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Wizards, spells and equity markets

Date : 24/06/2009

Author:  Venkateshwaran Ramadoss

I wonder how much time and effort the likes of Shakespeare would have needed to popularize their literary phrases compared to the time taken for the phrase “Green Shoots”, coined by Ben Bernanke. We all know that Economist publishes a monthly bar chart indicating the number of times the word was used in the media. I marvel at the sheer power and ability of such people to make the market jump like a puppy for a cookie, in a hope for a cookie rather.

Risk premium is a function of economic, financial and other information for capital market theorists proponing efficient markets while behavioral finance theorists argue that not all information is interpreted accurately and uniformly by all. Both theorists seem to be at odds when confronting verbal interventions by able individuals with knowledge which they possess by the virtue of the positions they hold and their impact on the market sentiment and risk premium. The market transforms itself from "half empty" to a "half full" mindset as these wizards cast their spells.

Ben Bernanke used it to make the market jump like a puppy but that is not the sole type of impacts created by such personalities. We can recollect the impact when Greenspan coined the phrase “Irrational Exuberance”  back in 1996. It had a longer term reference utility though Greenspan could not make any better than a mild 4% immediate impact. He is even more special that his words could affect the market even after his resignation as the Fed chief. I also remembered of early 2007, when Greenspan again commented on the possibilities and the probabilities of the US economy getting into recession by the end of the year, which he got it wrong any way, to be misunderstood by the market in general. He attempted to provide a positive opinion to the market but he ended up confusing the market by saying “By the end of the year, there is the possibility, but not the probability of the U.S. moving into recession” and brought the market down that day. The market bounced back eventually after articles left and right in the media explaining what he actually meant. I later saw the movie “Pursuit of Happyness” where Will Smith explains his son about the difference between the two words and kept wondering whether Greenspan meant the explanation.

My all time favorite are the words of A.B. Bharadhan who kicked on SENSEX’s legs and made it fell on its knees by his magic words “bhaad mein jaaye market” crudely translated as “let the market go to hell” after the 2004 Indian election results. Such “jump” “sit” calls are not restricted to the equity markets as we often hear oil ministers speaking on the ideal price of oil and other hints related to production cuts. However, the magnitude of impact is much higher in case of equity markets.

I thought about how wonderful it would be to have such powers and the amount of money to be made just by casting some spells while all over the world asset managers have to toil hard to outsmart a negative benchmark performance these days. I guess the trick lies in its timeliness if you are attempting to make it jump. You have to catch the sense of both the media and the investing public in the precise moment when they have got sick, tired and bored of repeating the negative views and a tactfully worded positive opinion is as sweet like a plum cake. No matter how weak the argument is, as long as the market is tired of being negative and when it perceives you to be in a position that ordinary market mortals cannot possess, then your views are respected. However, you have to take care that you don’t fail on any of these two aspects, else you will have to face embarrassments.

So, what is the point? How can I make “returns” from such spells by these wizards? With my limited experience, I have seen the impact of such calls to have short lives, especially if it causes the market to fall. Buy ‘em up when the puppy frantically obeys a “sit” order without considering anything else. However, one has to be more diligent in going against a “jump” order, as to jump, the puppy needs energy and the act of jumping evidences energy. The market wants to feel good and will enter into a cycle of self referring feel good factors which if real, would remain and else, would die only slowly. Who knows, before we can see the puppy to sit down, another shout of “jump” may come up. Hence, beware before challenging the wizards on the upside. I am relatively new to the market, a 5 year old, may be veterans can reject/reaffirm my findings.

Ala Economist, I tried what I can with “google”. I counted the number of results for both “Green Shoot” and “Bear Market Rally” and compared the trends. The trend shows that while “Green Shoot” is slowing down, “Bear Market Rally” is picking up. Soon, it will be time for another “jump” call or the puppy is getting tired. Hmm… there you have the open market committee meeting and the market has its ears sharpened already.





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