Sensex
|
Quarterly Window Dressing - A Recurrent Wall Street Scam
"The time has come the walrus said, to talk of many things": Of
corrections-
wizards--- and reality.
Quarterly portfolio window dressing is one of many immortal Jaberwock-like
creatures that roam the granite canyons of the Manhattan triangle, sending
inappropriate signals to unwary investors and media spokespersons. Many of
you, like the unsuspecting young oysters in the Lewis Carroll classic, are
responding to the daily news nonsense with fear instead of embracing the new
opportunities that are surely right there, cloaked, just beyond your
short-term vision field.
Older and wiser mollusks who have experienced the cyclical realities of the
markets tend to stick with proven strategies that are based on a solid
foundation of QDI (quality, diversification, and income production). They
know that corrections lead to rallies, and that rallies always give way to
corrections. If only the corrections could elicit patience instead of fear;
if only rallies didn't produce greed and excess. There's a lot of confusion
in a world that considers commodities safer instruments than corporate
bonds.
Long lasting investment portfolios are consciously asset allocated between
high quality income and equity securities. Each class of securities is then
diversified properly to mitigate the risk that the failure of a single
security issuer will bring down the entire enterprise. Simply put, a
portfolio with 100% invested in the absolute, hands-down, best company on
the planet is a high-risk portfolio. There is no cure for cyclical changes
in security market values--- diversified portfolios thrive on it, in the
long run.
The differences between a correction in either a market (equity or debt) or
a market sector (financials, drugs, transportation, etc.), and a fall from
grace in a specific company are important to appreciate. Corrections are
broad downward movements that affect nearly all securities in a specific
market. This particular one has impacted prices in both investment markets,
while creating rallies in more speculative arenas. Ten years ago, the
dot-com bubble began under very similar circumstances. Ten years earlier, it
was interest rates--- and on, and on. When all prices are down, opportunity
is at hand.
There are approximately 450 Investment Grade Value Stocks, and at least half
are down significantly from their 52-week highs; fewer than ten per cent
were in this condition just over a year ago. But very few companies have
thrown in the towel, or even cut their dividends. Closed end income fund
prices are still well below the levels they commanded when interest rates
were much higher, yet they provide the same cash flow as before the
financial crises. The economy and the markets have been through much worse.
Why aren't the wizards of Wall Street assuaging our nerves by explaining the
cyclical nature of the markets and pointing out that similar crises have
always preceded the attainment of new all time highs? Right, because the
unhappy investor is Wall Street's best friend. Why can't politicians
address economic problems with capitalist-economic solutions? Fear, and the
panic it evokes, creates an easy market for walruses, oyster knives in hand.
Wall Street plays to the operative emotion of the day--- greed in the
commodities markets and fear in the others. Once per quarter, they trim
their holdings in unpopular sectors and add to their positions in areas that
have strengthened. Under current conditions in the traditional investment
arena, don't be surprised by larger than usual cash holdings (certainly not
"Smart Cash"). Window dressing pushes the prices of your holdings lower, in
spite of their continued income production and sustained quality ratings.
How have the wizards managed to re-define the long-term investment process
as a quarterly horse race against indices and averages that have no
relationship to investor goals, objectives, or portfolio content? Why do
these proponents of long-term investment planning and thinking religiously
conspire to make short-term decisions that prey upon the emotional
weaknesses of their clients? The "art of looking smart" window-dressing
exercise accomplishes several things in correcting markets:
The things you own are artificially manipulated lower in price to make you
even more uncomfortable with them, while the things you don't have positions
in stabilize or move higher. The glossies from the new fund family your
advisor is talking about show no holdings in any of the current areas of
weakness. It's easy to make fearful investors change positions and/or
strategies. Sic 'em boys. Brilliant!
Value investors (those who invest in IGVSI stocks, and income securities
with an unbroken cash flow track record) may lapse into fearful thinking as
well, and this is where the Working Capital Model comes to the rescue. By
focusing on the purpose of the securities you own, their enhanced
attractiveness at lower prices becomes obvious. Higher yields at lower
market valuations and more shares at lower prices equal faster realized
profits as the numbers move higher during the next upward movement of the
cycle. That's just the way it is. A reality you can count on.
Surprisingly few investors have the courage to take advantage of market
corrections. Even more surprising is how reluctant the most respected
institutional walruses are to suggest buying when prices are low. The
instant gratification expectation of investors combined with the
infallibility expected of professionals, by both the media and their
employers, is the cause. Gurus are expected to know what, when, and how
much. Consequently, they prefer to manipulate their portfolios to create an
illusion of past brilliance, rather than taking the chance that they may
actually be in the right position a few quarters down the road. There is no
know in investing.
The stock market yard sale is in full swing--- add to your retirement
accounts, buy more of IGVSI stocks at bargain prices, increase your
dependable income and increase current yields at the same time. Apply
patience, and vote for economic solutions to economic problems.
Perge'
Steve Selengut
http://www.sancoser
http://www.kiawahgo
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall
Street Does Not Want YOU to Read", and "A Millionaire'
Strategy"
CYCLIC THEORY OF SHARE MARKET. Don?t expect a quick recovery? That?s the conclusion from our ?8-year? equity cycle model. The equity cycle is a lead indicator that digs into past data and throws a likely trend. To support our model?s conclusion are weakening fundamental and economic factors, which supplement the fact that a quick recovery in the Indian equity market is a far dream. Having depicted a crash in 2008 post Sensex peaking at around 22k levels, the model now shows some pain before consolidation. Both these events might occur over the next couple of years suggesting a long wait for bulls. For a small retail investor though, it?s a boon. Such investors can now get the opportunity to accumulate at regular intervals for the next boom in the Indian equity market. History: The 8th Year Itch phenomenon . The equity market was in strong hands in dec 2007and in the midst of a terrific Bull Run. There was reasoning for every irrational behaviour. No wonder a model that showcased a sharp correction was completely ignored. Also, there were just three cycles before 2008 (for which data was computed) and data was marked by home grown scams. That could have put off some investors. What was however ignored was the fact that these three 40% plus corrections occurred over 28 years (though, Sensex was officially launched in 1986, it has a base of 1978/79 and is back computed). These data points appeared strong enough to base a theory and confidence sparked from the fact that trend lines were replicated every eighth year, though the band inched higher every cycle. So, in all probability, the correction had to happen. The 40% Plus Corrections 1984 ? Riots, Assassination, Bhopal Gas Tragedy, Economic Crisis 1992 ? Harshad Mehta Scam 2000 ? Ketan Parekh Scam/Dot com bubble bust 2008 ? Sub prime meltdown And then, one fine day in January 2008, it all came raining down. Sensex tanked and within a few trading sessions lost over 25%. Since then a lot has changed, fundamentals have deteriorated and economic events worsened. The Sensex is struggling to regain lost glory. If the cycle is to be believed, the recovery may not happen as yet. There?s still some pain left. The First Hit Year Sensex High Sensex Low Decline Time 1984 410 242 -41% 1992 4467 2476 -45% 8 months 2000 5934 3590 -40% 8 months 2008 20873 14809 -30% 3 months Note: Sensex Level on closing basis. Decline may be higher if calculations are based on intra-day high/low of Sensex Recovery from the Lowest Point during the Correction Cycle Year High Lowest point Decline Time to Lowest Point Recovery to Old Top 1984 410 NA NA NA 1992 4467 2084 -53% 12 months 27 months 2000 5934 2617 -56% 19 months 46 months 2008 20873 14809 -30% Note: Sensex Level on closing basis. Decline may be higher if calculations are based on intra-day high/low of Sensex As evident from above, the corrections in every cycle were steep and fast. This was followed by a long cooling period, which could be 15-25 months. Once the base is built, the benchmark index swiftly moved up to achieve the earlier top that takes 27-46 months. At these levels, bouts of profit booking occurred from investors who believed a healthy correction was needed for markets to smoothly sail ahead. The Current Phase The 2008 cycle, in all probabilities, is the latest cycle. The benchmark index has corrected 30% odd and has witnessed some bounce back. If the cycle is to be believed, we may see some more pain in the offing ? 10% or more. The bounce back lacks strength.
You would see that once the correction started, the Sensex has made lower tops and lower bottoms. These are signs of weakness in the equity market. Weakness in the current equity market is evident ? oil issues, MTM losses, inflation concerns, fiscal deficits, and US subprime concerns among others. There is no escaping to this fact. The market knows all these and seems to have been factored such events. FIIs have already pumped out $5.6bn out of India and are reducing India Inc. ownership. The other element one could consider is the US Presidential cycle. According to the theory, the US equity market bottoms out 1.8 years into the Presidential term. And recently we have seen that Indian equity market is not decoupled with the US market. The Future India?s long term infra led growth story stays. However, we need to go through the current pain in order to witness the new Bull Run. As of now, Sensex EPS is expected to slow down. A 10-15% range would take Sensex EPS to Rs 950 valuing the market at 17 times FY09 earnings. Looking at the current market conditions, it appears expensive. All said, expect the unexpected. The equity market is a strange creature. It has a tendency to follow different paths under similar circumstances. But, one of the things investors would have learnt from the past is that emerging markets is difficult to emerge from post a fall down. So, don?t expect a quick recovery.
From: The Sharekhan Research Team [mailto:marketwatch
Sent: 23 June 2008 16:53
To: The Sharekhan Research Team
Subject: Sharekhan Post-Market Report dated June 23, 2008
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
