Seeking Hidden Motives of Market Players
Seeking Motives in Capital Flow Analysis
Why Determining Motivation Is Difficult
The first level of analysis of flow of fund accounts, described in Lesson 24, can be completed in a few hours or a few days; the second level — the search for motivation beyond the flow tables — may take much longer.
The second level of flow of funds analysis is not for those who seek quick and easy answers.
Second-level analysis is a long-term task. The 'devil is in the details' can be said of level-two Capital Flow Analysis.
There are reasons why it is difficult to determine second level sector motivation:
- Hidden Motives: Determinants of sector motivation are sometimes buried in obscure laws, tax provisions, court cases, or other factors governing the behavior of a player. Sometimes these determinants are old and virtually forgotten, hidden in things "taken for granted".
- Institutional Change: The capital market is always changing and there are many kinds of players. It is difficult to keep up with the latest news on every sector, especially those sectors with which we have little familiarity.
- Arcane Corners of the Market: Anyone who works in the capital market sees only a tiny piece of the picture in his or her daily work. There may be a court case today that profoundly influences the future of, say, closed-end funds or insurance companies that does not make the headlines. If you do not work in those areas, you may miss an important piece of the puzzle.
- Poor Reporting of The Global Market: The capital market is global, but news reporting is predominantly local. The Wall Street Journal does a poor job of reporting on the details of the capital market in Brazil or Indonesia. The interpretation of information from other countries is made difficult by differences in language, laws, and culture.
- Budding New Sectors: New players come into the market and often are reported in the flow of funds accounts only long after they are significant. In the 1970s, money market mutual funds and asset-backed securities were invented and, in time, came to play an important role in the U.S. capital market. Hedge funds have been growing in importance since the 1990s, but do not yet have their own table in the flow of funds accounts.
- Technical Complexity: Some aspects of the market are hidden by complexity. An example is the derivatives market in which non-diversifiable risks of derivative writers are inadequately shown on the balance sheets of commercial banks. Derivatives and other contingent liabilities of banks are not portrayed in the flow of funds accounts.
- Accounting Standards: Behavior is also clouded by limitations in accounting standards. To the degree that companies use share buybacks to jack up stock prices in order to give value to executive remuneration schemes, they should be considered expenses — a reduction in corporate income — but accounting rules mandate that buybacks be posted directly as a reduction in the equity accounts, without passing through profit and loss.
Help in Level-Two Analysis
A goal of the Center for Capital Flow Analysis (this site) is to help analysts find information relevant to sector motivation, especially second-level analysis.
The resources tab on the horizontal bar of each page leads to educational and research assistance available here at no cost.
Before proceeding, check your progress:
Self-Test
Level One Capital Flow Analysis is based on:
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Level Two Capital Flow Analysis is based on:
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Level Two Analysis is difficult because:
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learning module : continued >
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