Name-calling can't substitute
for understanding of market
19 November 2001
It is quite normal to see someone use a deprecatory term to describe someone else he does not approve of. However, deprecatory terms are also often used by people to describe others whom they don't understand. After all -- the logic goes -- if you don't understand what they're doing, they must be doing something wrong.
That appears to have been the case in today's edition of The Business Times. In his article "'Kiasu risk' brewing everywhere", R. Sivanithy describes the current behaviour of investors -- chasing up stock prices -- as "kiasu", a deprecatory term used in Singapore to describe people who are afraid of losing out on something. In a sense, Sivanithy is correct. Stock market rallies may be initiated by bargain hunters and bottom-fishers, but they are often given added impetus by kiasu investors who join in the rally in order to avoid missing out on the gains. But Sivanithy clearly sees no fundamental justification for the recent rally to begin with.
"The truth is that nothing has changed over the past week to justify any substantial change to the fundamentally bearish outlook for either the economy or stocks," he writes. "The market isn't discounting a recovery 6-9 months ahead, it's simply reacting to a sudden inflow of money that has targeted only the index stocks and nothing else. In this regard, upside risk or kiasu risk could both be described as rear view mirror risk - it's only visible once it's behind you."
Most economists see an economic recovery in about six to nine months' time, some even sooner. So while it may be true that liquidity had an important role in driving up equity markets, why Sivanithy thinks the market is not also discounting a recovery is a mystery to me.
Sivanithy is also incorrect in saying that upside risk is only visible once it's behind you. In fact, the upside risk had been evident to many analysts. On 19 September, in an article entitled "Crisis Investing", The Business Times itself quoted AMP Henderson Global Investors' chief economist and head of investment strategy Oliver Shane as saying that trading patterns after major crises like the 11 September incident suggest "an initial over-reaction in the face of uncertainty (as the risk premium of investing in equities rises), and then an equally strong rebound once uncertainty diminishes and it is determined that the long term impact on the economy is minimal."
Edward Yardeni, Chief Investment Strategist of Deutsche Banc Alex. Brown, wrote in the 8 October issue of his Global Portfolio Strategy that "stock prices probably hit a major cyclical bottom the week after the Attack…A rebound to 9000 is then likely, and then back to 10000 during the first half of next year is my current forecast."
Even the normally-bearish Morgan Stanley Dean Witter economics team acknowledged that after the 11 September attack and the subsequent fiscal and monetary stimuli, a V-shaped recovery was the likely scenario. "The logic for a 'V' shaped recovery from the current recession is growing more impressive daily," Richard Berner and David Greenlaw wrote in the 9 October issue of the Global Economic Forum. "The U.S. economic downturn now looks to be deeper and the policy response stronger than we thought only two weeks ago. Both are often surefire ingredients for a classic, sharp cyclical rebound: A deep contraction typically coils the cyclical spring powerfully for recovery as consumers and businesses accumulate 'pent-up' demands for big-ticket durables and pare inventories. And typically, aggressive policy responses tend to be procyclical; they move into high gear just as recovery begins, reinforcing the vigor of the rebound."
Lim Say Boon, director of OCBC Investment Research and another erstwhile bear, has also had a change of heart. "Despite the world teetering on the brink of recession, the battle for market direction is being won by liquidity," he wrote in today's The Straits Times. "While there could be a correction soon to both the Singapore and US markets, they are likely to push higher than current levels over the medium-term. Indeed, there is a real prospect of the Dow pushing higher to 10,200 and possibly beyond. The Straits Times Index (STI) has been testing the 1,440-points resistance level and could head for 1,575."
"The global economy may stink but you have cheap money," he continued, adding that "now the market is focusing on the prospect of a US economic and earnings recovery sometime in the middle of next year. And in almost classical fashion, the market is rebounding some six to nine months ahead of that recovery." Tell that to Sivanithy.
In direct contrast to Sivanithy's claim that nothing has changed over the past week, Lim attributes the market rebound to the better-than-expected October retail sales in the US and the declining oil price. In his article, Sivanithy instead chose to highlight the fact that the bond market recently "suffered one of its worst sell-offs in recent memory, sending yields soaring and raising the possibility that any fledgling growth in the US economy might be choked off". Considering that the sell-offs came on the back of the strong US October retail sales growth of 7.1 percent, most observers have attributed the rise in yields to a stronger-than-expected economy. Sivanithy's take on the rising yields is unusual.
To be sure, there is still plenty of pessimism with regards to the economy as well as stock markets, and Sivanithy is hardly alone in this respect. On 13 November, Kostas Panagiotou, senior economist at Kim Eng Securities, contributed an article to The Business Times warning of continued weakness in the economy and excessive optimism in the stock market. In an interview on the same day presented by BusinessWeek Online and Standard & Poor's on AOL, William Wolman, BusinessWeek's senior contributing editor for economics and long-time chief economist, said he saw the Dow Jones Industrial Average rising to 11000 by year-end but falling back to the 9000 level by mid-2002.
Ultimately, the fact is that predicting the market's moves accurately is not an easy task. There is always conflicting evidence. And investors are always trying to get a head start on other investors, so the market may move with scant justification. In assessing prospects in the stock market, it helps to keep an open mind, look at all evidence -- even those that do not conform to prior expectations -- and assess how other investors will react to the evidence.
But calling other investors names just because they have a different assessment of the market does not help.
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