ithought market wrap No. 56, 16 Dec 2011
CAPITULATION. This seems to be the word on everyone’s lips on a nervous weekend. The question for you is – Are you a party to it or are you going to stand aloof and do your own thing? The markets use this word to allude to the fall in the index below a certain number. In this case, the NIFTY’s 4700 mark seems to be the reference point. What is so significant about one number that we decide that we should become more negative if the indices fall below it ? That is a question which a value investor loathes and finds quite perplexing. Falling prices only make stocks more attractive and safer investment propositions. This time is no different. But, the hype-building, hysteria vendors of business channels may manage one more day when most people lose their nerves. If you are smart enough to log into stocks at lower valuations, you will be in the minority that will be smiling at the same time next year when the same people speak a very different language. The important lesson to remember – valuations speak the same language no matter what language sentiment chooses to change into.
Boom and doom are part of market cycles. In recent decades, monetary policies followed by central banks have fueled markets and the American example stands out. The markets move from one extreme to another cyclically. What fuels the markets is the changes in the liquidity which is brought about by the central banks. When the central banks squeeze liquidity severely and raise interest rates, the markets move towards a bottom. When they ease liquidity to the point of excess and drop interest rates, the markets form their top. Markets form their bottoms at the end of squeeze phases and tops at the end of ease phases. We are very near the end of a squeeze phase in the monetary cycle. A bottom is certain to form sooner than later. The cycles don’t reverse direction very quickly and when the ease phase starts it will prolong for an extended period. The bull market forms during this period. Investors would do well to remember this simple point while making investment decisions.