02 Nov 2012 Friday’s Markets Methode Cap for 02/12/2012
What a week! Sandy, a man/woman scorned for a century, threw more than toys out of the cot this week. The last time Wall Street was closed for two days on account of weather was in 1888. It was fortunate that the geeks at the weather bureau chose a name apt for both sexes.
Still, one person tweeted that he had sympathy with Americans after a night with a Sandy in NY years and years ago. By the way, do you follow me on Twitter, @iSayiTrade?
With US markets closed on Monday and Tuesday, volumes on the JSE were a little thin. All, and I mean All, stockmarkets take their lead from US markets, not in exact %, but definitely in direction. Monday was interesting. The JSE spent the whole day in the red (down), but jumped into positive territory in the closing auction. For those interested, the auction is a period (10 minutes before the close or 20 minutes before the opening) where investors and traders make bids and offers to buy and sell shares, but nothing trades. The big JSE comper then makes up a best price for each share and everyone with an equal or better price then trades at that price. Very fair.
The market grinded higher and closed about 2% up for the week. This despite some very negative economic news like the huge trade deficit. Many investors are baffled by the fact that the JSE continues to make new highs despite all the negative news. I tried to explain that in my blog post earlier this week, referring to the massive investment flows into “safe” Bonds out of “risky” equities since 2008.
We all know the Fed and other Central Banks pumped massive liquidity into the global monetary system. Investors risk appetite is returning as global markets stabilize. They are no longer concerned about the return “of” their money, but increasingly about the return “on” their money. Cash and Bonds yield a negative real returns (the return after adjusting for inflation). Investors are now looking for yields that can beat inflation and that is mostly in the equity market.
And so the sheep flock to equity markets. How long before it becomes overheated? I don’t know. Until Central Banks start reducing liquidity and increase interest rates this trend can continue for a long time. Like a hot-house effect with too much liquidity chasing a limited number of shares, all the time pushing up valuations. But the ride has just begun; don’t get off the train too early. It is like getting to a party after a long drought and the host opens a barn full of Methode Cap Classique bubbly and all the rest.
But make sure you get home before midnight, the Cinderella hangovers are the worst.
– Gerhard Lampen
Head, Sanlam iTrade