Monday 10 November 2008
Better to miss out on the best if it helps avoid the worst
Fear manifests itself in the stock market in two and only two ways. First is fear of losing money, which emerges when prices are plummeting and all mayhem is breaking loose, as was the case for most of last month. This stage is characterised by plenty of hand- wringing as investors agonise over whether to sell, or cut losses, or pay up their margin calls or, in the case of die-hard believers, to try and ride out the plunges and hope that one day they’ll be in the black again.
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Better to miss out on the best if it helps avoid the worst
By R SIVANITHY
10 November 2008
Fear manifests itself in the stock market in two and only two ways. First is fear of losing money, which emerges when prices are plummeting and all mayhem is breaking loose, as was the case for most of last month. This stage is characterised by plenty of hand- wringing as investors agonise over whether to sell, or cut losses, or pay up their margin calls or, in the case of die-hard believers, to try and ride out the plunges and hope that one day they’ll be in the black again.
Second is fear of losing the chance to make money, which occurs when a sudden rebound occurs and the majority are caught unprepared. The hand-wringing is then complemented by kicking oneself - sometimes with both feet - for not having had the courage to have bought earlier.
Since the Straits Times Index has now bounced almost 20 per cent from its intraday low of 1,500 a couple of weeks ago, there must be plenty of self-inflicted kicking going on, which together with equal doses of hand- wringing, is followed by the inevitable, gnawing question: should I take the plunge or risk being left out?
The mistake investors make when fear of losing out takes hold is to rely on most recent memory, say the two to three weeks just passed, and extrapolate this to the next most immediate period. It doesn’t work that way at all - in this environment, patience is a virtue because it’s much wiser to miss out on the best if it helps you avoid the worst.
First, volatility is still way too high, with 5-10 per cent intraday swings now commonplace. This is one legacy of the Greenspan/Bernanke/Bush administration, which failed to detect the widening fissures in the US property and banking markets and kept marvelling at just how strong its economy and banking system were even when the cracks appeared.
Second is that the worst of the economic crunch has yet to be seen. US unemployment can rise as high as 8 per cent - unheard of in the modern era - and nobody knows with even the slightest clarity when things will improve. As research outfit Ideaglobal said over the weekend on asking whether it’s time to call a recession: ‘Old wisdom has it that if it looks like a duck and quacks like a duck, chances are it’s a duck.’
Third is the problem of how to shake off the present recession and inevitable depression to follow. There is no guarantee that the standard policy responses of cutting interest rates to zero to try and engineer positive inflation and generous tax cuts to stoke consumer spending and demand will work - Japan has tried everything but has been mired in a deflationary environment for almost 20 years with nothing seeming to work.
Interestingly, Federal Reserve chairman Ben Bernanke six years ago delivered a speech that dealt with deflation, in which he said prevention is better than cure because of the difficulties associated with the cure. It’s also worth noting that he said there was no imminent threat of deflation at the time because the US economy was so strong and the banking system was so robust and well-regulated. It’ll certainly be interesting to see if he lives up to his preferred prescription at that time of resorting to the printing press and flooding the market with US dollars to combat deflation. In the worst-case scenario, all he may be doing is following in the footsteps of his predecessor Alan Greenspan - as one commentator noted about the hoped-for bailouts: ‘Let’s start another cycle of easy credit, leading to leverage, no regulation, opaque self-serving instruments of mass financial destruction, leading to another bubble, leads fat cats to whine, brings a federal bailout and lets the cycle repeat itself.’
As for the local market, its fortunes will continue to be dictated by expectations of how Wall Street might perform later each day - Friday’s bounce in the Straits Times Index despite a huge US loss on Thursday confirms that programme trades buy stocks here first before the US.
However, Wall Street’s rise on Friday was most likely due to short-covering after a 10 per cent collapse on Wednesday and Thursday and is very likely to fizzle out soon. The upshot of all this is that patience is a virtue and that it’s better to miss out now than regret being hasty later.
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