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AU CONTRAIYAR

Lull Before or Calm After?

The problem with understanding stock markets is that it is a bit like falling in love. It’s a battle between the logical left side of the brain which says there is no such thing as “can’t live without you” and the right side which convinces the most rational people that it is indeed so. Essentially it is a factor of which perception you eventually buy.

Just two weeks back, virtually everyone who is anyone in the world of global finance was trumpeting bullishly despite a historic high crude price and falling numbers in the tech sector.

Every major index on every global market was inching towards its historical peak (see chart). That was September 11. Cut to September 22. Every major index - in a space of just ten trading days - reversed its trajectory to inch towards its low for the year. While some analysts like Abby Joseph Cohen believe that the market has viciously over-reacted, the jury in general does seem depressed. Virtually every bull in town ( barring Cohen) has donned a bearish cloak and is pawing at the lack of fundamentals.

So what happened? The bard would have said: all for a piece of silicon and a few drops of oil. Actually it began with Oracle surprising the market with a profit warning. This was followed by crude touching $ 37 and the fuel strikes across Europe. Even as the market was mulling over the prospects of a cold and costly winter, Intel came up with a shocker: lower than expected earnings Q 3 and Q 4, thanks to the slowdown in Europe (actually, Piper Jaffray stock analyst Ashok Kumar had predicted this weeks back). Within the next seven days virtually every index in the world dived south.

Traditionally, the steep fall in valuations would have been read as the end of the chapter. For instance, once Intel has said what it had to and the impact had been factored in the fall in the prices of other tech stocks and in the sectoral indices. Ditto with the spiraling oil price. The impact of the high prices over the energy guzzling sectors and its inflationary pressures would have been absorbed by the market. Indeed, the venerable DJIA slumped close to a 1000 points to reflect the concerns of the people, corporates and governments. Does this mean that the worst is over? Is this the calm after the storm?

The jury is as yet out. But there are many who feel that the September song is not as out of tune as some bulls believe it to be. To start with despite OPEC’s promise of a higher output and the resultant slide in crude prices, there seems to be some doubts if the impact has been fully understood. Next, Intel’s profit warning is a welcome wake up call ( the second this year after the crash of the dot.coms) for punters. The important issue it has brought forth is that while the US itself may be in for a fourth successive year of four per cent plus growth, claims of a resurgent world economy -- particularly Europe in the face of a weak Euro and structural rigidities in Euro-land economies -- may need a re-check.

So does it mean the recovery of markets in Hong Kong, Japan and Mumbai simply signifies the lull before the next bull run? The left side of the brain would nod in agreement. The function of markets is after all to discount the future prospects and perils. But the right side -- which hosts the faculty of intuition clearly feels differently. Those who are skeptical of the prowess of the right hand side of the brain need only recall Greenspan’s theory of irrational exuberance or better, look at dot.com valuations between January 1999 and March 2000. Don’t tell me people were buying amazon on its intrinsic potential to earn money. Of course it was the victory of the right side over the left side.

So over the next few days you may see a reflection of the see-saw battle between the left and right side in global indices. The eventual direction and trajectory of the stock market would finally be decided by the outcome of this battle between the left and the right side. Me thinks the battle would be won by the left side of the brain. That the traditional bull cycle of September to November has been crimped by Oil and Intel. That the next bull run could be thus sharper over a shorter period of time.

Of course I could be wrong. And the intuitive right side of the brain right. It would be something not foreseen and the market would rush as never before to discount the discovery. In which case, expect the worst.

P.S.: As for Dalal Street its neither the left side nor the right side which determines its focus. Simply log on to NASDAQ. Any market which discounts slowdown in manufacturing, the highest ever fiscal deficit, a sliding rupee and hardening interest rates to record a rise of six hundred points in six days must not be using its head at all.

(V Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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