FYI | Mar 07 2007
The past nine days have been an absolute thrill fest for lovers of good old fashion investment clichés.
Always good to know, I guess, that whenever share prices rally a sheer unstoppable human greed takes over the market, but when the trend goes into reverse we collectively seem to seek solace in age old wisdoms contained in calendar phrases and famous people’s quotes.
Consider this one: “Everyone is a long-term buyer until the market goes down.”
(Apparently a quote from Steve Forbes, from the magazine).
Of course, there’s always room for a quote from Warren Buffett: “Be greedy when others are fearful.” (Annual Report Berkshire Hathaway 2007)
And to top it off, one more from Dr Mark Skousen: “The best lessons are learned when the market goes down.”
I found it quite remarkable I didn’t come across the good old “blood in the streets” quote from Baron de Rothschild. I guess that one had been used too many times following the sell down in May last year (and the one before that, and before that). Same for the “rear view mirror” quote from Buffett.
To all of you who did endure some losses in recent days: "The real measure of your wealth is how much you’d be worth if you lost all your money." (Apparently, nobody knows who actually said this the first time).
There are some interesting observations and analyses being made across the globe as well. Analysts at Leg Mason Capital Management in the US for instance went back into history to study what usually happens whenever the Dow Jones, the S&P 500 and the Nasdaq fall by 3% or more on the same day.
According to the study, there have been 27 such drops in the market since 1974, including last week Tuesday. What happens next should keep optimism high for everyone who’s in the market today.
Legg Mason found that one month after the big down days, the three indices were virtually unchanged. One year later, history shows gains of at least 14% for all three.
Not one of the aforementioned quotes can match the power of such a survey.
So is that all there is in terms of pain and losses: a few weeks and we’re back on the road to higher index levels again?
Analysts at Credit Suisse seem to agree with Leg Mason. They have done their own homework, making usage of several in-house models and tools. According to Credit Suisse’s findings the world lost 1.8% of its wealth on Tuesday, February 27, 2007.
One day falls in world wealth of 1.8% are very rare, the analysts report. Last time it happened was in the May 2004 correction (meaning the May 2006 correction wasn’t that bad in the greater scheme of things). On Credit Suisse’s calculations a drop of 1.8%, or more, in global wealth has occurred only 27 times in the past 27 years (since 1980 thus). The analysts also found that outsized, one-day declines tend to be clustered instead of occurring as one sole event.
Yes, I’ve just re-read that last sentence too.
The most logical event that would trigger a cluster of Black Tuesdays would be the spreading from US sub-prime mortgage loan defaults into other parts of the economy or the financial system, but so far few experts are arguing there is a genuine chance this might happen. (Morgan Stanley published a pro and contra report with Stephen Roach representing the bear side of the danger but it all seemed a worst case scenario to me.)
Unless one major financial institution or hedge fund would default tomorrow, of course (but let’s not tempt the Gods on this matter).
Apparently, Nick Leeson, whose wrong way bets on the Japanese share market brought Britain’s oldest merchant bank Barings on its knees in 1995, is considering becoming a full time market trader again. (You can call this an intermezzo if you like).
One of the more interesting comments I have come across in the past nine days was buried in a report by GSJB Were. What if a global repositioning of speculative market positions is responsible for most of the damage, the broker asked this week.
GSJBW believes there is quite some anecdotal evidence that heavy long positions on risk assets have been unloaded over the past nine days. If this were true it would mark the second big event in ten weeks this calendar year already that can be traced back to sudden adjustments in large market positions by professional investors and speculators (after the sell-off in commodities in early January).
One: this would go against the argument that the modern financial system is a more solid and stable one.
Two: it adds to the argument that what we experienced over the past nine days should be temporary only (once everyone is re-positioned the road should be clear again).
A more often referred to explanation is that investors had to re-adjust to lower growth expectations again as they might have been a little over-optimistic regarding US data for November and December.
If this explanation sounds correct, and why would it not go hand in hand with the mere adjusting of market positions, there could be some more heavy volatility coming up in the short term.
Watch out for Friday’s release of non-farm payrolls in the US as GSJBW has labeled the event the “key to near term price action”. The broker (in conjunction with the colleagues at Goldman Sachs) has been arguing for a while that market expectations regarding US growth may be a bit too rosy.
While economic data previously may have looked better because of seasonal factors, GSJBW believes we may have entered a period wherein the opposite is true.
Consensus for the February non-farm payroll release on Friday is that the US economy has created 100,000 new jobs last month. GSJBW/Goldman Sachs believe a mere 50,000 is more realistic given the big “weather payback” in the US construction sector.
Increased volatility or not, chartists at Morgan Stanley are nowadays talking of a “stage three” of the bull market. They believe it is only a matter of time before the S&P500 index (as a global proxy) will move beyond 1885/90 in the longer term. Equivalent upside attraction areas in other regionally representative markets are: Eurostoxx 50 at 5300; Nikkei 225 at 23,000; Hang Seng Index at 28,200 and TWSE at 11,860/880.
While all that seems very reassuring, I’d like to insert a special note from Eureka Report editor James Kirby who summarised my Weekly Analysis today with the sentence “The market fundamentals have not changed, but it’s a fundamentally different market.”
I think that sums it up perfectly.
Till next week!
Your fundamentally different editor,
Rudi Filapek-Vandyck
(As always supported by the Fab Three: Greg, Chris and Terry)