Thursday, 16 October 2008

Equity market people are funny

I used to work with a former equity analyst, a man who believed truly, deeply in the share markets, and so regularly lost huge amounts of money backing his hunches.

He would trade on anything. On rumours that a war might break out (they usually didn't), on talk that a company would fail to pay its debts (they usually did), or just on any old piece of analysis that seemed to make some sort of sense. In short, he was a normal short-termist trader, trying to profit from being just in front of the news curve. Unfortunately for my former colleague, he was rarely ahead of the market, nor near the truth, just a consistent loser, the type of bloke that keeps many others in the market (and many bookies in business).

The trick to making cash on short-term trading is not evaluate whether a piece of news is true or not, but whether it will move the market. But truth isn't profitable, it is only something for pedants and historians to argue over.

However, in the long-run everything tends to work out, and reality is hard to escape. I don't mean this in a general equilibrium sense but in a more prosaic commonsensical way.

For example: the credit boom had to end; and so the share markets were going to fall at some point. I sold my shares in November last year because of the credit crunch; it amazed me that the equity markets held up for so long. Apart from anything else, without the potential for a private equity bid many companies needed to be revalued. Look at
Sainsbury's.

So now we have the fallout from the credit crunch hitting the equity markets all at once. Whatever the fundamentals of a company, there is little they can do to fight bigger market trends, the biggest of all being the unwind of the hedge funds, deleveraging the entire market (credit and equity) with an almighty sucking sound. It has taken several weeks and multiple bailouts for the banking sector to work out how to move forward without massive flows of fund money, now it is the turn of the equity markets to wake up to the new reality of limited bids from slimmed-down funds. As such, expect more volatility in the weeks to come, and no sustained rally for some time. New 'regimes' take a while to settle in.

I haven't stayed in touch with my former colleague but I hope he has successfully navigated the last few weeks. Given the massive upswings, there has been much potential to profit, but only by timing moves very precisely, or being very, very lucky. Overall, I wonder whether retail (normal) investors will return to the equity markets any time soon, given that many will have lost a lot in recent weeks.


Elsewhere, a worrying quote: "there are signs that LEEBOR is stabilising", Stephen Timms, Financial Secretary of the Treasury, speaking last night on the BBC. The guy's weird pronunciation of a market standard phrase worries me.

Reasons to be cheerful, 1, 2, 3.

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