Re: flow or stock?

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

Well, as I said, I can see where I need to modify my previous statement.
There are some similarities between the demand for baseball cards, stamps
and speculative demand for financial assets.

To my mind, the difference is that the expected "rarity" of a stamp
determines its expected value, while the underlying expected financial
health of a company determines the value of its stock.

I think that a lot of investors look at ROE rather than dividends. From my
perspective, I don't care whether you actually pay me the dividends or not
(as long as it is not because you are giving them to a worthless CEO-but
that's another subject). In fact, better if you are reinvesting and driving
up the total value of a company-I still have a claim on the future net worth
of the company.

-----Original Message-----
From: J. Barkley Rosser, Jr. [mailto:rosserjb@xxxxxxx]
Sent: Monday, August 05, 2002 2:41 PM
To: Clifford Poirot; pkt@xxxxxxxxxxxxxxxx
Subject: Re: flow or stock?


Chip,
       What is the meaning of "earnings" to an
investor who is not going to be paid any of
those "earnings" in the form of dividends.  Those
are the income flows associated with the stock.
      Now, I grant you that future capital appreciation
(or depreciation) does tend to respond to apparent
news about those so-called future "earnings."  In
that regard, non-dividend paying stocks are slightly
different from stamps or baseball cards, whose
future capital appreciation or depreciation is determined
by different kinds of news, availability, fads about
particular stamps or players, etc.  But what is so
different about those streams of info than the ones
about the future "earnings" of a stock that pays
none of those earnings out to those who own the
stock?
Barkley Rosser
----- Original Message -----
From: "Clifford Poirot" <cpoirot@xxxxxxxxxxx>
To: "'J. Barkley Rosser, Jr. '" <rosserjb@xxxxxxx>; "Clifford Poirot"
<cpoirot@xxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
Sent: Saturday, August 03, 2002 7:12 PM
Subject: RE: flow or stock?


> 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
>
>