The Global Economic Crisis from China Has Started

“There is an opportunity that comes once every 100 years"

The global economic crisis from China has already begun, and a book has been published in Japan by two renowned economist, Miyazaki and Tamura, claiming that this crisis has an opportunity that comes once every 100 years. The new book “The Global Economic Crisis from China Has Started” explains the cause of the crisis from China, which will bring more shock global financial crisis 2007-2009, and suggests concrete method to find opportunities in this crisis. The global economy in 2020 is likely to be a more difficult year than ever in history. It is because there is a high possibility that the economic crisis caused by inflation from China, which has been constantly raised so far, will become a global economic crisis in the aftermath of the US-China trade war.

Unlike what appears to as trade war due to U.S. trade deficit, the essence of the U.S.-China trade war is the war of technological hegemony. In the empire of IT or IoT represented by tech companies so called MAFAA (Microsoft, Apple, Facebook, Alphabet, Amazon), VS AT (Alibaba, Tencent), it is  a fight to take control of technology hegemony. U.S. cannot afford to let China dominate such an important future industry. However, China also has to revert their industry from traditional manufacture industry which produces little profit to the high value-added industry.

China 2025 (Smart Manufacture+) is the best project for China from avoiding in debt-ridden environment and raise its GDP. The problem is that Japan and South Korea are the most affected countries in the U.S.-China trade war over global economic hegemony. Korean investors must come up with strategic countermeasures in case the friction between the U.S. and China continues. This is to minimize the damage and take advantage over opportunities. The book mainly focuses on the risk, which is steadily arising from U.S. and China trade disputes such as China's OBOR (BRI) policy and China Manufacturing 2025, and internal issues in China.
See my blog: https://techongstudy.blogspot.com/2020/08/china-wants-to-revitalize-its-domestic.html

Fighting for techno-hegemony
The background of the trade war began with a number of complicated reasons, in which China has made rapid progress in attracting technology and capital from around the world to become a technology powerhouse that surpasses the U.S. based on a huge trade surplus. As, Chinese exports have been blocked due to the trade war, China is concentrating its domestic economy mostly in technology area. The U.S. government found that it used all sorts of methods, such as corporate espionage and acquisition of foreign companies, such as technology theft and human resources transfer. Recently, as China's ZTE and Huawei (Tik Tok recently) have begun to outpace U.S. technologies in semiconductor and telecommunication technologies, which are key technologies in the future. The dispute between the U.S. and China has intensified as U.S. has pressured China in the form of competition for technological hegemony. This is said to be the same in both partisans (democratic and republicans).

Chinese leader Xi Jinping will never end his presidency by extending his term indefinitely in the National Assembly in 2018. China is expanding its belt and road initiatives with its huge trade surplus capital against the U.S. as a weapon. Before Trump administration, many of the Wall Street-linked relatives and politicians who sought wealth through 'China capital'. After entering the Trump administration, China's prestige grows and threatens the United States. The way to stop it at the source is to intervene in Chinese trade surplus that attracts enormous wealth of China.

Belt and road initiative
The book provides detailed examples of the problems of China's RBI development project. Common problems are that China lends money to emerging and frontier countries through RBI. Projects are monopolized by Chinese companies, major equipment is imported from China, and Chinese laborers are used. The debts leased to developing countries are marked in dollars and carried by the local government. If the debts cannot be paid off, China confiscates the infrastructure or land. The United States recognizes the seriousness of the matter, and Vice President Pence warns of this plan as a 'debt trap'. China is even building a military base (Djibouti, Africa) through this project. In the one-on-one plan, there is a new version of Silk Road intention to secure crude oil in preparation for an upcoming military conflict. Countries that are trapped in debt by OBOR are Pakistan, Sri Lanka, Cambodia, Maldives, Myanmar, Bangladesh, Malaysia, Indonesia, Nicaragua, Venezuela, Thailand, Nepal, Angola, Madagascar, Uganda.

RMB and inflation issue
Issuing more RMB than US dollar reserves, can lay concerns about inflation sooner or later. On the one hand, the United States and Japan support China appropriately, fearing the impact on the world if the Chinese economy collapses. Mainly Japan plays this role because Japanese policy interest rate is negative, so most of Japan's funds are invested abroad, and are borrowed from China through Panda bonds.
"A Panda bond is a Chinese renminbi-denominated bond from a non-Chinese issuer, sold in the People's Republic of China. The first two Panda bonds were issued in October 2005 on the same day by the International Finance Corporation and the Asian Development Bank." - Wikipedia

Japan is also well-known in having massive fiscal deficit, but the authors say that Japan's debt is near zero according to the balance sheet. (Japan is the biggest net creditor country in the world) Unlike the high debt rates of the U.S. and China, Japan has a high savings rate, so financial assets such as deposits and stocks are said to be three times the GDP. (Most of debt-holder is BOJ and its nation) 

Covid-19
Currently, China is not only facing pressure from the United States, but also neighboring countries such as India. There is also internal problem in China as growing sign of dissatisfaction with the government has started to emerge and Covid-19 crisis has triggered it.

Will China collapse in crisis? Well, the paradigm of dispute has reverted from trade tariffs to national security and diplomacy problem after first U.S. and China agreement and pandemic. This book shows historical events through specific examples and data. Global investors are very exposed to the relationship between United States and China; reading this book can serve as an opportunity to seriously think about how to catch global economy trend and prepare for it.

The Most Important Thing - Howard Marks [1]

"What is the secret of success in investing?"
The answer to this question is simple, "having a philosophy of effective investment strategy".
You may ask "Where does that come from?"
Well, it needs time and experience. No one is perfect from the beginning. Of course, someone may be lucky, novice mom-and-pop investors may be lucky enough to earn money from concentrated investments. The experience comes from lessons whether it is directly from investor's own harsh encounters of a great depression or indirectly from book which was written by investment gurus.

The important thing is to be aware of what's going on in the world and how it affects in the stock market. When a similar situation recurs the lessons can be very useful for developing the market insight. Otherwise, most investors are volunteered to be a victim to repeated booms and bust cycles. The most valuable lessons come from recession. I have not experience most of the depressions in the stock market. However, by taking lessons indirectly by useful materials such as books, newspaper, or podcasts, I could encounter the notorious events happened during the great depression (1929-1933), oil crisis (1973, 1979), Nifty Fifty (1969-1973), death of equities (1979), Black Monday (1987), Russian financial crisis and bankruptcy of LTCM (Long Term Capital Management) (1998), Dot-com bubble (2000-2001), large scale corporate accounting scandals (2002), great recession (2007-2009), and COVID-19 recession (great lockdown). By encountering these incidents, it is inevitable for investors to learn the lesson of great leaps and falls.

In the book 'The Most Important Thing' has twenty parts of principles in investments. The lessons that Howard Marks gives can be very meaningful for the investors whether they are experienced or novice. I will quote or summarize the most impressive parts short and briefly [1 - 4 parts].

Second level thinking
The field of investment is not always regular and contains many variables. Environment is impossible to control, never happens exactly the same as the past. Sentiments from investors are unpredictable leading to market volatility. The field is more of art than science. Howard marks emphasizes second level thinking which needs strategy of being unconventional, intuitive, and complex can achieve more than benchmark return such as index funds. Thinking beyond and stepping further market prediction is key to succeed in the investment field.

Understanding market efficiency
An average return can be achieved if the price of an efficient market already reflects the market's forecast. However, to win the market, investors must have a different view that is contrary to the market's predictions. There is a term called alpha and beta.

"Alpha helps reveal how a stock or fund might perform in relation to its peers or to the market as a whole. Beta or often referred to as the beta coefficient, beta is an indication of the volatility of a stock, a fund, or a stock portfolio in comparison with the market as a whole." - Investopedia

Accepted wisdom which is other expression of market efficiency. Getting over the idea of being an average needs the skill alpha. It should always be countered that investors cannot beat the market. Having deep and adaptive second level of thinking will help investors getting over it. “Many of the best bargains at any point in time are found among the things other investors can’t or won’t do.", explains Howard Marks.

Estimate intrinsic value
The buying price must be lower than the selling price. In other words, buying cheap and selling stocks at a high price is a general principle of the stock market. However, since selling is performed in the future and buying is carried out now, it is difficult to approach the stocks which have appropriate price. There must be an objective criterion for defining what is expensive or what is cheap, but it is most effective when it is valued based on intrinsic value. Measuring intrinsic value leads the way for investors to purchase a stock.

There are two ways for evaluating intrinsic value. One is analyzing the corporate value, the other is technical analysis.
Technical analysis is obsolete method due to random walk hypothesis. According to the hypothesis, past stock movements are not helpful at all to predict future stock price. “We all know that even if a coin has come up heads ten times in a row, the probability of heads on the next throw is still fifty-fifty. Like wise the fact that a stock’s price has risen for the last ten days tells you nothing about what it will do tomorrow.”  Momentum investors are the best example of investing in technical analysis. When TMT (tech, media, telecom) stocks rallies, they put their investment in very short term.
Value analysis has two types of investments: value and growth. The purpose of a value investor is to invest when the price of a security is lower than the present intrinsic value (margin of safety), and the purpose of a growth investor is to find a security whose value will increase rapidly in the future. Value investors believe present value of the asset is lower than the price. Growth investors buys stocks when they consider the stock of future will rapidly grow.
Value is more of present, growth is more of future. In my opinion, value has never lead to bubble or great falls. In opposite view, value stocks sometimes frustrate investors because they don't give the excitement that prices will skyrocket. However, value investors like Warren Buffett must have solid belief of value in order to withstand without profit for long time.
See my blog about Warren Buffett's recent value investment on five Japanese trading companies.
https://techongstudy.blogspot.com/2020/09/sogo-shosha-and-berkshire-hathaways.html

The Relationship Between Price and Value
To understand the relationship between value and the price is to know about the sentiment of the investors and technical factor. Technical factor may include margin call when inevitable situation comes out during collapse of stock market. Second factor is sentiment of investors.
"Psychology plays a key role in investing. Emotions that affect investing include fear and greed, but are more diverse and can significantly impact results. Investor psychological profiles affect how an investor's portfolio performs because investing decisions are directly linked to emotions." - Seeking Alpha
The error that investors claim can be based on excess liquidity and growth of the firms. However, it can lead to the trap of the greater fool's theory when the bubble starts to burst. An investment strategy based on sturdy value is most reliable. As John Maynard Keynes points out that markets are not rational as investors thought, it can remain irrational until investors run out debt repayment capabilities.

Why is onion future price so volatile?

What makes the market volatile? 
Why is the price of asset so fluctuating?
Is it because of speculative day-trading investors?

The article of <Newsweek> in 2010, mentioned about volatility saying, "By trading vast amounts of stock at warp speed, as many as a billion shares a day, high-frequency traders gobble up fractions of cents at a time. The more volatile the market, the easier it is for them to make money jumping in and out of stocks across exchanges."

Well, does high-frequency trade affects on the volatility on the market? Ken Fisher, CEO of Fisher Investments, indicates volatility during the Great Depression. The stock market was moving upwards and downwards frequently. The reasons for market surge and stumble in short period of time were various; one of them was regarded as lack of liquidity. There weren't that many listed stocks in the market and the trading volume wasn't abundant. Information was delivered much more slowly, which hindered the fast recovery of price. Markets with low trading volumes are usually highly volatile due to insufficient liquidity and supply.

Futures traders are often referred as speculators because they bet money on future prices. There are countless reasonable motives to have future trading deals. Firms use futures contracts to stabilize the cost of purchasing in response of highly volatile commodities. Airlines buy oil futures to stabilize operating costs. Farmers use future tradings to purchase agricultural manure or compost.

Why is onion future price so volatile
If you are curious about a market without speculation, just looking at the onion future market is enough. In 1958, onion farmers claimed speculators were slashing the price of onions. Michigan Congressman Gerald Ford, who later became president of United States, believed in this claim and banned futures contracts for onions. In fact, Ford was the one who has believed in the free market. This ban is not abolished and still exists today. Ford and the farmers did not understand that speculators were contributing to providing liquidity to the market. They didn't even know that their market participation actually makes volatility less.

Onion vs Oil
If you think oil future has heavy volatility, please refer to the chart below. Onion prices fluctuate more frequently than oil prices. The range of fluctuation of onion is even greater. If the price volatility was so high, speculators would need to be invited back to the market to reduce volatility. It is foolish to ban speculation just to protect farmers.

Speculation in forex market
The exchange rate must have a sufficient amount of supply and demand to determine the appropriate exchange rate in the foreign exchange market, which is determined purely by market function, and speculative foreign exchange transactions must exist in order to secure such demand and supply. If speculative trading is prohibited and only underlying transactions are made on demand, the size of the market will not reach a certain level and as a result, the foreign exchange market's exchange rate may be distorted or the exchange rate-setting function may be lost.
For example, lets presume that only underlying transaction is on demand. When the demand of dollar is 2 million and supply is only 1 million, the currency rate will soar up in need for more supply, which will make Forex in extreme volatility.  However, when speculative transaction is traded actively, then the supply problem will be hugely diminished.

Please refer to the blog here:
https://techongstudy.blogspot.com/2020/08/what-is-exchange-rate-and-forms-of-it.html

Source: Market Never Forgets (Ken Fisher)

Sogo Shosha and Berkshire Hathaway's investment.

Sogo Shosha is known as Japanese companies that trade in a wide range of products and materials, including energy and mining. It used to have big ratio on trading but recently it is more of investing company. The companies had to acquire the stake of overseas company exporting to Japan to make the trade easier. Sogo shosha now extends to many business such as foods, agriculture, chemicals, heavy equipment tools, retails, automotive, etc. They are more like investment company which focuses on operating profit and look for undervalued consumer business that could supply steady cash flow.

Five companies
On Warren Buffett's 90th birthday, Berkshire disclosed acquisitions of five Japanese trading companies, so called Sogo Shosha. The stakes in Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co Ltd and Sumitomo Corp over 12 months.
Mitsubishi is investment varies from motors, foods, retails, and foreign investments. Lawson is famous for Japanese convenient store which is about 1/3 owned by Mitsubishi. Norwegian company Cermaq is well-known for farming salmon in Oslo, Chile, and Canada. Sumitomo invests in variants of field such as information software, heavy equipment, chemicals. Isuzu, which is recognized as heavy vehicles like trucks, is part of Sumitomo. Fyffes, you may had heard, is also Sumitomo-owned fruit producing company (mostly banana) headquartered in Dublin, Ireland. Itochu is known for investing agricultural multinational corporation called Dole. It also takes part of Family Mart (95%), which is Japanese most common convenient store. Kwik Fit, British car service and repair company, is also part of Itochu. Marubeni and Mitsui are also recognized as leading investment companies in and out of the country.

Berkshire invested 5% of stakes in five companies each which is worth 655 billion yen ($6.21 billion). On Monday, shares in the companies surged about 11% in during trading hours. Marubeni was the top gainer among the five companies, jumping 12%. Sumitomo and Mitsubishi rose more than 10% and Mitsui rose 8.2%. Itochu. Berkshire is planning to hold the stake for longer term until it reach till 9.9% each. It was Mr.Buffett's first time to invest in Japanese companies since he is mostly concentrating on U.S. firms. (IMC international and Detlev Louis are just a few example of non-U.S companies) This means he is diversifying his portfolio outside of U.S., since American stocks are now costly which makes him trouble to find the appropriate worth of its value. As he sold stake in newspaper, airlines, finance firms, he had ammunition for giving himself into new bets.

Why did Warren Buffet invested in Sogo Shosha

Low price-to-book ratio

Those five companies have very low market capital against their book value. Four companies except Itochu are less than 1. Their price earning ratio is about 5 to 7, which means the share price is traded only five times more than their earnings. Japanese companies overall are cash-rich. They have total of over 300 trillion yen which is 1.6 times more than the last decade.

High dividends

Four companies are paying more than 4% of dividend yields (mostly 5% except Itochu). Dividend yield in overall Japanese companies are 0.7% more higher than U.S. Warren Buffett prefers companies which have large compensation for owning the stake of the firm.

Aggressive Investments

Sogo Shosha is trading company but now concentrating on investment field, not only on the energy field such as mining and copper, but also on consumer goods and foods. It is not like Softbank which endows only on IT companies. Five companies which Berkshire invested, may have reason to change more of their strategy on investment; I think because of low growth of Japanese economy.

U.S dollar fall

Worries about the pandemic recession made more of stimulus package and monetary policy which is making U.S. dollar weak. As Japanese Yen is less volatile and quite regarded as safe-haven currency, it could be great hedge against losing value of dollar. Resigning of former prime minister Abe can mean somewhat uncertainty of Abenomics which will trigger Yen to shift its value upwards. (In fact Warren Buffett announced its investments right after the prime minister's resign) Also, newest monetary policy announced in Jackson Hole conference last week could be trigger for the dollar drop. 

See my blog https://techongstudy.blogspot.com/2020/08/review-of-monetary-policy-strategy-fed.html

These are the quotation that approached me impressively. I really want to share these quotes.

“But there is no other place which offers such undervalued stocks with solid financial health and steady profitability”  - Wall Street Journal

“The fact that Warren Buffett chose to buy them speaks highly of his confidence in their corporate governance and business acumen,”  - Financial Times

"Warren Buffett is swimming the opposite direction to other international investors.... laughably low valuations on the stock market, tremendous values available in Japan today” - New York Times

Many investors worry that low book value can be a real value trap indicating their growth is over. However, investors like Warren Buffett is not thinking as normal mom-and-pop investors do. If cheap, then there is low risk of losing much money since the downward gap is thin. Although value stocks can be risky due to extremely cheap price, if there is a shift to value in a positive manner, Japanese stocks would likely perform very well indeed.


Source 1: Wall Street Journal
https://www.wsj.com/articles/berkshire-hathaway-buys-stakes-in-five-japanese-trading-companies-11598841219

https://www.wsj.com/articles/warren-buffett-at-90-still-has-an-eye-for-a-bargain-11598881078

Source 2: New York Times
https://www.nytimes.com/reuters/2020/08/31/business/31reuters-usa-investors-buffett-analysis.html

https://www.nytimes.com/reuters/2020/08/30/business/30reuters-berkshire-stake-japan.html

Source 3: Financial Times
https://www.ft.com/content/e20708ac-347b-47de-b79a-ab7fb9088d6f

Source 4: Business Insider
https://markets.businessinsider.com/news/stocks/why-warren-buffett-berkshire-hathaway-7-billion-5-japanese-stocks-2020-9-1029555556#

Luxury brands are flourishing? Here is what we miss.

Luxury brands, would they still be luxury without explosive demand? What if China lose its needs for haute couture? Well, we still don't know yet. However, it is convincing that luxury industry is hugely relying on one nationality. Carol Ryan, journalist of WSJ, mentions that having a stock of Hermès and Gucci’s owner Kering could be riskier than the past.

Rapid recovery for expensive luxury goods are prominent in China after Covid-19; that does not mean luxury brands are carrying out excellent performance. Weak demand problem still remains outside of China. Luxury spending from China or Chinese nationals were about only 11% of total global spending in 2019.

But in other side, Chinese demand for luxury brands are steadily increasing, in which China will cover about half of global luxury spending by 2025. Investors were positive about those luxury brands since China has been eagerly looking for it for the past few years. Stocks of Louis Vuitton, Christian Dior, etc has climbed up.

Japan had similar experience during 1980's and 1990's. Global luxury sales to the Japanese nation covered about 55%. Rapid economic growth, increase in affluent middle class, and income level enhancement were the common factor between these days China and past Japan. It as to show off their wealth and spending life. Most of the consumers in China are youngsters whose income are mostly from parents' allowance, meanwhile, Japanese consumers were mostly living on home in rent-free during 1990s and were able to buy the luxurious goods. (designer bauble)

The boom on Japanese lavishness was slowly fading away not only because of economy recession so called "lost decade" in the 1990s. It was also due to demographics. As population is getting more age, expenditures on luxury goods started to decline. It applies similar to China. Chinese economy now is slowing to show weak fundamental in many reasons (such as excessive corporate debts, U.S-China conflict), but it does not mean of slowing demand on the brands. Demographic challenge is the main reason. Chinese population has been dis-inflated due to the policy of 1 child starting from 2015. World Bank data shows about 1.7 children per family. The cost could be spent on supporting an older population in the future.

Also there are signals of danger of oversupply issue in China since the demand is quite robust for the next couple of years. Chinese spending by luxury companies surged 230% year by year in the second quarter (Gartner). That can lead to lose of preciousness and their exclusive image like example of Japan, which made luxury brands suffer.

However, brands cannot abandon Chinese market since the demand is sturdy, and population is huge. Luxury sales in Europe has been decreasing since consumers lost appeal for it. Now, they rely heavily on China which can risk investors on betting luxury brands higher.

Source : Forbes
https://www.forbes.com/sites/pamdanziger/2020/05/15/fate-of-luxury-depends-on-china-but-continued-success-there-is-not-guaranteed/#5e0b819c530c

Source: WSJ
https://www.wsj.com/articles/luxury-brands-dust-off-their-japanese-lessons-11598871601

Introduction of YCC (Yield Curve Control).

Yield curve control or YCC (sometimes called YCT) is aimed to control treasury yields at a certain target. FFR or fed fund rate is an interest rate of very short maturity and can be regarded as call rates. YCC is positioned to target at longer bonds by imposing interest rate caps at a certain rate.

When bond price soars high (remain above the floor), then central bank sells the treasury or does nothing at all. However, if the bond price fall and interest rates surge, then the central bank purchases the bond at a higher price. That can be one of the announcement effect that can let investors buy the bonds beforehand, expecting the bonds to be sold by central bank at a higher price. YCC or YCT is used to remain interest rates near zero. (It has strength of maintaining interest rate zero without expanding Fed's balance sheet)

Past week, Fed announced about monetary policy plans, remaining federal funds rate near zero until average inflation reaches and remains over 2 percent "over time".  Please see my blog down below.
https://techongstudy.blogspot.com/2020/08/review-of-monetary-policy-strategy-fed.html

However, YCC is not very easy to apply right now. In the recent economic and financial environment, the control is not a good function for 'added fuel'. Two-year treasury note yield is 16 basis point, five-year bond yield is 30 bp, and ten year of 64bp. There is no much room to pull the yields down; if needs targeting, then it should be 30 year maturity. (targeting long term has risk of austerity or tightening).

James Bullard, the CEO of St.Louis Fed is worrying about the exit of the policy. The essential target of YCC is pulling down the yields that the bonds have. When the yields remain zero with the effect and later consider about exiting from YCC, market has to prepare aftermath. (Cold turkey phenomenon) YCC is for strengthen the 'forward guidance' that Fed can do to stabilize the market, removing the panic of mom-and-pop investors or financial institution. The rise of YCC was due to the climb of long term treasury yield after Fed announce to ease money on short-term market (call or repo).

U.S. has proceeded YCC during second World War times(1940) by incurring massive debt expenditures. Mr. Bernanke mentioned yield cap in 2002 to terminate deflation cause. In 2010, Fed announced to target at around 0.1% after financial crisis. Japan adopted YCC in 2016 and Australia in 2020.


Source: Saint Louis Fed
https://www.stlouisfed.org/on-the-economy/2020/august/what-yield-curve-control

Source: Global Monitor
https://now.globalmonitor.co.kr/view.php?ud=2020090107371593171a6a872ef5_41

https://now.globalmonitor.co.kr/view.php?ud=2020090107363630891a6a872ef5_41

Container-shipping companies create profit despite Covid-19 recession.

The increase in freight rates have benefited shipping companies for more profitd. It is due to the reduction of fleet supply and volume. Even though economic downturn was forecasted due to low demand of global trade, economic slowdown did not lead to the deterioration of the profits of container ship operators.

In the past, during the 2008 financial crisis, the profitability deteriorated significantly due to deliberate price fall responding on low demand. However, in response of Covid-19, shipping companies operated capacity adjustment instead of price slashing which later triggers profit rise when there is demand for it. Shares rise aftermath.

Source: Shipping Stocks Weather the Pandemic Storm 

https://www.wsj.com/articles/shipping-stocks-weather-the-pandemic-storm-11598868003

Stock split and your portfolio.

The stock split of Apple and Tesla has been an issue for a months to the investors; the novice in investment field could be confused with it (delusion that price can be looked cheaply) even though there is not much of a change in a system. When company announces to split its stocks, then it can entice the media and attract investors to buy the shares in nominally cheaper price.

Stock splits have not much proceeded in recent days as it was not corporate playbook. After the dot-com crash in 2000, stock splits by S&P 500 companies became obsolete, while Dow Jones Industrial Average are much less frequent. Stock splits used to happen when shares reached above $100 in the past, however brokerages like Charles Schwab Corp started giving the options to clients for buying a fraction of shares in $5. 

Stock split
Wikipedia explains that "stock split or stock divide increases the number of shares in a company. A stock split causes a decrease of market price of individual shares, not causing a change of total market capitalization of the company." (Different idea against paid-in capital increases)

Shareholders of companies will receive more stocks (the total value does not increase) when shares go into the split. For example, when the company announces for 4-for-1 stock split, then three additional shares will be granted to each investors. So if the previous price was traded in $400, then it would be $100 aftermath.

Company dividend
Board of the company decides what to do with dividend. Normally, dividend is also divided as the ratio of stock split. For example, imagine there is a company which gives a dividend of $1 per share. If the stock is split into 1/4, then the dividend will be from $1 to 25 cents.

Options bets
Option contracts held at the time of division are recalculated through a process of "being made whole". Options Clearing Corp has rules and procedures in place to modify the contract so that the holder is not affected by the division. The contract is adjusted to reflect the new price and number of shares, but the value remains the same.

Dividing it by one to four, a call option contract that covers 100 shares at the strike price of $100 each will cover 400 shares at the strike price of $25.

Fractional shares
Again using the example of a 4-for-1 split, investors who hold less than one share ahead of the split will receive three additional fractional share equivalents. An investor holding half a share before the split will end up holding two shares after the split. An investor holding a quarter of a presplit share will end up with one share afterward. Anyone with less than a quarter share will hold a fractional share following the split.

Benefits for corporate
Company just offer lower stock price and more shares. Above that, there is nothing. It does not affect the value of company at all. However, stocks price usually pop out in short-term as history says. Stocks in Nasdaq rose 2.5% at sight right after announcement of stock split and S&P 500 soared 5% in the year. Apple has added 30% since July 30 after the unveiling of stock split, whereas Tesla's share has climbed 61% since August 11th after announcement.

"Many investors say the outsize reactions to those splits reflect factors including novice traders’ embrace of technology favorites during a year of pandemic-related disruption and the perception that a stock split ratifies a firm’s perceived competitive strength." as Wall Street Journal says.

Stock market
Mostly, there is not much of an impact on overall stock market. The S&P 500 index is followed by corporate's market capital, which means that firm's market value is leading the index. However, the Dow Jones Industrial Average is different. Dow is price-weighted index. The index is followed by the nominal price of the shares. This means that if the index is composed of nominally high value, then it is easier to move upwards when shares rocket up. Blue-chip companies' stock split won't do good influence on Dow since bigger share value rise influences more on index moves.

Popularity
Splits are not a fad now despite the announcement from Apple and Tesla. About 41% of stocks in S&P 500 are trading above $100, which was considered high enough to be split. There are 3 plans for stock split, which as 102 in 1997, seven companies 4 years ago. (Schwab) Alphabet and Amazon have not split its stocks for 20 or more years. Berkshire Class A has never been split after its foundation. In 1996, Berkshire Hathaway created another class to help individual investors to trade in around $200. It was split in 2020.

Stock split in the past
Stock splits were more likely to happen in the past since the trading wasn't very well developed. It wasn't traded quickly by digital system and was expensive to small individual investors. Normally in the market, when buyers purchase in large quantity, then the compensation of it can be discount. Investors willing to buy 100 shares at a time, then the commission fee could be discounted. Commission fee is not a big problem contemporary, due to the development of digital trading system. Target Corp and PepsiCo denied of stock split with these reasons.

Options for the stocks that are not split
They have three options: paying up; buying shares of other firms that trade for less; or purchasing a fraction of a share, an alternative recently offered by some retail brokerages. Fractional shares are not the real share. It is a product from brokerage to help investors to buy cheaply. Proportional dividend and voting right can be performed in accordance in the contract.

Source: https://www.wsj.com/articles/what-is-a-stock-split-and-how-does-it-affect-your-portfolio-11598616477