Re: flow or stock?

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

 Companies do not have to pay dividends for investors to be buying on the
basis of anticipated earnings and/or capital appreciation. A company that
pays no dividends, yet has substantial earnings, may generate the
expectation of higher future earnings. So while they may not be buying an
"income stream", they are buying on the basis of expected future
performance. People buy stamps on the basis of "rarity". These are very
different motivations.

You may wish to argue (and in fact, I think I hear you already thinking)
that earnings do not predict a stock's price. And I agree to a point.
Current earnings may not be a good predictor, but people's subjectively
determined expectations of future earnings are.

What distinguishes what I am saying from the EMH? Well it seems quite clear
to me. The EMH thinks people can accurately know. I say they only guess, and
that the manner in which they form their expectations about future earnings
often reflects poor judgement.

-----Original Message-----
From: J. Barkley Rosser, Jr.
To: Clifford Poirot; pkt@xxxxxxxxxxxxxxxx
Sent: 8/3/02 5:34 PM
Subject: Re: flow or stock?

Chip,
      Last time I saw a figure reported, it was that only about
22% of companies pay dividends on their stocks, although
they tend to be bigger companies, hence the percentage of
stocks on which dividends are paid is substantially higher
than that number (anybody out there know the current figure?).
     Anyway, for all practical purposes there is no difference
between those stocks and the stamps and baseball cards
that have been mentioned.  There is no future income (dividend)
to discount to the present, although one might argue that there
is some probability that some stocks might sometime in the
future start paying dividends.  Indeed, in the current environment
I think a number of companies are deciding that paying dividends
on their stock might be a good idea.
Barkley Rosser

----- Original Message -----
From: Clifford  <mailto:cpoirot@xxxxxxxxxxx> Poirot
To: 'pkt@xxxxxxxxxxxxxxxx' <mailto:'pkt@xxxxxxxxxxxxxxxx'>
Sent: Saturday, August 03, 2002 2:30 PM
Subject: Re: flow or stock?



Paul Davidson
 Those who propagate the belief that stock prices reflect future
dividend (or even income) flows is a reflection  that these "economists"
have not yet been sable to slough the skins of the irrelevant efficient
market hypothesis of mainstream economics.
[Clifford Poirot]
To argue that people buy financial assets on the basis of expected
future returns (be it in the form of anticipated dividends, earnings or
capital appreciation) is not the same as accepting the efficient market
hypothesis-by a long shot. The EMH says all current prices reflect all
known information, and only new information moves prices. The EMH
assumes the information is correct, and that in the aggregate, any
mistakes in anticipation cancel each other out. I would argue that
people buy on the basis of expected future returns, but that for many
reasons (including, but not limited to uncertainty) often wind up being
wrong in their expectations, and that prices do not reflect all known
information. So this is far from the EMH.

When students present this argument I confront them with the following
real world example.

 While I was at Rutgers a colleague of mine collected stamps as a
professional occupation.  His collection was so valuable that he had to
keep it in a safe deposit box at a bank. (Therefore he could not get any
utility from looking at these beautiful pieces of paper as some
mainstream colleagues argue when I present them with this example. Nor
could many of these bits of paper even move a letter through the mails
--since they were often cancelled -- and even if they could move a
letter they could not be worth more than their face value.)   Yet he
continued to buy and sell parts of his collection. Why?

These pieces of paper certainly did not represent a share of the future
profits of the post office (That's a laugh since most postal systems
lose money.)
Did these bits of paper represent the Marginal product of the post
offices which issued them?  Or was it (as I have argued is the same for
any liquid assets in a nonergodic system) the "buy to sell to the bigger
fool theory"?
[Clifford Poirot]
Paul, I must protest this example as bordering on the invidious. Did
your students really let this go unchallenged? Do you characterize
stamps as a "financial asset"? Stamps are a rare commodity, and their
rareness or uniqueness makes them valuable. Your colleague may have been
unable to derive pleasure from looking at stamps, but most collectors of
anything rare value things due to their rareness. Nonetheless, they buy
on the basis of anticipated future values-or-to obtain an opportunity to
buy another item. When I collected baseball cards as a teenager, I
placed on a disproportionate value on the Yankees. Yet I would trade
Yankee cards if I thought it might bring me something equally as
good-like say -Pete Rose. What made the value of Pete Rose (or Thurmond
Munson, or Bobby Mercer...) high? It was anticipation of their current
and future performance. The same with rookie cards.

Nonetheless, I was never able to parlay my minimal baseball card
collection into tradeable liquidity (though others I knew were to a very
limited degree).

Such items are not the same as the purchase of financial assets.

Another example: In the 1970s the US postal system offered a  stamp for
Dag Hammersjold (spelling may be wrong) a former UN official that had
died..  After the end of the production run, a person in Peoria told the
media that he had obrtained a sheet of these stamps where the picture
was reversed --and the owner explained how  since this was so rare he
expected to sell this for millions at a stamp collectors auction.  The
U.S. post office found out about this as the TV media picked up the
story , and they decided to print  sheets of the stamp with the picture
reversed.  As soon as that was announced guess what happened to the
value of the original sheet of misprinted stamps?
[Clifford Poirot]
And this is a perfect example of unanticipated information changing the
value. Why did its price fall? Because now its anticipated future value
had changed.

One final fact, several years ago (before the Clinton Administration
started retiring the 30 year Treasury Bonds, statisitcs indicated that
the duration that people held a 30 year Treasury was on average less
than 180 days. In that case who cares about future stream of interest
payments?
[Clifford Poirot]
Anyone who is buying and selling Treasury Bonds-because the decision to
buy, hold or sell will be based on anticipated changes in bond prices
and yields. Nonetheless, I would like to see these statistics. I'll make
a guess that professional bond traders and bond funds held the bonds for
short term purposes to trade in response to short term market movements,
in an attempt to push fund yields up a few basis points (and also
generate management fees).  I would hazard to guess that the "average"
investor who bought Treasury bonds for long term income and safety, held
them for much longer. But let's extend this further-what period are we
talking about? Sometimes the FED changes policies every 180 days.

Regardless, why would I buy or sell a bond if it was not in anticipation
or in response to, actual or anticipated changes in yields.


The important thing to recognize is that if an orderly, well organized
market for a durable (with low carrying costs) exists, people will hold
it for speculative purposes primarily --
[Clifford Poirot]
To speculate: I thought that meant in anticipation of future yields or
values?

And as I have argued in my just published book FINANCIAL MARKETS, MONEY
AND THE REAL WORLD a liquid market is not an efficient market -- and, in
a nonergodic  uncertain world, an efficient market cannot be a liquid
market.

Paul



Paul Davidson
Editor, Journal of Post Keynesian Economics
503 SMC
University of Tennessee
Knoxville, Tn 379996-0550
phone Number: (865) 974-4221
fax number: (865) 974-1686