FAO: Motorcycleboy -- assets, flows

[GoSeigen]

If anything it was perhaps my pendantry at play - mainly from a formal definition of flow. That is, if I pay my kids' school 50 quid then my balance declines by 50, so I'd (if I felt incredibly abstract that particular day) express that the 50 flowing[*] from my account to the schools.

However, I'll reread your last words sometime and chat later (busy week this one) and probably over a PM.

Matt, I'd prefer to keep this public so have posted a new thread for the topic.

It's not pedantry, it's the substance of the matter.

Your description above is correct as far as it goes, but incomplete. First, we are talking about a double-entry accounting system, so your kids' school liability to you rises by 50 while your prepayments asset increases by 50.

Second, and more relevant to the topic: your view of the transfer of cash as a flow only works from the perspective of a single party to the exchange. Once you view yourself and the school as a closed system, a black box, then the flows disappear completely and just the ownership of the assets has changed. This is a specific example of the general principal that the properties of an group may be different from the properties of the individuals comprising the group. [See also "Fallacy of composition".]


It can be seen more easily with your earlier example. You talked about investors selling their Apple shares. I asked to whom. You didn't answer, but the fact is they are sold to other investors! Since those other investors are also investors, they are in fact one and the same class. i.e. You cannot say that "investors have sold their apple shares": there is no-one to sell to except Apple share investors!

So in fact there is always the same quantity of Apple shares held by investors, no matter how much or how little selling [or buying] those investors do. Similarly there is always the same amount of money held by the investors no matter what price the shares are traded at. What changes is the VALUE that the investors ascribe to the shares and money.

To reiterate: you cannot say that "investors" are selling AAPL**. You can say that momentum investors are selling to value investors, but then equally value investors are BUYING those shares (from the momentum investors). In aggregate [composition] no net shares have been sold or bought -- they have merely moved from one owner to another.

GS
[**For simplicity we assume throughout that there is no net issuance of shares by the company during these transactions.]

[doug2500]

I'd always assumed that there must be a roughly equal number of buyers and sellers in any one day, with market makers holding a small number of odd shares.

You seem to confirm this but you often see articles like 'last months most bought investment trusts' and 'buyers pile into wackadoo plc' which have always struck me as nonsense given that there must be almost as many sellers.

[Itsallaguess]

I'd always assumed that there must be a roughly equal number of buyers and sellers in any one day, with market makers holding a small number of odd shares.

You seem to confirm this but you often see articles like 'last months most bought investment trusts' and 'buyers pile into wackadoo plc' which have always struck me as nonsense given that there must be almost as many sellers.

If we assume that by 'most', we might talk about volumes of trade, or the number of individual numbers of trades, then the other aspect to consider is price-action.

If there are no trades, something can't really qualify as 'most' anything, other than 'most ignored'...

If there are a huge number of trades, and the price-finding action results in a drop in price, then might we consider that to perhaps be 'most sold'?

If there are a huge number of trades, and the price-finding action results in a price-rise, then might we consider that to perhaps indicate 'most bought'?

Cheers,

Itsallaguess

[Alaric]

I'd always assumed that there must be a roughly equal number of buyers and sellers in any one day, with market makers holding a small number of odd shares.

I don't think that's necessarily true, given that stocks are purchased for future settlement and it's possible for stock to be lent. So there's possibly a delay before an equilibrium returns. Shorters can act as a supplier of last resort. The derivatives markets also.

[SalvorHardin]

By definition for every share sold there must be a buyer for that share, and for every share bought there must be a seller of that share. It is the relative level of interest displayed by both buyers and sellers which causes prices to change (and the media based its reporting on these price changes).

The current market price of a share is what economists call an equilibrium price; a price where all of the supply and demand for this share can be dealt with at this price. But when the level of interest by one side changes without a similar change in the other side then the price will quickly move.

When reports talk about investors selling their shares, what has happened is that the supply of shares exceeded the demand at the current price (more sellers than buyers). In order for all of the shares to be sold (clearing the market) the sellers (as a whole) have to accept a lower average price.

For example, if there were 3,000 shares of a company for sale at 150p but there was only demand for 2,000 shares at 150p, then 2,000 shares would change hands at 150p leaving 1,000 to be sold and the sellers get a lower price for these shares. The media reports this as investors selling shares purely because the price fell, even though there were investors on the other side of the trade buying these shares.

Similarly if there was demand for 4,000 shares then 3,000 would be sold and the price would rise to entice more sellers into the market. This would be reported as investors buying because the price rose.

[GoSeigen]

If there are a huge number of trades, and the price-finding action results in a drop in price, then might we consider that to perhaps be 'most sold'?

If there are a huge number of trades, and the price-finding action results in a price-rise, then might we consider that to perhaps indicate 'most bought'?

But how do you know if the drop in price attracted the trades, or conversely if the trades caused the drop in price?

It's silly.

Why not simply report that the price of X rose or the price of Y fell? Or investors became more bullish/bearish?


I can accept that people are allowed to use sloppy language but I think it goes far beyond carelessness: people actually believe that there was net "buying" when the price went up and selling when it went down. This is exacerbated by the silly buy/sell labels attached to reported trades on various web sites.


GS

[GoSeigen]

When reports talk about investors selling their shares, what has happened is that the supply of shares exceeded the demand at the current price (more sellers than buyers). In order for all of the shares to be sold (clearing the market) the sellers (as a whole) have to accept a lower average price.

For example, if there were 3,000 shares of a company for sale at 150p but there was only demand for 2,000 shares at 150p, then 2,000 shares would change hands at 150p leaving 1,000 to be sold and the sellers get a lower price for these shares. The media reports this as investors selling shares purely because the price fell, even though there were investors on the other side of the trade buying these shares.

Similarly if there was demand for 4,000 shares then 3,000 would be sold and the price would rise to entice more sellers into the market. This would be reported as investors buying because the price rose.

I appreciate the thought SalvorHardin has invested in this, but in 99% of cases where this sort of language is used I doubt the reporter bothered to do any investigation whatsoever into the supply/demand situation. [And how would anyone know anyway?] They merely think: "share cheaper -- investors sold" and "share more expensive -- investors bought".


GS

[GoSeigen]

I'd always assumed that there must be a roughly equal number of buyers and sellers in any one day, with market makers holding a small number of odd shares.

You seem to confirm this but you often see articles like 'last months most bought investment trusts' and 'buyers pile into wackadoo plc' which have always struck me as nonsense given that there must be almost as many sellers.

There is exactly the same number of each. Why is the market maker not an investor? No market maker I've ever spoken to wishes to make a loss: the economic incentives for them are the same as for any other participant with the additional advantage of "earning the bid-offer spread". The "piling in" nonsense headlines are NEVER supported by evidence of market-maker exposure changes.

People always want to believe there has been more buying when the price has risen -- never the other way round. There are various spurious justifications for this thinking, e.g.:
-the plain price change argument: the price went up so investors are buying
-the volume argument: volume was heavy and the price moved up so investors must be buying
-the market maker argument: market makers raised the price so investors must be buying
-the supply/demand argument: clearly demand was higher than supply as the price moved up so investors must have been buying
-the trade report argument: more trades were reported as "buys" so the shares were bought today
-the news argument: investors bought shares as the company reported higher profits

All of these are BS in my opinion.


GS

[Itsallaguess]

If there are a huge number of trades, and the price-finding action results in a drop in price, then might we consider that to perhaps be 'most sold'?

If there are a huge number of trades, and the price-finding action results in a price-rise, then might we consider that to perhaps indicate 'most bought'

Why not simply report that the price of X rose or the price of Y fell? Or investors became more bullish/bearish?

I can accept that people are allowed to use sloppy language but I think it goes far beyond carelessness: people actually believe that there was net "buying" when the price went up and selling when it went down.

This is exacerbated by the silly buy/sell labels attached to reported trades on various web sites.

I'm not at all suggesting that there was 'net buying' or 'net selling'.

I was trying to point out that there's a key element of price-finding during this process, as there is with all trade, and it's that price-finding process that is more important than the number of trades.

Itsallaguess

[odysseus2000]

If we consider company X reporting after market close with earnings that are well above estimates.

There will be some price discovery in post market trading and then in the pre market trading the next day. At market open the price of share X probably gaps up from its close the day before by some % which can be quite small if the earnings beat is small or large (tens of %) if the earnings beat is large.

At that point very few shares will have traded, just what ever the volume was in the pre and post market.

Once the market opens the investors who owned the share the day before may decide they want more and will put in orders to buy around the new price, or they may decide they have enough profit and sell their shares to other investors who like the earnings and have decided they want to buy.

In the by and by as the trading day moves on the price will either sit, go or crap as it is usually referred to depending on investor sentiment and overall market conditions. The inverse situation occurs for an earnings miss.

Day traders will be all over it, going long to get a quick profit if the price action is positive, going short if the price action is negative and likely not doing much if the price doesn't move.

In a day or so the day traders will be less interested unless it is still moving strongly but ready to come back if it starts to move and the price will be set by the aggression of the folk who want to buy it and those who want to sell it.

Meanwhile there will be option activity, with investors actioning various tactics depending on what they hold, their hedging instincts and their belief on the future direction of the share. There may be pinning of the price to best suit option holders close to expiration which is now every Friday for weekly options.

Folk could be trading around a big holding, buying when the price is below vwap (volume weighted average price), selling when it is above vwap. Others may be working big orders over periods of days or longer. With some shares like e.g. Apple there will also be buy backs operating for much of the trading year (not around earnings) that will be removing shares from the float, thereby raising the quotient of earnings divided by the remaining shares.

Nowadays there will also be commentary all over the place, some of it fake all trying to get folk to buy, sell or short as best suits the interests of the commentators.

The mechanics of much of this is hidden. An investor with level 2 pricing can see bid and offer being put in and the withdrawn, often this being the high frequency guys trying to establish some discovery of other investors intensions, hoping to make a turn by front running what ever their research indicates is the line of easiest price movement. Folk with out level 2 will be just have the price to look at which will be the cumulative results of all these various threads and could include fat finger trades where something other than what was intended is mistakenly entered and actioned before it can be corrected.

Meanwhile one can't ignore the overall market sentiment. If the market is going down, then even good earnings may lead to a lower share price and conversely if the market is going up.

Price discovery is a complicated thing driven by many factors.

Regards,

[TheMotorcycleBoy]

Wow....as I don't subscribe to many forums...and rarely read the new posts, it was lucky I was eventually alerted to this thread...

Thanks for writing things up GS!

Brain a bit tired from day-job...will try to chew on some of this later on or in a free minute tommorrow.

thanks Matt

[dspp]

This brings one back to the comment I made a while back, "you are their lunch".

Very little market activity is of the long term buy & hold type. Almost all of the activity is far more short term than that.

https://www.telegraph.co.uk/finance/per ... conds.html says about 22 seconds !

With long term holdings a positive (or negative) sum game can reasonably emerge. So a free lunch, with good luck.

With short term holdings it is far more likely to be a zero sum game. Yes one party may gain, but the other loses. Hence my comment to be careful about who is the lunch. It was not flippant, simply a commentary on how markets and activities that take place around markets, really are.

Short term trading is something I recognise I am not very good at. Probably through not much practice, but I am not rushing to explore that hypothesis. Others around here are far more knowledgeable.

regards, dspp

[tikunetih]

Summary:
The world is divided between those who "get" double entry bookkeeping and those who don't.

Next Up for Discussion:
The Billions upon Billions of "money on the sidelines" just itching to be "put to work"

[TheMotorcycleBoy]

In an attempt to keep this thread on the straight and narrow it it emanated from here

viewtopic.php?p=194507#p194507Is

Where GS disputed an earlier quote from me that money had "flowed from equities to bonds"....or some such

So I'm not altogether sure whether it relates at all to price discovery, short term trading, etc. It's (I think) more about concepts of flow, value and yield, I believe.

But I'm still catching up TBH....

[TheMotorcycleBoy]

GS:

Your mention of the term "closed" was a useful one. Of course, in our original chat with AAPL and bonds, money cannot magically flow into the system.

However the value of items in a system (closed or otherwise) can and will change with time. If Apple's phones stop selling, the value of the AAPL shares will fall relative to the bonds. So when some market commentary suggests "flows into bonds" they (I think) are merely stating that higher amounts of value are being stored in things called "bonds" rather than things called "AAPL". This is completely reasonable regardless of system boundaries, and valuations can be as temporal or as subjective as we wish....

Matt

[TheMotorcycleBoy]

GS:

Your mention of the term "closed" was a useful one. Of course, in our original chat with AAPL and bonds, money cannot magically flow into the system.

However the value of items in a system (closed or otherwise) can and will change with time. If Apple's phones stop selling, the value of the AAPL shares will fall relative to the bonds. So when some market commentary suggests "flows into bonds" they (I think) are merely stating that higher amounts of value are being stored in things called "bonds" rather than things called "AAPL". This is completely reasonable regardless of system boundaries, and valuations can be as temporal or as subjective as we wish....

Matt

I'm even starting to suspect whether our whole debate is actually just down to terminology. The reason why I stated/quoted that "money was flowing from one asset class to another", came from my original quoting of this:

https://www.cnbc.com/2019/01/11/treasur ... lainternal

Where (death cross aside!) the 10 yr Tbond yield is seen to be falling of late. Now returning to the example in the quote (above) of a post I made last night, then perhaps I was merely being too liberal with my terminology - "money". What I observed was that "more value was being assigned" to Tbonds relative to AAPL. Whether this is a money flow or not is, surely, just a matter of rhetoric - since it is *obvious* that, in the above example, the net trading in Tbonds is actually at larger rates of exchanged $$$/money/present-value than the AAPL shares.

Matt

[GoSeigen]

GS:

Your mention of the term "closed" was a useful one. Of course, in our original chat with AAPL and bonds, money cannot magically flow into the system.

However the value of items in a system (closed or otherwise) can and will change with time. If Apple's phones stop selling, the value of the AAPL shares will fall relative to the bonds.

Exactly.

So when some market commentary suggests "flows into bonds" they (I think) are merely stating that higher amounts of value are being stored in things called "bonds" rather than things called "AAPL".

You and I might now know this is the reality behind the words. I'm not sure the people writing them grasp it. They genuinely think money is flowing into the pockets of the shareholders from new buyers, which of course is absurd.

Also, be aware that flows are sometimes legitimately discussed -- when market participants are divided into easily identifiable classes like "pension fund holders" "hedge fund investors" "banks" "government" and so on. Such articles if carefully written identify the class being referred to and often present supporting data collected from the various sub-classes. I'm not criticising this sort of analysis, just the popular concept that "price went up so investors [unqualified] are buying".


GS

[GoSeigen]

I'm even starting to suspect whether our whole debate is actually just down to terminology. The reason why I stated/quoted that "money was flowing from one asset class to another", came from my original quoting of this:

https://www.cnbc.com/2019/01/11/treasur ... lainternal

Where (death cross aside!) the 10 yr Tbond yield is seen to be falling of late. Now returning to the example in the quote (above) of a post I made last night, then perhaps I was merely being too liberal with my terminology - "money". What I observed was that "more value was being assigned" to Tbonds relative to AAPL. Whether this is a money flow or not is, surely, just a matter of rhetoric - since it is *obvious* that, in the above example, the net trading in Tbonds is actually at larger rates of exchanged $$$/money/present-value than the AAPL shares.

Matt

I agree, it's about terminology, but would argue clear use of terminology derives from clear understanding of the underlying issues (and muddled terminology from muddled understanding)!


Your description above is in complete accord with my understanding. Yes it's about the relative value of AAPL vs everything else (or more commonly, vs money). The relative value is determined by the PRICE at which trades occur, NOT the fact that someone is buying (or selling).


As you referred to the article, I'll unpack one paragraph from near the end:

Morganlander believes global fears will prompt investors to buy safe-haven assets like US Treasurys to protect their portfolio. As the asset becomes more in demand, this will put additional downside pressure on yields.

What Morganlander is suggesting is that in aggregate investors will want their allocation of US Treasuries to be higher. This will prompt some investors (maybe only one!, for fun let's assume it is just one) to buy some Treasuries to increase their allocation. Of course the buyer has not put more money into Treasuries, because every penny of the money he paid has gone into the seller's pocket and the seller no longer holds Treasuries -- i.e. the seller is in an identical position to the buyer before the trade had occurred. But the aggregate value of all holders' portfolio holdings of Treasuries HAS increased because the buyer paid a higher price for the Treasuries he bought than had previously subsisted AND the rest of the market agrees this new higher price to be a fair representation of the value of Treasuries.

[Mathematically, the Treasury allocation of all holders rises by the amount of the price rise in that single trade, multiplied by the number of all Treasuries in issue.]

The author of the extract above, in referring to "the asset becom[ing] more in demand" means in effect that investors will want a greater allocation of Treasuries in their portfolios. A few will achieve this greater allocation by purchasing more [e.g. the buyer above], offsetting the seller who has a lower allocation by virtue of selling; however the vast majority will achieve their greater allocation as a result of the rise in value represented by the higher price paid by this one buyer.

Does that make sense?


GS

[Alaric]

Of course the buyer has not put more money into Treasuries, because every penny of the money he paid has gone into the seller's pocket and the seller no longer holds Treasuries

Surely it's normal for central banks to buy or sell government paper as demand fluctuates?

Some Investment Trusts attempt to manage their discount/premium by buying back stock or releasing it / issuing new stock. In those circumstances the counter party is the Company and the amount owned by the wider market will fluctuate.

[TheMotorcycleBoy]

I'm even starting to suspect whether our whole debate is actually just down to terminology. The reason why I stated/quoted that "money was flowing from one asset class to another", came from my original quoting of this:

https://www.cnbc.com/2019/01/11/treasur ... lainternal

Where (death cross aside!) the 10 yr Tbond yield is seen to be falling of late. Now returning to the example in the quote (above) of a post I made last night, then perhaps I was merely being too liberal with my terminology - "money". What I observed was that "more value was being assigned" to Tbonds relative to AAPL. Whether this is a money flow or not is, surely, just a matter of rhetoric - since it is *obvious* that, in the above example, the net trading in Tbonds is actually at larger rates of exchanged $$$/money/present-value than the AAPL shares.

Matt

I agree, it's about terminology, but would argue clear use of terminology derives from clear understanding of the underlying issues (and muddled terminology from muddled understanding)!

Yes. It reminds me of an ex-colleague stating that the most difficult part of implementing a software assignment is choosing the correct words with which to label one's abstractions.

Your description above is in complete accord with my understanding. Yes it's about the relative value of AAPL vs everything else (or more commonly, vs money). The relative value is determined by the PRICE at which trades occur, NOT the fact that someone is buying (or selling).


As you referred to the article, I'll unpack one paragraph from near the end:

Morganlander believes global fears will prompt investors to buy safe-haven assets like US Treasurys to protect their portfolio. As the asset becomes more in demand, this will put additional downside pressure on yields.

What Morganlander is suggesting is that in aggregate investors will want their allocation of US Treasuries to be higher. This will prompt some investors (maybe only one!, for fun let's assume it is just one) to buy some Treasuries to increase their allocation. Of course the buyer has not put more money into Treasuries, because every penny of the money he paid has gone into the seller's pocket and the seller no longer holds Treasuries -- i.e. the seller is in an identical position to the buyer before the trade had occurred. But the aggregate value of all holders' portfolio holdings of Treasuries HAS increased because the buyer paid a higher price for the Treasuries he bought than had previously subsisted AND the rest of the market agrees this new higher price to be a fair representation of the value of Treasuries.

[Mathematically, the Treasury allocation of all holders rises by the amount of the price rise in that single trade, multiplied by the number of all Treasuries in issue.]

The author of the extract above, in referring to "the asset becom[ing] more in demand" means in effect that investors will want a greater allocation of Treasuries in their portfolios. A few will achieve this greater allocation by purchasing more [e.g. the buyer above], offsetting the seller who has a lower allocation by virtue of selling; however the vast majority will achieve their greater allocation as a result of the rise in value represented by the higher price paid by this one buyer.

Does that make sense?


GS

Yes, it does. Thanks for helping me to ponder the matter further.

Matt