Why ‘I will buy a house hit by a plane!!’ A lesson in the 'counterintuitive logic and optimism' an
investor needs to learn in the present markets!
Iqbal Latif 15/03/2001, Iqbal Latif's Global Market Review, London..
As we close below DOW 10,000 and break through a major support of SPX at 1180, I think that ‘Buy Stocks Now’
is the best bet for any investor. The Dow Industrial Average lost 317 points, while the Nasdaq Composite lost 43 points.
A big ‘Guru’ (Valentine, CFA in reference to Garp)wrote this story in his column and I thought it has a great relevance to present falling markets. A small plane crashed into a house just as a prospective buyer and his wife are looking at it with a real estate broker, from the driveway. After ducking the plane, observing the crash, and dusting themselves off, the buyer turns to the broker and says, "We'll take it!" To the amazement of the broker, and his wife, he reasons, "Do you know what the odds of that happening again are?" This is what I call a great mix of counterintuitive logic and optimism!
The relentless drop in Japan's stock market has apparently threatened the financial stability of two major banks. Shares of The Bank of Tokyo and Daiwa Bank both fell by 7% overnight, even though the Nikkei edged up .2% to 11,843. Futures traders overreacted in the U.S. and pushed U.S. stock indices down the limit this morning.
Wall Street wants an immediate rate cut of 75 basis points. However, Mr. Greenspan has never cut rates in response to a falling U.S. stock market, nor has he ever cut rates by 75 basis points. A rate cut of 50 basis points is highly likely on March 20.
Liquidity in the U.S. is at record levels and that is more important than a rate cut. Liquidity in Japan is probably zero and that is the problem. Mr. Greenspan has advised Japan many times to "print money" to increase Japan's liquidity. The Japanese, however,have not figured out how to do that.
Today's market action is overdone: Stocks are now undervalued and oversold. The reasons are many but I would highlight a few of them.. Interest rates cut rallies will be sold into, the bears smell blood here in wake of these corporate announcements every day, they will like to draw more blood exacting intense pain on the bulls. I see a long drawn battle over next 20-30 days post FOMC cuts until the macro-economic situation is cleared. The 'commodity inflation debate' needs to be settled and 'wage pressures issues' that raised few eyebrows need to be out of the discussions. With annual inflation of 4.2% our rallies will fail.
In pre-recessions we don't have rising commodity cost or rising wage pressures, we do have falling economic activity! Unemployment at 4.2% cannot be termed as rising iti s just the level that high productive nation like US needs to have from super heated economy slow down. With GE and retailers giving good guidance and UK announcing un-employment below 1 million ( first time since 1975) and demand for new offices in Paris at new highs, I don't see the 'global cooling' that market has priced in. The market has priced in a recession, which may or may not happen. Recessions with good housing starts are uncommon, recessions with high capacity utilisation are un common also we don' have recessions with high unemployment and high productivtiy. We have a severe case of 'profit recessions' in technology sector and no comparisons could be made to japan or Europe. Japan is now down and undervalued by 70% on FED model basis and Europe like UK is nearly down 20% on Fed model basis that is yield of long bond and dividend yield ratio of 1, ( dividend yiled is inverse of P/E). If we have one, it's likely to be contained to the First and Second Quarters of this year. Since the market discounts the economy in advance,the market will begin to reflect the recovery soon the liquidity MZM and interestr rate cuts will help..
For the first time since 1999, the growth of the money supply-as measured by my favourite metric, Money of Zero Maturity (or MZM)-is rising. The Fed is creating money and lot of this liquidity will find its way in the oversold markets. This is very bullish as money growth and rate cuts bode very well for stocks.
The put call ratio that Chris posted yesterday nearing a level that sounds of impending bounce. The consensus among professional or amateur investors is that the market outlook is bleak. This much bearishness is always bullish. The end of the world prognosis from Japan’s Nikkei 16 year low made yesterday and news of ‘death of new economy and technology’ are excessively pessimist views. An investor need not to be to much of a pessimist at lows and too much of an optimist at the highs. |
