The O'Brien Column: Get those guardians guarding - the bear market has arrived

By Peter V O'Brien

Friday 19th July 2002

Anyone who claims to know when and at what level international investment markets will bottom is either a psychic or a liar.

Last week and at the beginning of this week the New York-led share sell off was unnerving even stable, long-term investors, as opposed to gun-slinging traders.

Market pessimism fed on itself, driving prices down further, subject to directionless minor rallies; classic phenomena in bear markets.

Newspapers and the electronic media talked about Wall Street reaching levels unseen since 1997 when the Dow-Jones index fell to 8684 on July 12 (it could be higher or lower by now).

That meant little, because comparisons with the past depend on the date and level chosen. Examination of what happened before 1997 puts recent events into perspective.

NBR Personal Investor (September 1997) included an annotated chart of Dow-Jones index for the preceding 10 years.

Annotations were made to indicate notable political and economic events over the period and the index's landmarks.

The latter included: "Feb 23, 1995: Dow hits 4000," "Nov 21, Dow hits 5000," "Oct 14, 1996: Dow hits 6000," "Feb 13, 1997: Dow hits 7000," and July 16, 1997: Dow hits 8000."

The index therefore doubled in two years and five months. It reached 8000 five years and three days ago from today.

It was interesting to see a note on the chart at the end of 1996: "Greenspan [Federal Reserve chairman] warns of 'irrational exuberance' in markets."

Mr Greenspan's warning was given when the Dow was under 7000 and more than 20% below the apparently disastrous 8684 reached last Friday.

The Federal Reserve chairman issued fresh warnings after 1996 but they were eventually ignored, after usual short-term reactions to the powerful guru's sober assessments.

On went the Dow - through the Asian economic crisis of 1997-98, through 9000 in 1998, 10,000 in 1999, 11,000 the same year and to a peak of 11,772.98 on January 14, 2000.

Events inevitably caught up with the euphoria. The high-tech boom collapsed toward the end of 1999 and into 2000, affecting the Nasdaq and Standard & Poor's 500 index more than the narrow-based Dow-Jones.

The US economy showed signs of slowing down, which affected stock prices. They were normal occurrences that always appear (including the end of a fad) during business and bull market cycles.

The abnormal then cut in, one being September 11, a date that no longer needs explanation.

Markets were recovering from September 11 a few months ago and adjusting to slower growth in the US and major economies, while emerging markets held up reasonably well.

It was unlikely share markets would have returned to 1999-2000 levels for some time. The bull market which peaked in those years had began in late 1990 and ran ahead of economic financial reality and sustainable goals.

The markets then discovered significant wealth gains reported from equally significant US corporations were myths at best and criminal fraud at worst.

It followed that part of the bull market must also have been scared of what could happen to their equity holdings, including those held through managed funds, unless they got out in the current slide.

That philosophy guarantees more losses, until the panic recedes, the nervous disappear along with the shonky companies and their accounts, and reasoned analysis decides markets are ready for revival.

The latest move from bull to bear market had elements common to similar shifts in history but there was a significant and ominous difference.

A view has developed, rightly or wrongly, that many guardians appointed to watch the guardians can no longer be relied on to verify the legitimacy of company accounts.

Auditors and accountants protested that investors and the wider public expected too much of them but they knew privately such perceptions were soundly based.

Accountants around the world will be scrambling to produce procedures to restore their reputations as financial watchdogs and to shore up public acceptance of accounting and auditing systems. Restoration could take a long time.

Solid companies can expect close scrutiny of their accounts and general announcements, however unwarranted such a reaction may be, until markets regain confidence.

They can blame the dubious operators for creating the reaction and investors can blame the same operators for a fair slice of any continuing bear market.

Wait a while before buying big.

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