Monday, 19 April 2010

Before it goes under once again

It has to be said that if the plane had crashed on trading day the turmoil on the market could have been as wobbly as in the finest days after the collapse of Lehman Brothers Bank. But given two days to get over, Polish financial markets proved absolutely indifferent to the Smolensk tragedy. Stock market until last Wednesday was heading north, driven upwards by the positive sentiment among speculators. Currency market saw some uncertainty after intervention carried out by National Bank of Poland on 9 April to prevent further abrupt appreciation of Polish currency.

As many analysts pointed out, after ten week long rally market was in the short run bought up to the limits (what is plain English means no one wanted to buy stocks), so a small spark was enough to set the flame and drag the stock prices down.

Schadenfreude – is what comes to minds of many market observers when we read the news that SEC pressed charges against Goldman Sachs for misleading its clients who had been buying structured products based on subprime mortgage market. The products had been designed in collusion with a hedge fund, which later had shorted derivates linked to them. Wall Street firms, acting within a letter of law but not necessarily morally, already have a dented reputation. I have read some opinions that state the Goldman case might be just a tip of the iceberg and the next lawsuits against other big banks might follow. In the short term such news may help bring back markets into balance by reminding about the element of fear and curbing increasingly hazardous complacency.

But what about the long term? Last week George Soros, world’s most prominent speculator (I sincerely recommend reading wikipedia entry, mostly the passage which describe his views on stability of financial markets) warned of an unprecedented market crash which is going to hit in a few years. Mind this long-term prospect is a very probable scenario. The time of robust economic growth is still ahead (if it comes, given the scale of public indebtedness we cannot take it for granted), low inflation will be beneficial for equities, the resources of untapped funds of individual and institutional investors who still are wary of entering the market are not to be sneezed at. The last ingredient is complacency, at the present already dangerous, in the future it will be stoked to reach record-breaking levels.

And what if the market crashes vehemently? Be prepared, take what you amassed during the golden years and short it using leverage. Those who did it after Lehman went bust or in January and February 2009 and had a capital cushion thick enough not to get a margin call could afford to retire. Anyone can earn when the prices are rising, a real art is to rake in profits when prices are falling.

The alternative scenario is that if SEC charges next banks with frauds, the bull market driven to a considerable extent be those institutions will lose momentum for a while. If it materialises, the correction may last even a few months and may bring the indices down by even thirty per cent.

The notions above are left to your further consideration. In the current phase of business cycle and shortly after the last crisis stock indices are unlikely to plummet.

Good news for today is that Polish financial market regulatory body is going to introduce short selling on Warsaw stock exchange. It is the next step towards developing Polish stock market. In every civilised country it should be possible to bet against stocks and profit not only from rising prices. I am in two minds about the restrictions – it is all about taking risks. If stocks are much overvalued they should be allowed to reach an optimal level, also with help of speculators. If not, like the shares of Volkswagen in 2008, then short-sellers have to cover their positions and take losses. This is the life!

As a small speculator I would also embrace first Polish investment funds for bears ;)

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