The biggest bulls have
come out to play
Portfolio,
By Barrie Dunstan
Those Wall Street bulls who have never lost their faith in the stockmarket have re-emerged, snorting and freshly confident, after last week's 0.25 per cent cut in rates by the Federal Reserve Board.
But Dr Alan Greenspan's principal target for his policy surprise is almost certainly the worry of a crunch in credit markets, rather than the stockmarket, which he has branded over-exuberant in the past.
Friday's surge by the stockmarket had Wall Street stock-picker Laszlo Birinyi pronouncing the bull market alive and well, while other bulls re-emerged, including Abby Joseph Cohen of Goldman, Sachs & Co and Edward Kerschner of PaineWebber Inc.
The sceptics, however, are doubtful that a bull market which lasted so long and rose so high will be followed by a bear market which sees only about a 20 per cent fall in a couple of months.
Everyone, of course, reads meanings into the Fed's easing which coincide with their feeling or market position. Thus, we are seeing both the bulls and the bears nodding at the move.
A lot of pundits are welcoming it largely because they believe that the Federal Reserve Board has been too slow to react to the need for much more stimulatory monetary policy. This group notes last week's low inflation numbers and signs that US industrial output is slowing.
In addition, those taking a global view argue that the Fed will have to lead the pack to help nudge the US dollar lower and the yen higher, and to encourage most major central banks to free up credit for a world threatened with recession.
The really big, bad bears argue that the second cut means the Fed is aware of some really nasty surprise yet to emerge. Already, three banks – Merrill Lynch, Nomura and BankAmerica – have admitted to big trading losses and lower profits, while Bankers Trust and Lehman have been forced several times to deny rumours. Perhaps these bears are closer to the real reason for the cut in rates.
But it sometimes pays to read the official statement by the Fed, which said it eased because of "growing caution by lenders and unsettled conditions in financial markets". That soothing central bank-speak clearly understates the position in the markets.
Says Chase Securities's US analysis at the weekend: "Fixed income markets are suffering from the most illiquid conditions in memory, as even traditionally deep markets have become unable to absorb typical trading volumes without significant price distortions."
The huge volume trading by hedge funds might be part of the reason, but it's more likely, as Chase says, that the conditions have resulted from investors' growing risks aversion. That is, the professionals are scared and are sitting, frozen, in the headlights.
The trouble is that these really nasty market conditions are visible only to the market professionals – and, of course, the central bank. If the system stays frozen, then the flow of credit to business in the US and elsewhere will simply seize up.
So, all those bears and bulls talking their book might just have ignored the most obvious reason for the easing in rates: Alan Greenspan is telling the market professionals that the Fed won't allow the problems on Wall Street to overflow and affect Main Street.
It is, as Morgan Stanley strategist Stephen Roach says, a confidence game which the authorities have to win to restore confidence and stem a potentially nasty credit crunch.
In the past, the financial markets usually were affected by changes in the real economy, but the 1997 and 1998 financial crisis has turned the global economy inside out, Roach says, with a growing risk that dislocations in financial markets could drive the real economy. While there is a risk of a global recession, he puts this at only a 30 per cent possibility.
If the stakes are this high, then the markets might be right in assuming that there could be further cuts in interest rates. The markets are certainly pricing in further easings, though there may be dangers in pushing this too far.
For instance, Connecticut currency specialist Bridgewater Associates is bearish on Australian bonds after the recent rally largely because of the large and growing current account deficit. So far, the strength in the $A has been a reflection of the easing $US.
The other key factor for the Australian stockmarket is the apparent lack of excitement in the commodity market after the latest cut in rates. Bridgewater notes that commodities like gold and oil prices, in non-US currency terms, were lower after the move. "We like world equities right now, but we're hedging a number of our positions with puts just in case the central banks find that they are pushing on a string," Bridgewater says.
While Australian sharemarket valuations aren't expensive, there must still be doubts over the key US stockmarket as long as there is some possibility of the credit markets causing a recession and as long as US shares look a touch overpriced.
afr.com.au |
