economic activity and falling demand leads to further price declines (deflation). The central bank may decide in that case to increase the money supply (quantitative easing). A larger money supply actually leads to price increases and disruption of the deflationary spiral. In the past the printing presses would be turned on but nowadays the central bank buys government bonds, mortgage bonds and other securities and finances these transactions by increasing the personal balance. There are no extra physical bank notes printed. The mechanism works by means of central banks buying bonds in the market or directly from banks. Banks are credited for the purchase amount in the accounts held with the central bank. In this way, banks obtain liquidity. In response to this liquidity banks can then provide new loans.

Figure: The quantitative easing policy of the Fed (US central bank) and its effect on the S & P 500

Due to the combination of interest rate policy and quantitative easing by central banks a lot of money has flowed the stock markets since 2008 and has in fact created a new, fictional bull market. This is evident in the price-earnings ratio chart (Shiller PE Ratio), which has risen again since 2008. But central banks now have no more ammunition to break the deflationary spiral.  At the end of the 2nd industrial revolution in 1932 the PE Ratio dropped to 5. Currently, this ratio, partly due to the behavior of central banks, is 23. The share prices can still go down by a factor 4

Figure: Two industrial revolutions: price-earnings ratio (PE ratio Shiller)

 

Will history repeat itself?

Humanity is being confronted with the same problems as those at the end of the second industrial revolution such as decreasing stock exchange rates, highly increasing unemployment, towering debts of companies and governments and bad financial positions of banks.

Figure: Two industrial revolutions and the debt of America

 

Transitions are initiated by inventions and discoveries, new knowledge of mankind. New knowledge influences the other four components in a society. At the moment there are few new inventions or discoveries. So the chance of a new industrial revolution is not very high. History has shown that five pillars are indispensable for a stable society.

Figure: The five pillars for a stable society: Food, Security, Health, Prosperity,
Knowledge.

 

At the end of every transition the pillar Prosperity is threatened. We have seen this effect after every industrial revolution.

The pillar Prosperity of a society is about to fall again. History has shown that the fall of the pillar Prosperity always results in a revolution. Because of the high level of unemployment after the second industrial revolution many societies initiated a new transition, the creation of a war economy. This type of economy flourished especially in the period 1940 – 1945.

Now, societies will have to make a choice for a new transition to be started.
Without knowledge of the past there is no future.

 

Wim Grommen

References:

  • Geschiedenis Werkplaatssite van Wolters-Noordhoff en Wikipedia
  • Prof J. Rotmans, e.a. (2000), “Transities & Transitiemanagement: de casus van een emissiearme energievoorziening”
  • Dow Jones Industrial Average Historical Components, S&P Dow Jones Indices McGraw Hill Financial
  • Dow Jones Industrial Average Historical Divisor Changes, S&P Dow Jones Indices McGraw Hill Financial
  • W. Grommen, (november 2007), “Nieuwe beurskrach, een kwestie van tijd?”, Technische en Kwantitatieve Analyse,  (20 – 22)
  • W. Grommen, (January 2010), “Beurskrach 1929, mysterie ontrafeld?”, Technische en Kwantitatieve Analyse,  (22 – 24)
  • Grommen, (March 2011), “Huidige crisis, een wetmatigheid?”, Hermes, 49, (52 – 58)
  • Grommen, (January 2013), paper “The present crisis, a pattern” gepresenteerd op International Symposium The Economic Crisis: Time For A Paradigm Shift
  • W. Grommen, (November 2014), “The Dow Jones Industrial Average , A Fata Morgana”, TRADERS’ Magazine,  (14 – 18)
  • Grommen, (April 2015), “Stock Splitting And The Market Crash 1929”, ValueWalk
  • Grommen (August 2015), “Stock Market Boom and Crash, the Cause and Effect of Extreme Market Movements” , TRADERS’ Magazine, (28 – 30)

Stock Market Crash, A Historical Pattern? by Wim Grommen

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History of Futures Trading

History of Futures Trading

The first recorded instance of futures trading occurred with rice in 17th Century Japan, there is some evidence that there may also have been rice futures traded in China as long as 6,000 years ago.

Futures trading is a natural outgrowth of the problems of maintaining a year-round supply of seasonal products like agricultural crops. In Japan, merchants stored rice in warehouses for future use. In order to raise cash, warehouse holders sold receipts against the stored rice. These were known as “rice tickets.” Eventually, such rice tickets became accepted as a kind of general commercial currency. Rules came into being to standardize the trading in rice tickets. These rules were similar to the current rules of American futures trading.

In the USA, futures trading started in the grain markets in the middle of the 19th Century. The Chicago Board of Trade (CBOT) was established in 1848. In the 1870s and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Today there are ten commodity exchanges in the United States. The largest are the Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and the New York Coffee, Sugar and Cocoa Exchange.  Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, France, Singapore, Japan, Australia and New Zealand. The products traded range from agricultural staples like Corn and Wheat to Red Beans and Rubber traded in Japan.

The biggest increase in futures trading activity occurred in the 1970s when futures on financial instruments started trading in Chicago. Foreign currencies such as the Swiss Franc and the Japanese Yen were first. Also popular were interest rate instruments such as United States Treasury Bonds and T-Bills. In the 1980s futures began trading on stock market indexes such as the S&P 500.

The various exchanges are constantly looking for new products on which to trade futures. Very few of the new markets they try survive and grow into viable trading vehicles. Some examples of less than successful markets attempted in recent years are Tiger Shrimp and Cheddar Cheese.

Futures trading is regulated by an agency of the Department of Agriculture called the Commodity Futures Trading Commission. The agency regulates the futures exchanges, brokerage firms, money managers and commodity advisors.

 

 

Current Problems Associated with the End of the Third Industrial Revolution

By Wim Grommen, a teacher in mathematics and physics and later a trainer of programmers in Oracle software. He has also studied and written about transitions, social transformation processes, the S-curve and transitions in relation to market indices. Originally presented at an international symposium in Valencia: “The Economic Crisis: Time for a Paradigm Shift”

 

ABSTRACT

This paper advances a hypothesis of the end of the third industrial revolution and the beginning of a new transition. Every production phase or civilization or human invention goes through a so- called transformation process. Transitions are social transformation processes that cover at least one generation. In this paper I will use one such transition to demonstrate the position of our present civilization. When we consider the characteristics of the phases of a social transformation we may find ourselves at the end of what might be called the third industrial revolution. The paper describes the four most radical transitions for mankind and the effects for mankind of these transitions: the Neolithic transition, the first industrial revolution, the second industrial revolution and the third industrial revolution.

The Dow Jones Industrial Average (DJIA) Index is the only stock market index that covers both the second and the third industrial revolution. Calculating share indexes such as the Dow Jones Industrial Average and showing this index in a historical graph is a useful way to show which phase the industrial revolution is in. Changes in the DJIA shares basket, changes in the formula and stock splits during the take-off phase and acceleration phase of industrial revolutions are perfect transition-indicators. The similarities of these indicators during the last two revolutions are fascinating, but also a reason for concern. In fact the graph of the DJIA is a classic example of fictional truth, a fata morgana.

History has shown that five pillars are essential in a stable society: Food, Security, Health, Prosperity and Knowledge. At the end of every transition the pillar Prosperity is threatened. We have seen this effect at the end of every industrial revolution. Societies will have to make a choice for a new transition to be started.
1 INTRODUCTION

Every production phase or civilization or other human invention goes through a so-called transformation process. Transitions are social transformation processes that cover at least one generation. In this paper I will use one such transition to demonstrate the position of our present civilization. When we consider the characteristics of the phases of a social transformation we may find ourselves at the end of what might be called the third industrial revolution. Transitions are social transformation processes that cover at least one generation (= 25 years).

A transition has the following characteristics:

– It involves a structural change of civilization or a complex subsystem of our civilization

– It shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other

– It is the result of slow changes (changes in supplies) and fast dynamics (flows)

Examples of historical transitions are the demographical transition and the transition from coal to natural gas which caused transition in the use of energy. A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.
2 TRANSITIONS

In general transitions can be seen to go through the S curve and we can distinguish four phases (figure 1):

1. A pre development phase of a dynamic balance in which the present status does not visibly change

2. A take off phase in which the process of change starts because of changes in the system

3. An acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding

4. A stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

A product life cycle also goes through an S curve. In that case there is a fifth phase:
the degeneration phase in which cost rises because of over capacity and the producer will finally withdraw from the market.

Figure 1. The S curve of a transition

Four phases in a transition are best visualized by means of an S curve: Pre-development, Take-off, Acceleration, Stabilization.

The process of the spreading of transitions over civilizations is influenced by a number of elements:

• Physical barriers: oceans, deserts, mountain ranges, swamps, lakes

• Socio-cultural barriers: difference in culture and languages

• Religious barriers

• Psychological barriers

When we look back over the past, we see four transitions taking place with far-reaching effects.
2.1 THE NEOLITHIC TRANSITION

The Neolithic transition was the most radical transition for mankind. This first agricultural revolution (10000 – 3000 BC) forms the change from societies of hunter gatherers (20 – 50 people) close to water with a nomadic existence to a society of people living in settlements growing crops and animals. A hierarchical society came into existence. Joint organizations protected and governed the interests of the individual. Performing (obligatory) services for the community could be viewed as a first type of taxation. Stocks were set up with stock management, trade emerged, inequality and theft. Ways of administering justice were invented to solve conflicts within and between communities and war became a way of protecting interests.The Neolithic revolution started in those places that were most favorable because of the climate and sources of food. In very cold, very hot or dry areas the hunter gatherer societies lasted longer.

Several areas are pointed out as possible starting points: southern Anatolia, the basins the Yangtze Kiang and Yellow river in China, the valley of the Indus, the present Peru in the Andes or what is now Mexico in Central America. From these areas the revolution spread across the world. The start of the Neolithic era and the spreading process are different in each area. In some areas the changes are relatively quick and some authors therefore like to speak of a Neolithic revolution. Modern historians prefer to speak of the Neolithic evolution. They have come to realize that in many areas the process took much longer and was much more gradual than they originally thought.
2.2 THE FIRST INDUSTRIAL REVOLUTION

The first industrial revolution lasted from around 1780 tot 1850. It was characterized by a transition from small scale handwork to mechanized production in factories. The great catalyst in the process was the steam engine which also caused a revolution in transport as it was used in railways and shipping. The first industrial revolution was centered around the cotton industry. Because steam engines were made of iron and ran on coal, both coal mining and iron industry also flourished.



Britain was the first country that faced the industrial revolution. The steam engine was initially mainly used to power the water pumps of mines. A major change occurred in the textile industry. Because of population growth and colonial expansion the demand for cotton products quickly increased. Because spinners and weavers could not keep up with the demand, there was an urgent need for a loom with an external power unit, the power loom.

A semi-automatic shuttleless loom was invented, and a machine was created that could spin several threads simultaneously. This “Spinning Jenny”, invented in 1764 by James Hargreaves, was followed in 1779 by a greatly improved loom: ‘Mule Jenny’. At first they were water-powered, but after 1780 the steam engine had been strongly improved so that it could also be used in the factories could be used as a power source. Now much more textiles could be produced. This was necessary because in 1750, Europe had 130 million inhabitants, but in 1850 this number had doubled, partly because of the agricultural revolution. (This went along with the industrial revolution; fertilizers were imported, drainage systems were designed and ox was replaced by the horse. By far the most important element of the agricultural revolution was the change from subsistence to production for the market.). All those people needed clothing. Thanks to the machine faster and cheaper production was possible and labor remained cheap. The textile industry has been one of the driving forces of the industrial revolution.

Belgium becames the first industrialized country in continental Europe. Belgium was “in a state of industrial revolution” under the rule of Napoleon Bonaparte. The industrial centers were Ghent (cotton and flax industries), Verviers (mechanized wool production), Liège (iron, coal, zinc, machinery and glass), Mons and Charleroi. On the mainland, France and Prussia followed somewhat later. In America the northeastern states of the United States followed quickly.

After 1870 Japan was industrialized as the first non-Western country. The rest of Europe followed only around 1880.

The beginning of the end of this revolution was in 1845 when Friedrich Engels, son of a German textile baron, described the living conditions of the English working class in “The condition of the working class in England“.
2.3 THE SECOND INDUSTRIAL REVOLUTION

The second industrial revolution started around 1870 and ended around 1930. It was characterized by ongoing mechanization because of the introduction of the assembly line, the replacement of iron by steel and the development of the chemical industry. Furthermore coal and water were replaced by oil and electricity and the internal combustion engine was developed. Whereas the first industrial revolution was started through (chance) inventions by amateurs, companies invested a lot of money in professional research during the second revolution, looking for new products and production methods. In search of finances small companies merged into large scale enterprises which were headed by professional managers and shares were put on the market. These developments caused the transition from the traditional family business to Limited Liability companies and multinationals.

The United States (U.S.) and Germany led the way in the Second Industrial Revolution. In the U.S. there were early experiments with the assembly line system, especially in the automotive industry. In addition, the country was a leader in the production of steel and oil. In Germany the electricity industry and the chemical industry flourished. The firms AEG and Siemens were electricity giants. German chemical companies such as AGFA and BASF had a leading share in the production of synthetic dyes, photographic and plastic products (around 1900 they controlled some 90% of the worldwide market). In the wake of these two industrial powers (which soon surpassed Britain) France, Japan and Russia followed. After the Second Industrial Revolution more and more countries, on more continents, experienced a more or less modest industrial development. In some cases, the industrialization was taken in hand by the state, often with coarse coercion – such as the five-year plans in the Soviet Union.

After the roaring twenties the revolution ended with the stock exchange crash of 1929. The consequences were disastrous culminating in the Second World War.
2.4 THE THIRD INDUSTRIAL REVOLUTION

The third industrial revolution started around 1940 and is nearing its end. The United States and Japan played a leading role in the development of computers. During the Second World War great efforts were made to apply computer technology to military purposes. After the war the American space program increased the number of applications. Japan specialized in the use of computers for industrial purposes such as the robot.

From 1970 the third industrial revolution continued to Europe. The third industrial revolution was mainly a result of a massive development of microelectronics: electronic calculators, digital watches and counters, the compact disc, the barcode etc. The take off phase of the third industrial revolution started around 1980 with the advent of the microprocessor. The development of the microprocessor is also the basis of the evolution and breakthrough of computing. This had an impact in many areas: for calculation, word processing, drawing and graphic design, regulating and controlling machines, simulating processes, capturing and processing information, monetary transactions and telecommunications. The communication phase grows enormously at the beginning of the new millennium: the digital revolution. According to many analysts now a new era has emerged: that of the information or service economy. Here the acquisition and channeling of information has become more important than pure production. By now computer and communication technology take up an irreplaceable role in all parts of the world. More countries depend on the service sector and less on agriculture and industry.
2.5 EFFECTS OF THREE INDUSTRIAL REVOLUTIONS

The first (and second revolution) transformed an agricultural society into an industrial society where mechanization (finally) relieved man of physical labor. The craft industry could not compete with the factories that put products of the same or even better quality on the market at a lower price. The result was that many small businesses went bankrupt and the former workers went to work in the factories. The effects of industrialization were seen in the process of rapid urbanization of formerly relatively small villages and towns where the new plants came. These turned into dirty and unhealthy industrial cities. Still people from the country were forced to go and work there. Because of this a new social class emerged: the workers, or the industrial proletariat. They lived in overcrowded slums in poor housing with little sanitation. The average life expectancy was low, and infant mortality high. The elite accepted the filth of the factories as the inevitable price for their success. The chimneys were symbols of economic power, but also of social inequality. You see this social inequality appear after each revolution. The gap between the bottom and the top of society becomes very large. Eventually there are inevitable responses that decrease this gap. It could be argued that the Industrial revolutions have created the conditions for a society with little or no poverty.

The third revolution transformed an industrial society into a service society. Where mechanization man relieved of physical labor, the computer relieved him of mental labor. This revolution made lower positions in industry more and more obsolete and caused the emergence of entirely new roles in the service sector.
3 INDUSTRIAL REVOLUTIONS AND STOCK MARKET INDICES

The Dow Jones Industrial Average was first published halfway through the second Industrial Revolution, in 1896. The Dow Jones Industrial Average Index is the oldest stock index in the United States. This was a straight average of the rates of twelve shares. A select group of journalists from The Wall Street Journal decide which companies are part of the most influential index in the world market. Unlike most other indices the Dow is a price-weighted index. This means that stocks with high absolute share price have a significant impact on the movement of the index.

Figure 2. Exchange rates of Dow Jones Industrial Average during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously.

The S & P Index is a market capitalization weighted index. The 500 largest U.S. companies as measured by their market capitalization are included in this index, which is compiled by the credit rating agency Standard & Poor’s.

Figure 3. Third industrial revolution and the S&P 500

S&P 500

 

3.1 WHAT DOES A STOCK EXCHANGE INDEX LIKE DOW JONES OR S&P 500 REALLY MEAN?

In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit.

After a period of 25 years the value of the original set of apples is compared to the value of a set of pears. At the moment only 6 of the original 30 companies that made up the set of shares of the Dow Jones at the start of the take-off phase of the last revolution are still present.

Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.132319125 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:

Dow1985 = (x1 + x2 + ……..+x30) / 1

Dow2012 = (x1 + x2 + …….. + x30) / 0,132319125

In the nineties of the last century many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed. An increase in share value of 1 dollar of the set of shares in 2012 results is 7.5 times more points than in 1985. The fact that in the 1990-ies many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 13207 points. If we used the 1985 formula it would be at 1760 points.

The most remarkable characteristic is of course the constantly changing set of shares in during the take-off and acceleration phase of a revolution. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take-off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition. From 1980 onward 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft), the engines of the latest revolution were added to the Dow Jones and 5 financial institutions, which always play an important role in every revolution.

This is actually a kind of pyramid scheme. All goes well as long as companies are added that are in their take-off phase or acceleration phase. At the end of a transition, however, there will be fewer companies in those phases.

Figure 4. The two most recent revolutions and the Dow. The stock value increase has accelerated enourmously during the acceleration phase of a revolution.

3.2 STOCK MARKET BOOMS

The Dow was first published in 1896. The Dow was calculated by dividing the sum of the 12 component company stocks by 12:

Dow-index_1896 = (x1 + x2+ ……….+x12) /12

In 1916 the Dow was enlarged to 20 companies; 4 were removed and 12 added:

Dow-index_1916 = (x1 + x2+ ……….+x20) /20

The shares of a number of companies were split in 1927, and for those shares a weighting factor was introduced in the calculation. The formula is now as follows (x1 = American Can is multiplied by 6, x2 = General Electric by 4 etc. )

Dow-index_1927 = (6.x1 + 4.x2+ ……….+x20) /20

On 1 October 1928 the Dow was further enlarged to 30 stocks. Because everything had to be calculated by hand, the index calculation was simplified. The Dow Divisor was introduced. The index was calculated by dividing the sum of the share values by the Dow Divisor. In order to give the index an uninterrupted graph the Dow Divisor was given the value 16.67.

Dow-index_Oct_1928 = (x1 + x2+ ……….+x30) /Dow Divisor

Dow-index_Oct_1928 = (x1 + x2+ ……….+x30) /16.67

Since then the Dow Divisor has acquired a new value every time there has been a change in the component stocks, with a consequent change in the formula used to calculate the index. This is because at the moment of change the results of two formulas based on two different share baskets must give the same result. When stocks are split the Dow Divisor is changed for the same reason.

In autumn 1928 and spring 1929 there were 8 stock splits, causing the Dow Divisor to drop to 10.47.

Dow-index_Sep_1929 = (x1 + x2+ ……….+x30) /10.47

From that moment on a an increase (or decrease) of the set of shares results in almost three times as many (or fewer) index points as a year before. In the old formula the sum would have been divided by 30. The Dow’s highest point is on 3 September 1929 at 381 points.

So the extreme increase followed by an extreme decrease of the Dow in the period 1920 – 1932 was primarily caused by changes to the formula, the constant changes to the set of shares during the acceleration phase of the second industrial revolution and splitting of shares during this period. Because of these changes in the Dow investors were wrong footed. The companies whose shares constituted the Dow index at that time also continued into the stabilization and degeneration phase.

After the stock market crash of 1929, 18 companies were replaced in the Dow and the Dow Divisor got the value 15.1.

Table 1. Changes in the Dow, stock splits and the value of the Dow Divisor after the market crash of 1929

The table makes it clear that the Dow Jones formula has been changed many times and that the Dow Divisor in the period 1980-2000 (take off phase and acceleration phase of the third revolution ) and has actually become a Dow Multiplier, due to the large number of stock splits in that period. Where in the past the sum of the share values was divided by the number of shares, nowadays the sum of the share values multiplied by 7.5. Dividing by 0.132 is after all the same as multiplying by 7.5. (1 / 0,132 = 7,5). This partly explains the behavior of the Dow graph since 1980.
3.3 SHARE PRICE / INCOME RATIO DURING AN INDUSTRIAL REVOLUTION

During the pre-development phase and the take-off phase of a revolution many new companies spring into existence. During the acceleration phase of a revolution it will be clear that many of these companies also enter the acceleration phase of their existence (Figure 5).

Figure 5. Typical course of market development: Introduction, Growth, Flourishing and Decline.

The expected value of the shares of these companies which are in the acceleration phase of their existence increases enormously. This is the reason why shares in the acceleration phase of a revolution become very expensive.

The share price / income ratio of shares increased enormously between 1920 – 1930 (the acceleration phase of the second revolution) and between 1990 – 2000 (the acceleration phase of the third revolution). In acceleration phase of a revolution there will always be a stock market boom (Figure 6).

Figure 6. Two industrial revolutions: share price /income ratio

Share price /income ratio during a stabilization phase of a industrial revolution will decrease; The companies whose shares constituted the Dow also continued into the stabilization and degeneration phase (Figure 6).
4 WILL HISTORY REPEAT ITSELF?

Calculating share indexes as described above and showing indexes in historical graphs is a useful way to show which phase the industrial revolution is in. Especially financial institutions play an important role during an industrial revolution. The graphs showing the wages paid in the financial sector therefore shows the same S curve as both revolutions.

Figure 7. Historical excess wage in the financial sector

The third industrial revolution is clearly in the saturation and degeneration phase. This phase can be recognized by the saturation of the market and the increasing competition. Only the strongest companies can withstand the competition or take over their competitors (like for example the take-overs by Oracle and Microsoft in the past few years). The information technology world has not seen any significant technical changes recently, despite what the American marketing machine wants us to believe.

Investors get euphoric when hearing about mergers and take overs. Actually, these mergers and take overs are indications of the converging processes at the end of a transition. When looked at objectively each merger or take over is a loss of economic activity. This becomes painfully clear when we have a look at the unemployment rates of some countries.

New industrial revolutions come about because of new ideas, inventions and discoveries, so new knowledge and insight. Here too we have reached a point of saturation. There will be fewer companies in the take-off or acceleration phase to replace the companies in the index shares sets that have reached the stabilization or degeneration phase.

Humanity is being confronted with the same problems as those at the end of the second industrial revolution such as decreasing stock exchange rates, highly increasing unemployment, towering debts of companies and governments and bad financial positions of banks.

Figure 8. Two most recent revolutions: US market debt

Transitions are initiated by inventions and discoveries, new knowledge of mankind. New knowledge influences the other four components in a society. At the moment there are few new inventions or discoveries. So the chance of a new industrial revolution is not very high.

History has shown that five pillars are indispensable for a stable society.

Figure 9. The five pillars for a stable society: Food, Security, Health, Prosperity, Knowledge.

At the end of every transition the pillar Prosperity is threatened. We have seen this effect after every industrial revolution. The pillar Prosperity of a society is about to fall again. History has shown that the fall of the pillar Prosperity always results in a revolution. Because of the high level of unemployment after the second industrial revolution many societies initiated a new transition, the creation of a war economy. This type of economy flourished especially in the period 1940 – 1945.

Now, societies will have to make a choice for a new transition to be started.

Without knowledge of the past there is no future.

All Stock Market Indices Are Fata Morganas

Stock Market Crash, A Historical Pattern?

‘No Muslims’ cafe sign stirs controversy in Australia

5 Rules For Investing by Warren Buffett

15 of Steve Jobs most inspiring quotes

All Stock Market Indices Are Fata Morganas

All Stock Market Indices Are Fata Morganas

Have you ever wondered what information a stock market index actually gives? An index point is not a fixed unit in time and does not have any historical significance.

Two measurements during a marathon

Imagine the following two measurements:

  • In the first measurement, the average time is measured which 30 runners need to run a marathon.
  • In the second measurement the same runners start a marathon. However, after 10 kilometres the 10 slowest runners are replaced by 10 fresh. After 20 kilometres again the 10 slowest runners are replaced by 10 fresh and after 30 kilometres this happens again. Again the average time is measured.

In which measurement will the average time over 30 runners be the smallest? And what will happen to the average time if the stopwatch is running more slowly during the second measurement? In the beginning of the second measurement, there are 60 seconds in a minute and at the end this increased to 380 seconds in a minute. Does it still make sense to compare the two measurements?

If your answer to this question is no, you will probably have no problem qualifying stock market indexes such as the AEX, DAX, S&P 500 and the Dow Jones Industrial Average as fata morganas.

All Stock Market Indices are Fata Morganas

The parallel with stock market indices is easy to draw. An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit. In less than ten years twelve of the thirty companies (i.e. 40%) in the Dow Jones were replaced. Over a period of sixteen years, twenty companies were replaced, a figure of 67%. This meant that over a very short period we were left comparing a basket of today’s apples with a basket of yesterday’s pears.

Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index, which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15571590501117 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:

••••••••••••••••••••••••••••
Dow 1985 = (x1 + x2 +..+x30) / 1
Dow 2014 = (x1 + x2 +.. + x30) / 0.15571590501117
••••••••••••••••••••••••••••

In the 1990s many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed. An increase in share value of 1 dollar of the set of shares in 2014 results is 6.4 times more points than in 1985. The fact that in the 1990s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 16,437 points. If we used the 1985 formula it would be at 2,559 points.

The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the poorly performing companies are removed from the set and companies in the growth phase, which perform well, are added. This greatly increases the chance that the index will rise rather than go down, you don’t need a probability calculation

Should the European Union reindex the stock markets?

It makes no sense to compare the number of points with the number of points of a stock market index from 30 years ago. The time is ripe for the European Union, after the introduction of the euro, to reindex European stockmarkets to 100 points. A fata morgana is an optical phenomenon, and so is the graph of a stock market index.

Written by Wim Grommen

Stock Market Crash, A Historical Pattern? by Wim Grommen

5 Rules For Investing by Warren Buffett

5 Rules For Investing by Warren Buffett

5 Rules For Investing by Warren Buffett

You don’t need to be an expert in order to achieve satisfactory investment returns.” But Buffett also warns that the investor should recognize her limitations and “keep things simple.

“Focus on the future productivity of the asset you are considering.” Buffett notes that no one can perfectly forecast the future profitability of an investment. “isn’t necessary; you only need to understand the actions you undertake.”

 “If you instead focus on the prospective price change of a contemplated purchase, you are speculating.” Buffett has nothing against price speculation. But he emphasizes that it’s important to be able to know the difference between investing for the productivity of the asset versus investing on hopes that the price of the asset changes.

“With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.” In other words, focus on the long-run.

“Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.” So mute CNBC, Bloomberg TV, and Fox Business. Unless Warren Buffett comes on.

 

Kamikaze Defense

Factors That Drive Stock Prices

Stock Market Crash, A Historical Pattern? by Wim Grommen

Current Problems Associated with the End of the Third Industrial Revolution by Wim Grommen

All Stock Market Indices Are Fata Morganas by Wim Grommen

15 of Steve Jobs most inspiring quotes

Forex trading tips from the pros

Be prepared before you start trading with your money! Here you can find some useful tips that will help you to be a better trader.

Be patient, don’t expect to be rich quick. Forex trading experience can make you rich.

Do your own fundamental and technical analysis before starting a new forex trade

If you lose 3 trades in a row go away from your trading station

Be independent and not a follower

Most of the new forex traders fail

Focus only on one pair

Stick to your trading method and try to improve it

No forex trading method,  system or style will be 100% profitable




Choose a single time frame and keep things simple

Keep your charts clean, do not put many technical indicators they confuse you

 

Read more forex trading tips

Forex Bonuses Glossary

Forex Trend Trading

Short-Term Forex Trading Strategies

Forex Trading Tips

Kamikaze Defense

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All the information on Futuresandoptions is published in good faith and for general information purpose only. We do not promise warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information you find on this website is strictly at your own risk and we will not be liable for any losses and/or damages in connection with the use of our website.

 

I

Idiosyncratic Risk
Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words, the risk that is firm specific and can be diversified through holding a portfolio of stocks.

Immediate settlement
Delivery and settlement of securities within five business days.

Immunization
The construction of an asset and a liability that are subject to offsetting changes in value.

Immunization strategy
A bond portfolio strategy whose goal is to eliminate the portfolio’s risk against a general change in the rate of interest through the use of duration.

Implied call
The right of the homeowner to prepay, or call, the mortgage at any time.

Implied repo rate
The rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date. Related: cheapest to deliver issue

Implied volatility
The expected volatility in a stock’s return derived from its option price, maturity date, exercise price, and riskless rate of return, using an option-pricing model such as Black/Scholes.

Income bond
A bond on which the payment of interest is contingent on sufficient earnings. These bonds are commonly used during the reorganization of a failed or failing business.

Income fund
A mutual fund providing for liberal current income from investments.

Income statement (statement of operations)
A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

Income stock
Common stock with a high dividend yield and few profitable investment opportunities.

Incremental cash flows
Difference between the firm’s cash flows with and without a project.

Incremental costs and benefits
Costs and benefits that would occur if a particular course of action were taken compared to those that would occur if that course of action were not taken.

Incremental internal rate of return
IRR on the incremental investment from choosing a large project instead of a smaller project.

Indenture
Agreement between lender and borrower which details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of bondholders.

Index Amortizing Swap
A swap whose Notional Amount amortizes (declines) each period by an amount that depends on the level of one or more interest rates. This gives the IAS a superficial resemblance to a mortgage loan or mortgage-backed security, which has optional prepayment. This superficial similarity has been the basis for a sales pitch to institutions with a large prepayment risk to hedge. Alas, the basis risk is large enough to discourage intelligent, experienced – or even merely intelligent – professionals from hedging this way. The IAS – like the legendary House of the Rising Sun, in New Orleans – has been the ruin of many a poor boy

Index arbitrage
An investment/trading strategy that exploits divergences between actual and theoretical futures prices.

Index fund
Investment fund designed to match the returns on a stockmarket index.

Index model
A model of stock returns using a market index such as the S&P 500 to represent common or systematic risk factors.

Index option
A call or put option based on a stock market index.

Index warrant
A stock index option issued by either a corporate or sovereign entity as part of a security offering, and guaranteed by an option clearing corporation.

Indexed bond
Bond whose payments are linked to an index, e.g. the consumer price index.

Indexing
A passive instrument strategy consisting of the construction of a portfolio of stocks designed to track the total return performance of an index of stocks.

Indifference curve
The graphical expression of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utilities according to  and  .

Indirect quote
For foreign exchange, the number of units of a foreign currency needed to buy one U.S.$.

Industrial revenue bond (IRB)
Bond issued by local government agencies on behalf of corporations.

Inflation
The rate at which the general level of prices for goods and services is rising.

Inflation-Linked Bonds
Inflation-Linked Bonds have coupons that depend on the rate of inflation or a related index. They have two main structures.
1. Capital Indexed Bonds. The principal accretes according to the CPI or another price index or deflator. The bond’s coupon is a fixed percent of the accreted principal.
2. Floating Rate Bonds. The principal is fixed, but its coupon floats. The floating rate depends on inflation or something related, such as the rate of change in the CPI or on the Treasury Inflation Protected Security (TIPS) variable coupon rate.
A flurry of issues have hit the market in 1997. Issuers include Federal Home Loan Banks, JP Morgan & Co. Inc., Sallie Mae, Salomon Brothers, Toyota Motor Credit Corporation, the U.S. Treasury.
The two main unresolved issues of Inflation-Linked Bonds are how large and variable (1) the coupon and (2) the market price should be.The real yields on Inflation-Linked Treasury Bondsbegan large enough to surprise many observers, and has fallen little in a few months. Some observers believe that these high real rates are sustainable and have historical precedent. Others believe that they are the result of investor uncertainty about the market and will fall over time. (Jonathan Clements, “Second Thoughts: Inflation-Tied Bonds Offer an Intriguing Option for Investors,” Wall Street Journal, 3/11/97.)
Advocates for the U.S. market envisioned a bond with a variable coupon and a stable price. However, the experience with Australian Capital Indexed Bonds is that the price varies significantly. (Wesley Phoa, “Inflation-Linked Bonds; are they too safe or too exciting?”, Financial Trader 4 (2), p. 30.)

Inflation risk
Also called purchasing-power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative.

Inflation uncertainty
The fact that future inflation rates are not known. It is a possible contributing factor to the makeup of the term structure of interest rates.

Inflation-escalator clause
A clause in a contract providing for increases or decreases in inflation based on fluctuations in the cost of living, production costs, and so forth.

Information asymmetry
A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC)
The correlation between predicted and actual stock returns, sometimes used to measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship.

Information costs
Transaction costs that include the assessment of the investment merits of a financial asset.

Information-content effect
The rise in the stock price following the dividend signal.

Informational efficiency
The speed and accuracy with which prices reflect new information.

Initial margin requirement
When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange.

Initial public offering (IPO)
A company’s first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains. IPO’s by investment companies (closed-end funds) usually contain underwriting fees which represent a load to buyers.

Insider information
Relevant information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.

Insider trading
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.

Insiders
These are directors and senior officers of a corporation — in effect those who have access to inside information about a company. An insider also is someone who owns more than 10% of the voting shares of a company.

Insolvency risk
The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

Insolvent
A firm that is unable to pay debts (liabilities are greater than assets).

Installment Option
An option on an option on an option …

Installment sale
The sale of an asset in exchange for a specified series of payments (the installments).

Installment Warrant
Aussie for what is simultaneously a Compound Option (q.v.) and a Warrant (q.v.), and which apparently confers some of the benefits of ownership. “They involve two payments: an initial payment followed by a second, which includes fees and interest, paid optionally about 14 months afterwards. In the meantime, depending on the issuer, the instalments confer full dividends, franking credits and voting rights.” (Source: Australian Financial Review Dictionary of Investment Terms.)

Institutional investors
Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

Institutionalization
The gradual domination of financial markets by institutional investors, as opposed to individual investors. This process has occurred throughout the industrialized world.

Instruments
Financial securities, such as money market instruments or capital market insturments.

Insured bond
A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies.

Intangible asset
A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets.

Interest
The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest coverage ratio
The ratio of the earnings before interest and taxes to the annual interest expense. This ratio measures a firm’s ability to pay interest.

Interest coverage test
A debt limitation that prohibits the issuance of additional long-term debt if the issuer’s interest coverage would, as a result of the issue, fall below some specified minimum.

Interest payments
Contractual debt payments based on the coupon rate of interest and the principal amount.

Interest-only strip (IO)
A security based solely on the interest payments form a pool of mortgages, Treasury bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop and the value of the IO falls to zero.

Interest rate agreement
An agreement whereby one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined level (the strike rate).

Interest rate cap
Also called an interest rate ceiling, an interest rate agreement in which payments are made when the reference rate exceeds the strike rate.

Interest rate floor
An interest rate agreement in which payments are made when the reference rate falls below the strike rate.

Interest rate parity theorem
Interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate.

Interest rate risk
The risk that a security’s value changes due to a change in interest rates. For example, a bond’s price drops as interest rates rise. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates.

Interest rate swap
A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive variable.

Interest subsidy
A firm’s deduction of the interest payments on its debt from its earnings before it calculates its tax bill under current tax law.

Intermarket sector spread
The spread between the interest rate offered in two sectors of the bond market for issues of the same maturity.

Intermarket spread swaps
An exchange of one bond for another based on the manager’s projection of a realignment of spreads between sectors of the bond market.

Internal finance
Finance generated within a firm by retained earnings and depreciation.

Internal growth rate
Maximum rate a firm can expand without outside source of funding. Growth generated by cash flows retained by company.

Internal market
The securities market within the boundaries of a particular country, consisting of the domestic market and the foreign market. Example: Most Daimler Chrysler debt trades in the German internal market.

Internal rate of return
Dollar-weighted rate of return. Discount rate at which net present value (NPV) investment is zero. The rate at which a bond’s future cash flows, discounted back to today, equals its price.

International Bank for Reconstruction and Development – IBRD or World Bank
International Bank for Reconstruction and Development makes loans at nearly conventional terms to countries for projects of high economic priority.

International Banking Facility (IBF)
International Banking Facility. A branch that an American bank establishes in the United States to do Eurocurrency business.

International bonds
A collective term that refers to global bonds, Eurobonds, and foreign bonds.

International Depository Receipt (IDR)
A receipt issued by a bank as evidence of ownership of one or more shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR structure is that the corporation does not have to comply with all the regulatory issuing requirements of the foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depository Receipt (ADR).

International diversification
The attempt to reduce risk by investing in the more than one nation. By diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce the variability of their returns.

International Fisher effect
States that the interest rate differential between two countries should be an unbiased predictor of the future change in the spot rate.

International fund
A mutual fund that can invest only outside the United States.

International Monetary Fund
An organization founded in 1944 to oversee exchange arrangements of member countries and to lend foreign currency reserves to members with short-term balance of payment problems.

International Swaps and Derivatives Association
The principal trade association for Swap and Derivatives dealers, as well as allied organizations.

International Monetary Market (IMM)
A division of the CME established in 1972 for trading financial futures. Related: Chicago Mercantile Exchange (CME).

In-the-money
A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money by $0.50 an ounce. Related: put.

Intramarket sector spread
The spread between two issues of the same maturity within a market sector. For instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility corporate bonds.

Intrinsic value of an option
The amount by which an option is in-the-money. An option which is not in-the-money has no intrinsic value. Related: in-the-money.

Intrinsic value of a firm
The present value of a firm’s expected future net cash flows discounted by the required rate of return.

Inventory
For companies: Raw materials, items available for sale or in the process of being made ready for sale. They can be individually valued by several different means, including cost or current market value, and collectively by FIFO, LIFO or other techniques. The lower value of alternatives is usually used to preclude overstating earnings and assets. For security firms: securities bought and held by a broker or dealer for resale.

Inventory loan
A secured short-term loan to purchase inventory. The three basic forms are a blanket inventory lien, a trust receipt, and field warehousing financing.

Inventory turnover
The ratio of annual sales to average inventory which measures the speed that inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.

Inverse Floater
A Floating Rate Note with a coupon that decreases as the underlying index rate increases (e.g., a simple Inverse Floater’s coupon rate might be 11.5% minus LIBOR). The Replicating Portfolio (q.v.) for a simple Inverse Floater is long a pair of Fixed Rate Notes and short a Floating Rate Note. Commonly, an Inverse Floater’s coupon has a ceiling and a floor, (e.g., no more than ten percent, never negative). Thus, its replicating portfolio is the same as for a simple Inverse Floater, plus long a Cap and short a Floor.

Inverted market
A futures market in which the nearer months are selling at price premiums to the more distant months. Related: premium.

Investment bank
Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts.

Investment grade bonds
A bond that is assigned a rating in the top four categories by commercial credit rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moodys’ classifies investment grade bonds as Ba or higher. Related: High-yield bond.

Investment management
Also called portfolio management and money management, the process of managing money.

Investment manager
Also called a portfolio manager and money manager, the individual who manages a portfolio of investments.

Investment product line (IPML)
The line of required returns for investment projects as a function of beta (nondiversifiable risk).

Investment trust
A closed-end fund regulated by the Investment Company Act of 1940. These funds have a fixed number of shares which are traded on the secondary markets similarly to corporate stocks. The market price may exceed the net asset value per share, in which case it is considered at a “premium.” When the market price falls below the NAV/share, it is at a “discount.” Many closed-end funds are of a specialized nature, with the portfolio representing a particular industry, country, etc. These funds are usually listed on US and foreign exchanges.

Investments
As a discipline, the study of financial securities, such as stocks and bonds, from the investor’s viewpoint. This area deals with the firm’s financing decision, but from the other side of the transaction.

Investor
The owner of a financial asset.

Investor fallout
In the mortgage pipeline, risk that occurs when the originator commits loan terms to the borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at closing.

Investor relations
The process by which the corporation communicates with its investors.

Investor’s equity
The balance of a margin account. Related: buying on margin, initial margin requirement.

Invoice
Bill written by a seller of goods or services and submitted to the purchaser.

Invoice billing
Billing system in which the invoices are sent off at the time of customer orders are all separate bills to be paid.

Invoice date
Usually the date when goods are shipped. Payment dates are set relative to the invoice date.

Invoice price
The price that the buyer of a futures contract must pay the seller when a Treasury Bond is delivered.

In-house processing float
Refers to the time it takes the receiver of a check to process the payment and deposit it in a bank for collection.

In the box
This means that a dealer has a wire receipt for securities indicating that effective delivery on them has been made.

Irrational call option
The implied call imbedded in the MBS. Identified as irrational because the call is sometimes not exercised when it is in the money (interest rates are below the threshold to refinance). Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).

Irrelevance result
The Modigliani and Miller theorem that a firm’s capital structure is irrelevant to the firm’s value.

ISMA
International Security Market Association. ISMA is a Swiss law association located in Zurich that regroups all the participants on the Eurobond primary and secondary markets. Establishes uniform trading procedures in the international bond markets.

Issued share capital
Total amount of shares that are in issue.

Issuer
An entity that issues a financial asset.