This week , being the end of the tax year, should see us putting the finishing touches to our own personal financial picture, shovelling spare money into our pension and a final Pep. Yet whether we have money to save or not, the bigger picture we live within seems increasingly uncertain. It is also as if we are in a vacuum, waiting for something to happen, overpowered by a sense of huge impending change which makes our own small manoeuvrings insignificant.
"It?s a curious weird atmosphere, sort of neutral," said Kevin Costner standing outside the Vanity Fair party at last week?s Oscars. He was referring to the ceremony at which a small number of films carried off nearly all the prizes. Miramax reportedly spent many millions promoting Shakespeare In Love, which made their victory somehow exude the sourness of a rotten borough election. The pragmatic playacting of Roberto Benigni, filled a vacuum in place of real sentiment, an exercise in vacuity which barely mentioned the suffering of those his film were actually been about. Of course Hollywood still glimmered and emoted. But it was quivering too. Forget the glamour, it is just an export business vulnerable to market sentiment. Perhaps the herd sensed, like Costner, that change is in the air.
Like the Oscars, the markets have been reliant in recent years on just a small number of winning stocks which the trackers and the backers have followed up and down in the wind like bows on a kite. And like the Academy?s judgement on films ? which all too often seems without sound basis ? so market sentiment has appeared to the small investor too often based on hype or misinformed criteria. This has not mattered while he or she was winning, but as Barry Riley warned, in a piece on the curse of benchmarking in last week?s F.T., too much analysis of stocks and sectors "is focused not on the value or lack of it, but on who ?underowns? or ?overowns? them relative to market weightings ... without value peg share prices can become extremely volatile, as in the second half of 1998."
As we market extras try and make sense of our money, we cannot escape the feeling that our pensions and investments are more dictated by fashion conscious models and analytical gimmicks than solid judgements reflecting genuine company performance and value. Is this an emperor?s clothes phenomenon where we are dismissed as children if we question the new orthodoxy?
Thomas Lux of Bonn University and Michele Marchesi of Cagliari University have just come up with yet another spanking new mathematical model which proves that chaotic market movements happen when one group of traders do not see the underlying value of stocks. First there are Fundamentalists, not turbaned sheikhs but old school traders who spot the difference between the share price and what the share is generally worth based on potential earnings. One imagines Warren Buffett in this category, old fashioned to a fault and certainly not up to speed on the latest technological techniques of investment, poor thing. The second group are Noise Traders who do not care what the general value of a company is, they make their money by speculating on the rise and fall of the share price. They are the herd. Volatility occurs, surprise surprise when noise traders reach critical mass. Thomas and Michele do not say whether this point has been reached, they are after all, only mathematicians. Yet one can only feel that the fashion now is that most traders would feel it foolish to be anything but a noise merchant. As Barry Riley suggests, in a benchmarked world, risk shifts from manager to client, and while for most of us in volatile times it is risky to own shares, for the noisy brigade it is risky not to.
How much can a company?s real value be divorced from the real world? I/B/E/S/ the information company says that its model which compares bond yields with the forward earnings yield on the S& P 500 index, indicates that US equities are 27.8 % overvalued. Huge amounts of money have been chasing too few shares in this vacuum which has no apparent sense of real worth as if the markets, like the Oscar stars, inhabit a parallel tinseltown reality.
But now finally worries of a correction is affecting not just the Dow but also Asian and European markets as real life intrudes. Europe too of course faces its own vacuum with fears of cold war fall-out over N.A.T.O action in Kosovo, and that other financial black hole, the EC administration. Romano Prodi has been applauded as some miracle-working political Roberto Benigni who will metaphorically stand on the chairs and somehow make a principessa out of the of overblown Commission, but far away from such decision-making, we powerless hoi polloi just hold our breathe.
Vacuums of course can be creative, providing thinking time to see how we are manipulated. They are also an opportunity to foresee other global vacuums. Next year both Bill Clinton and Alan Greenspan exit stage left off the world stage. Both will be keen to leave the markets buoyant and full of happy investors, nice men that they are. Yet the some ungrateful, disrespectful proles might just wonder what will be left behind for the next poor sucker to clean up? Only history can be the judge.
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