Fragmented Basics 1: Footsie

Interesting week.

No further comment, just that.

We now live in a brave new world, about which I have my thoughts, but I’m not going to write about them. I just want to find a place in the puzzle pieces where I can draw some understanding, without the influence of media lean, or amidst the accusations of scaremongery. So I’m going to take refuge in fragments that I may otherwise have overlooked and go back to basics – redefining the way I look at our world.

Playing footsie seemed the obvious way to begin.

“Footsie (n) informal flirtation involving the touching together of feet, knees, etc (esp in the phrase play footsie). An informal name for Financial Times Stock Exchange 100 Index.

To them the Warrenders are just upstart Tudor gentry who got their lands playing political footsie with the first Elizabeth.

Meek, M R D IN REMEMBRANCE OF ROSE

Well while you’re playing footsie with Bea I’ll be playing gooseberry with Bella.

Isabel Wolff RESCUING ROSE”

Source: Collins English Dictionary

It is the financial definition I’m interested in, because it’s the market and ups and downs I’m trying to understand, as a layman. The flirtations of the stock market, what they mean and how they are to be used as a fragmented basic. (It’s interesting to note that not only do stocks and shares go up and down, but word usage too – Footise last peaked in 1998 and is now barely used at all…)

So what is the FTSE 100? The best explanation I’ve found is here, which gives the following, succinct but useful explanation:

“The FTSE 100 is an index composed of the 100 largest companies listed on the London Stock Exchange (LSE). These are often referred to as ‘blue chip’ companies, and the index is seen traditionally as a good indication of the performance of major companies listed in the UK. The FTSE 100 name originates from when it was owned 50/50 by the Financial Times and the LSE (hence FTSE – FT and SE) and the fact it contains 100 companies. The FTSE 100 is now maintained by the FTSE group which is a wholly owned subsidiary of the London Stock Exchange . Although the FTSE 100 is the most famous index the company produces, FTSE Group also calculates over 100,000 other indices, covering markets around the world, every day. In the UK market, the other FTSE UK indices include the FTSE 250 (the next 250 largest companies after the FTSE 100) and the FTSE SmallCap (the companies smaller than those). The FTSE 100 and FTSE 250 together make up the FTSE 350; add in the FTSE SmallCap and you get the FTSE All-Share”.

This set me to wondering. How reliable is it for me to look at the FTSE 100 as an indicator of the state of the economy? I’ve concluded that it’s not, and not just on the basis that it’s so flagrantly volatile, speculative and reactionary. Alone, the FTSE100 is meaningless.

I mean, lets take a look at the last twelve months, with a screenshot of the performance taken straight from the London Stock Exchange website this morning (Sat 25/06/2016):

2016-06-25

What I see is that after the general election last year markets were higher than they are now.

That simply means that over a year, things aren’t as good as they once were. I can also see a huge dip (Feb/March 2016). This related to the financial turmoil induced in the world markets by China, which sparked a chaotic tumble and took a while to recover from. Still, the general picture, if you draw a straight line from peak left to peak right, is decline over time.

So, it doesn’t appear to be a bad indicator over the long term. But there are those figures at the top, that’s the short term stuff – what do they mean?

The left is the market closing value on Friday afternoon (6138.69). The furthest right is the close before that (Thursday night). High and low…well, you know – they’re the best and worst bits of Friday’s working day. So that’s how performance is judged day by day, against the day before.

So, in black and white, the market closed on Friday 199.41 points down on Thursday, which is -3.15%

How does that graph look in one day, though? As clear and steady as the good, over a year indicator? No.

2016-06-25 (3)

It looks mad but does show something interesting. A major news event (in this case the EU Referendum leave result) can cause a huge plummet in the share values of 100 companies within as little as an hour. But it shows that, within a ten hour day, those losses can be minimised by the traders putting the graft in.

The almost immediate reaction of the Bank of England, promising £250billion to help stabilise the markets was pivotal in calming things down. Without it, it would have been a bloodbath, according to a number of city insiders.

So is it all alright then? I’m not sure it’s as simple as looking at the top 100 companies, they are top for a reason – resilience. The ability to survive and thrive. Which is why international markets are distilled in the same way and countries compare and bet for and against each other on that basis.

Perhaps its better to have a look at the next 250 companies down the list then, in the same way. Less resilient, and less internationally influenced by their secondary position, to keep it simple. What they tell us is curious.

2016-06-25 (5)

Over a year, a simple straight line, peak to peak, still shows decline over time. And the market is no less susceptible to events like China, as we can see in February/March, mirroring the FTSE 100. But the losses are much bigger.

On the day of the referendum result, the market lost over 2000 points, minimising that loss over the day to -1245.46. Over a larger group of companies, more relevant to British economy rather than purely international focus, a loss of -7.18% in ten hours trading is substantial. The double of the losses incurred by the top 100 companies – which again confirms their resilience and the importance of international influence.

Over the same trading day, the graph shows something very different from the top 100 companies, too.

2016-06-25 (6)

It appears much harder for the traders to recover losses in this market. It basically stagnates over the ten hours. What this tells me is that they managed to keep a lid on it, but it’s a much harder task.

Because of the national relevance and the apparently less fickle nature of it, I’m going to spend more time looking at the FTSE 250 than the FTSE 100. But in both these indices, these are still big old companies.

There is of course another way, to get the overall picture, and that’s to look at the FTSEAllShare, which does exactly what it says on the tin. All of the shares, in one place, to give a balanced picture of all the differing behaviours – including the smaller business listed in the FTSESmallCap (less resilient again).

Over the last year, the AllShare shows the same straight line decline and international influence. And while the points involved are less, the overall money is much more. So on Friday it closed down by -133.16 points or -3.82%

2016-06-25 (7)

Which means that all businesses in the UK, which trade stocks, lost almost 4% of their value in one day. Suffice to say we are talking billions, hundreds of billions, of pounds here. It’s mindboggling, and a loss like that has a knock on effect – it can’t not.

The general picture, however, is one of long term decline, and each major dip seems to take longer and longer to recover from, and that recovery is apparently to a level nearly but not as good as before.

Maybe it’s just stocks and shares though? It’s not. The pound has been behaving in the same way over the same period of time. Looking at it simply, it’s how much we are worth in the world – how cheap or expensive it is to buy from us, and how much bang we can get for our buck, buying in.

While the EUR/DOL has gained and stabilised, the pound has seen a prolonged devaluation against both the Dollar and the Euro over the last twelve months. Reuters provide really good long and short term data, in much the same way as the LSE do, above.

2016-06-25 (9)

The last plummet on the pound – an approx 10% value drop – was on the announcement of our referendum result.

The overall picture, accounting for companies large and small, and our currency, is decline. Not growth, not immediate fluctuation, not even stagnation. Decline.

In financial terms the nearest word which can be used to describe this decline appears to be recession – the definition being, a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

This means GDP needs to be taken into account, just to have a more rounded understanding.

Our GDP information is published quarterly by the ONS with the next update due in a few days, on the 30th of June.

In the last quarter, from January to March 2016, our GDP increased overall by 0.4% which is 0.2% less growth than the previous quarter. So Q on Q growth is reducing.

Interestingly, the economy is being driven by services (tourism, logisitics, communications), whereas manufacturing, construction, production and agriculture are in decline, contracting the overall output.

2016-06-25 (10)

Looking at the GDP over time, incorporating our last periods of recession, it’s apparent that our economy has entered a period of steadily declining growth once again. The monetary value shown in yellow is of little apparent relevance, as it’s the old fashioned “how much was a car in 1979?” question, in essence.

2016-06-25 (11)

There are numerous other sources of economics data, which include forecasts – all of which bar one conclude a negative impact over the next few years – but I’d urge anyone to read them with caution, as many come from partisan places. You should, however, seek them out and digest them.

I’m not going to explain my rationale, as it would be leading and you need to work things out for yourselves now – drawing your own conclusions from available data because the garden path is one everyone has been taken up enough times, frankly – but I’ve drawn my own conclusions as follows:

  • Our worth in the markets has been declining for a year.
  • The pound is in decline and other currencies are more stable than ours.
  • Our markets across the board are in decline and have just suffered significant losses as a direct result of our referendum.
  • We may be facing a recession of uncertain duration.

In terms of the way I look at the world, in respect of finances, I won’t be listening to the media anymore. All I’ll be doing is looking at these indicators, which are factual, and making my own mind up.

I hope this has been helpful to some of you, too.

 

 

 

 

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