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    Senior Member kevmk81's Avatar
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    when stock prices go down

    Say a company's stock goes down 10% or more within a short period of time. If it's drastic, and stays low for quite some time, is there without a doubt going to be layoffs? What would change, from the standpoint of running the company? Just curious if anybody had any insite.

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    Administrator CbadRider's Avatar
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    I wouldn't pay much attention to the stock these days. How are the monthly profits? My company's stock has tanked along with everyone else's but we continue to make a lot of money so will be hiring like mad for the next year.
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    more ape than man timmhaan's Avatar
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    a lot of things are reflected in the price of stocks. some of them are specific to the company and some of them are industry wide or even because of global fears. right now, people are yanking money out of the market and even great companies are seeing their stock prices drop.

    you can take a benchmark like the Dow or S&P500, and compare your stock to that. better yet, compare it to the industry group it belongs to. if you're talking about a bank stock, for example, compare it to other banks. if your stock is plummeting much faster than others then there may indeed be some trouble ahead.

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    Senior Member kevmk81's Avatar
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    Quote Originally Posted by CbadRider View Post
    I wouldn't pay much attention to the stock these days. How are the monthly profits? My company's stock has tanked along with everyone else's but we continue to make a lot of money so will be hiring like mad for the next year.
    Good point.

    I'm just asking with an inquizitive mind, so no idea on monthly profits.

    The company I work for doesn't have stock options, it isn't public. In fact, it's a nfp - sort of.

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    Generated Member trsidn's Avatar
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    Stock prices are really only what someone is willing to pay at any given time. Right now, no one knows where the overall market is going, so ppl are sitting on the sidelines. Fewer people buying, prices fall.

    There is usually an 'estimated share value', and most of the time it is not the same as the stock price. In fact, in recent years many companies have been making business decisions based on share price, and quarterly reports, which isn't necessarily in the best interest of the company.
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    Many of the investors over the past decade or so were mainly interested in the prospects of the stock value rising, much more than they were interested in the fundamentals of the company. We're having a huge shake-out now.
    The search for inner peace continues...

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    Senior Member DannoXYZ's Avatar
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    Well... isn't the main reason you buy stock to make money? If the price goes up, you make money. If it goes down, you lose money. There are secondary factors that will affect the price of the stock, such as earnings. But the primary and only factor that determines a stock's price is exactly what the next buyer is willing to give you for it. They may have a tonne of 'reasons' WHY they want to purchase said stock at such-and-such a price, such earnings, market-share, unique-products, management-ownership, float, etc., but those factors are secondary. Major regulations have changed the market-mechanisms in 1975, but very few people have adjusted their investment strategies to take advantage of those regulatory changes.

    Quote Originally Posted by kevmk81 View Post
    Say a company's stock goes down 10% or more within a short period of time. If it's drastic, and stays low for quite some time, is there without a doubt going to be layoffs? What would change, from the standpoint of running the company? Just curious if anybody had any insite.
    Stock prices don't have an affect on the company's operations. Aside from using stock as a collateral for loans or to find financing for an IPO. But conversely, on the other hand, a company's operations may directly affect the stock-price more.

    It used to be that a company's earnings would have a direct impact on the stock price. This was back in the days of 20-40% dividend payments from profits. You could actually calculate exactly what your dividend return would be given the stock's price, the dividend-yield and the earnings. With the same earnings, a company with lower stock price would give you a higher-rate of return.

    Today however, with very few stocks paying any dividends at all, or very low 1-2%, the earnings don't directly affect the price. But, if the players in the market look at earnings as an indicator, then their mentality will then affect the price they are willing to pay for the stock. If they aren't willing to pay a high-price, but are looking to dump their existing shares, the price will go down. If they want to own that stock, along with a lot of others, then yes the price will go up because they're willing to pay more for it.

    Good example is the "worth" of an antique cabinet in a consignment store. Someone may be willing to pay $5000 for it. I see a pile of firewood and will offer you $40/cord for it. Somewhere in the middle may be a fair price. Typically the last sale-price is a reference for the next sale, but that's still secondary as it's really what the next buyer is willing to pay that directly and ultimate determines the sale price.

    Check out: "Trading Places".
    Last edited by DannoXYZ; 10-24-08 at 04:23 PM.

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    Senior Member DannoXYZ's Avatar
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    A good example of the "mentality" aspect of the market players is the earnings game. Well before a company comes out with their 10q, "analysts" in the field will tossed their hats in the ring with bets as to what the company will post for earnings results. Sure, there's a lot of research on the background of the company, the product-line, the sales-volumes and profit-margins, etc. that they use to best determine the earnings-report. But ultimate, it's still a guess. And when you combined 10-20 guesses together, you come up with something like a "expert's prediction", "industry expectations" report.

    So these jokers all say something like, "BlahBlah Corp. will earn $450mil for 4th quarter, for $0.45 earnings per share (EPS). This is a +21% growth rate over last year's quarter. Great, good "guess". And people's "mentality and mood" then act on this guess and they may sit on the edge of their chairs in anticipation or they may actually pick up some stock. Then the BlahBlah company comes out with their real 10q which states: "For 4th quarter, we earned $440mil for $0.44 eps, a 20% improvement over last year's quarter.". What do you think will happen?

    THE STOCK TANKS!!! Any company that makes a 20% earnings increase is doing darn good business. But the market and the players in it will punish the stock-price because the company didn't meet expectations. It's ultimately the market-players mood and mentality that determines how much or how little they are willing to pay for the next transaction in that stock.

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    Of course the the stock should tank. The current price of the stock has the expectations factored into it. If the company doesn't meet expectations then it's valued too high and one should sell. Conversely if a company loses less money then expected (but still has a loss) then the price should go up.

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    T-Shirt Guy ehidle's Avatar
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    Quote Originally Posted by kevmk81 View Post
    Say a company's stock goes down 10% or more within a short period of time. If it's drastic, and stays low for quite some time, is there without a doubt going to be layoffs? What would change, from the standpoint of running the company? Just curious if anybody had any insite.
    Stock price in my company is down 60% from the 52-wk high. We're not laying off, but then again, we don't operate at a deficit and don't need to borrow money to make payroll, thank god. We still earn ~$3/share, hah and our sales are still growing.

    We're DEFINITELY cutting back, but not laying off just yet.

    It all depends on how well your company is managed. If your company is deep in the red and depends on cheap borrowing to make payroll every two weeks, then you probably have something to worry about. If you've been posting loss after loss after loss and your numbers all start with a minus sign, it's time to polish up the resume and start looking.
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    Banned. timmyquest's Avatar
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    Quote Originally Posted by kevmk81 View Post
    Say a company's stock goes down 10% or more within a short period of time. If it's drastic, and stays low for quite some time, is there without a doubt going to be layoffs? What would change, from the standpoint of running the company? Just curious if anybody had any insite.
    Start looking for another job?

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    Senior Member DannoXYZ's Avatar
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    Quote Originally Posted by ehidle View Post
    Stock price in my company is down 60% from the 52-wk high. We're not laying off, but then again, we don't operate at a deficit and don't need to borrow money to make payroll, thank god. We still earn ~$3/share, hah and our sales are still growing.
    Does this mean your earnings are also down 60%?

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    T-Shirt Guy ehidle's Avatar
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    Quote Originally Posted by DannoXYZ View Post
    Does this mean your earnings are also down 60%?
    No. Why would it?
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    Portland Fred banerjek's Avatar
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    Quote Originally Posted by DannoXYZ View Post
    Well... isn't the main reason you buy stock to make money? If the price goes up, you make money. If it goes down, you lose money. There are secondary factors that will affect the price of the stock, such as earnings. But the primary and only factor that determines a stock's price is exactly what the next buyer is willing to give you for it. They may have a tonne of 'reasons' WHY they want to purchase said stock at such-and-such a price, such earnings, market-share, unique-products, management-ownership, float, etc., but those factors are secondary.
    Sounds kind of like a ponzi scheme to me. But I'm grouchy because I've lost well over 50% of my retirement this year I have no one to blame but myself since I purposely took a riskier trajectory and was aware that financing based on loans that made no sense to me was fueling many of the gains. But it's a good time to buy cheap now

    The recent housing meltdown has been like that too. People kept buying houses at insane prices that way outpaced inflation, and now it's time to get back to reality.

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    T-Shirt Guy ehidle's Avatar
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    Quote Originally Posted by banerjek View Post
    But I'm grouchy because I've lost well over 50% of my retirement this year
    Don't worry, you'll lose the rest of it next year when it is confiscated and put into the social security system.
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    Senior Member DannoXYZ's Avatar
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    Quote Originally Posted by ehidle View Post
    No. Why would it?
    Sorry, I was thinking PE instead of EPS.

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    Senior Member DannoXYZ's Avatar
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    Quote Originally Posted by banerjek View Post
    Sounds kind of like a ponzi scheme to me. But I'm grouchy because I've lost well over 50% of my retirement this year I have no one to blame but myself since I purposely took a riskier trajectory and was aware that financing based on loans that made no sense to me was fueling many of the gains. But it's a good time to buy cheap now
    Sure, throw more perfectly good cash into a burning fire! I don't like single-sided positions, I always buy an insurance-policy. Anyone who've gotten into a car crash without insurance knows how much that hurts. Same with buying stocks or funds without insurance. In some cases, like severe drops over 25%, the insurance will actually pay me more than what I lost in the stock. The percentage of the time that it goes down is smaller, but when it does, it goes down way faster than it goes up and takes you years to recover, if ever.

    Quote Originally Posted by banerjek View Post
    The recent housing meltdown has been like that too. People kept buying houses at insane prices that way outpaced inflation, and now it's time to get back to reality.
    yeah, housing prices for decades have matched inflation (averages 7% for the long-term). I don't think higher appreciation rates are bad, as long as it matched something like earnings and wages. But I don't know of too many people getting 15% pay-raises every year.

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    Quote Originally Posted by banerjek View Post
    People kept buying houses at insane prices that way outpaced inflation, and now it's time to get back to reality.
    snipped a lot. I'm waiting for this to happen to health insurance. Same plan as last year is up 25% (24.97% to be precise).
    sigless at the moment....

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    Portland Fred banerjek's Avatar
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    Quote Originally Posted by DannoXYZ View Post
    Sure, throw more perfectly good cash into a burning fire!
    Yeah, that's the rub. But this isn't the first time I got clobbered. Around 9/11, I also lost over 50%, and it took about 5 years to recover.

    However, I still have plenty of time, and as my timeframe shortens, I'll play more conservatively. Even with these huge losses, I still do decent compared to what I would have done had I used the old lady investing strategies my wife goes by. I lose big from time to time, but I gain big too. In the long run, I come out ahead from the best I can tell. I'm not confident I'll be back to normal in 5 years, but I am confident I'll be back to normal when it matters.

    Also, I believe you should never bet anything you can't bear to part with.

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    Senior Member DannoXYZ's Avatar
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    Quote Originally Posted by banerjek View Post
    Yeah, that's the rub. But this isn't the first time I got clobbered. Around 9/11, I also lost over 50%, and it took about 5 years to recover.

    However, I still have plenty of time, and as my timeframe shortens, I'll play more conservatively. Even with these huge losses, I still do decent compared to what I would have done had I used the old lady investing strategies my wife goes by. I lose big from time to time, but I gain big too. In the long run, I come out ahead from the best I can tell. I'm not confident I'll be back to normal in 5 years, but I am confident I'll be back to normal when it matters.

    Also, I believe you should never bet anything you can't bear to part with.
    Yeah, and you can do even better. Insurance man... buy insurance...

  21. #21
    more ape than man timmhaan's Avatar
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    Quote Originally Posted by annc View Post
    Of course the the stock should tank. The current price of the stock has the expectations factored into it. If the company doesn't meet expectations then it's valued too high and one should sell. Conversely if a company loses less money then expected (but still has a loss) then the price should go up.
    expectations for the performance of a company play a part of it certainly. but price can be influenced by so many other things.

    one thing is momentum of price. if a stock is being bought, the demand is driving the price up. this alerts others who want in on the action. they buy more and the price keeps going up. i would say that most of these momentum players know very little about the details of the company or really care that much about earnings (remember the .com boom?) this can drive a stock price too high, and even if the company meets all the expectations, people who already made money will sell off, and the price will drop. depending on the frenzy, you can even see companies report earning above expectations and still see the price drop. i used to get screwed on this all the time.

    a keen investor, who has a good idea of the value of a stock, can buy it when the price dips low enough under the idea that the market will eventually price it more accurately. a solid understanding of how to do this accurately is difficult, but most people "sense" when it becomes a bargain and start accumulating the stock again.

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    It's easy being green. recumelectric's Avatar
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    Quote Originally Posted by DannoXYZ View Post
    Yeah, and you can do even better. Insurance man... buy insurance...
    Isn't that what AIG sells? Sh!^. They screwed me over on car insurance years ago (dropped my policy without telling me). Like I'm going to trust one of those guys to back me up in a bad economy.
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    Senior Member DannoXYZ's Avatar
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    No, you buy a put-option along with your stock. I usually pick up a OTM put that's about 5% of the stock position. Then if the stock goes down 10%, the put increases by 100% and offsets any losses in the stock position. Once the put is ITM, it matches the stock's fall with a matching gain. No matter how far the stock falls, I lose no money. This lets me hang onto a stock that's falling and not take a hit.

    But that's still a zero-sum game as it's flat. Typically I'll be closed out when a stock falls and be shorting it on the way down.

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    Certified Non-Voter wernmax's Avatar
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    Quote Originally Posted by DannoXYZ View Post
    No, you buy a put-option along with your stock. I usually pick up a OTM put that's about 5% of the stock position. Then if the stock goes down 10%, the put increases by 100% and offsets any losses in the stock position. Once the put is ITM, it matches the stock's fall with a matching gain. No matter how far the stock falls, I lose no money. This lets me hang onto a stock that's falling and not take a hit.

    But that's still a zero-sum game as it's flat. Typically I'll be closed out when a stock falls and be shorting it on the way down.
    Sigh...what do you want to bet there's only about three of us here that knows what you said?

    You'll have to explain that in longhand, Danno. Plus it's doubtful that they're playing in those percentages. I don't know if your stock options are in blocks, but if one Put is 100 shares, they'd be playing 2,000 held shares. And they have to stay not too far Out-of-the-Money, for the gain curve to cover losses, but then premiums get high.

    Still...good insurance, almost what we do in the PM's.

    Can you believe an 88 dollar!? Never thought we'd see that again.
    Last edited by wernmax; 10-25-08 at 02:16 PM.

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    more ape than man timmhaan's Avatar
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    if there ever was a time for put options - this past year has been it. i never sold one stock i owned, and still have a 10% gain year-to-date. i could have been much more aggressive, but i don't trust myself when i start to get too greedy.

    i don't even buy options on individual stocks most times, i just keep an option or two open on the prevailing trend of the S&P and cash in after the big moves to buy more stock. the easiest strategies are often the best, especially since this bear market is acting exactly like a bear market.

    most people put more time and effort into buying a bike then they do on their investments. i'll never understand that.

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