Forum Archive Index - April 2000

[NZ.Herald.Online]

The following story has been sent to you by briangale@xtra.co.nz who feels it 
may be of interest.



Message: Thought this was worth passing on
BG

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17/04/00 - Blow froth off stocks but don't shout fire By ROD ORAM, <i>Between 
the lines</i>

Right now, global stock markets are as perilously poised as a crowded cinema. 
If anybody yelled "Fire!", lots of people would be killed in the stampede for 
the exits.

So far everybody who is taken seriously as a market authority is behaving very 
well. Right on cue, arch-bull Abby Joseph Cohen (if you'll pardon the gender 
bending) said the S&P 500 index would end this year at 1575, 16 per cent above 
where it lay bloody and bruised on Friday.

As chief investment strategist for Goldman Sachs, the most formidably 
profitable of investment banks, Ms Cohen is taken seriously indeed. So far 
through the 18 years of this bull run, she has been right far more often than 
she has been wrong.

"Today we've seen a market event rather than an economic event," she said on 
Friday. "As we look at our expectations for earnings, economic growth and so 
on, nothing has changed during the past two weeks."

By this argument, the 25 per cent collapse in Nasdaq share prices last week was 
merely a market correction that knocked the froth off technology share prices. 
Depending on how strictly you value shares, more froth may need to be blown off 
yet. Anyway, the message is hang in and hunt for bargains.

So far, so sanguine. US investors seem to be keeping the faith ... and their 
money in the markets. Only day-traders have been killed to date. Only 
speculators and margin buyers have been seriously injured.

The survivors are the over-whelming majority of investors who are long-term 
players who have put little money into US stocks in the past six months. They 
are still sitting on gains.

But that is a bit too pat. Ms Cohen's market event could mutate into an 
economic event. Here is how: a big chunk of investors bail out of the market. 
Greed will drive some - they will want to sell high and buy low. Fear will 
drive others - they will lack the courage to take a long view.

The first whiff of fear or greed will prompt somebody to shout "Fire!" Then 
panic will blow away stocks around the world.

Next, the US economy would take a very nasty knock. Much of its growth in 
recent years has depended on consumers who have been buoyed up by the wealth 
effect of booming shares. If US growth falters, so could other countries'.

So the world is teetering on the edge of an abyss?

No. The world economy is in much better shape than it was at the time of the 
1987 crash. But two ailments weaken it: absurdly hyped share prices in 
virtually every market except New Zealand; and the threat of inflation.

A collapse in share prices and a cut in economic growth rates will be harsh 
medicine for some but therapeutic for many. 
 
                

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To view more stories please visit the NZ Herald Online at 
http://www.nzherald.co.nz





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