Financial Daily from THE HINDU group of publications
Monday, Jul 22, 2002
Money & Banking
US markets showing signs of `capitulation'?
IT was intriguing to hear that word again after a very long time. One of the analysts described the current mayhem in the US stock markets as signs of `capitulation'.
Equity markets have continued to slide down and dashed hopes of any short-term revival. We all know that financial markets are run by emotions of greed and fear. The bull and bear runs are formed when one of these emotions overwhelms.
Those of us who follow technical analysis or Elliot Wave theory know that the last leg of any large move is the strongest and sharpest. In a bearish market such a move carries classic symptoms of `panic' run and irrational fear. Since `capitulation' leads to return of sanity, such signs are awaited by the investment managers.
Is there any hope for the global equity markets that are reeling under a tight bear hug?
The Dow Jones Index closed last week below the lows that was seen in the aftermath of terrorist attacks in the US last year. The index has lost over 20 per cent of its value since the start of the year.
The Federal Reserve Chairman, Mr Alan Greenspan, delivered his semi-annual testimony before the senate committee on the state of the economy. Although he tried to sound cautiously upbeat, the financial markets have not taken any respite from his comments. There are a few risks to growth that he dwelt on in this testimony.
Business capital spending has not shown signs of any significant recovery. Productivity growth remains strong and has grown by an annual rate of 7 per cent over the last few quarters. In the recent past stock markets have severely punished companies that have not conformed to transparent accounting standards.
Accounting woes and concerns would result in companies showing increased focus on cash generation and capital conservation. This would result in further reduction of business spending.
Stocks markets have also witnessed lower profits from companies because of the way the stock option grants were treated in the past. Companies had not expensed the stock option grants in their accounts. Now that the companies have reworked the numbers, the profit numbers have moved lower. There is also a clear shift away from stock options towards cash compensation in the current year. This would also lead to lower numbers.
Widening fiscal deficit is the biggest risk to the US economy.
Over the last couple of decades, the US has worked towards reigning in the deficits. The efforts had lead to reduction in debt and lower interest rates. There has been extraordinary expenditure for war on terrorism, homeland security, beefing up SEC and tax reductions. The current year's capital account deficit in the US is expected to be around $ 480 billion.
The Fed Chairman has said that all the gains in controlling fiscal deficit have been given up. He has warned about the need to go back to tight fiscal discipline.
Depreciation of the dollar is fallout of the reduction in the relative attractiveness of the US assets.
The Fed Chairman has commented on the trend of the dollar and how some commentaries were projecting the downward trend. He has once again highlighted the importance of prudent fiscal policy to create environment that promotes investment. This is the only way in which the dollar sell-off could be stopped.
The economic data over the last few weeks have shown cracks in consumer spending and housing sector. This is a cause of concern as these are the sectors that have kept the economy from falling in to a recession. There are signs of weakening of consumer confidence. This does not bode well for the equity markets. There may not be any change of policy stance for a long time. The profitability data remains mixed and outlook is not encouraging.
There is threat of another negative wealth dynamo hurting the system. In such an environment further downside in the equity markets cannot be ruled out. We are seeing huge volatility in the markets but there are no clear signs of `capitulation'.
(The author is Senior Manager, Corporate Treasury Sales Southern India for HSBC. The views expressed herein are his own and not necessarily those of his employer.)
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