Monday, February 11, 2008

Bulls and Bears

The origin of market “bulls” and “bears” is apparently quite obscure (even Wikipedia says so!), but as far as I’m concerned, both are pretty aggressive animals. So if I’m invited to a dinner to exchange views on the hot question of “Quo vadis dollar?” I expect to see a few objects flying across the table at the very least.

So what a disappointment, when a recent event with the above theme turned out a non-event. The idea was admittedly very appealing: Bring together a bunch of counterparts in competitor Wall Street firms, imbue them with alcohol and let them exchange views on the state of the world.

Now you have to admit, this has the potential of a Tuesday-night-“must,” and not just because of the food... With credit markets in shambles, stock markets reeling and brand-name banks seeking rescue from unlikely partners in the middle and far east, it’s kind of fun getting to know those who actually move the markets and what they think—especially when drunk!

The problem is implementation. You have a bunch of Wall Streeters, predominantly male of course, still in their work suits (and ties), looking drained, wine glass on the right hand, left hand in the pocket, discussing in low voice. Two camps eventually emerge, the “Bulls” and the “Bears,” yet from a distance, these guys look as if they are exchanging tips on flower arrangements or their next tea party!

“The dollar has to go up from here,” contends a Bull. “It’s pretty undervalued on purchasing power parity grounds. Just go to Switzerland and try to pay for a bag of chips!”
“May I point that purchasing power parity considerations can only give good guidance for the dollar’s direction in the long-run, but not necessarily for the next six months,” counters a Bear.

“No doubt the dollar will benefit from all the boost America’s economy will get from Bush’s tax rebates and Ben Bernanke’s aggressive cuts in interest rates,” intersects another Bull. While the likes of Europe, England and Japan will go downhill “thanks” to their lame central bankers, who simply lack Ben’s balls.”
Growth?” questions a Bear. It will take about six months to see the impact of the tax rebates. Not to mention that many investors—us included—are still waiting for all the subprime-related crap to come to the surface before we are confident that bank credit can resume and growth can pick up again.”
(“Crap”? Did I hear the word “crap”? Surely this warrants at least a few greek olives being thrown at the offender!)

But no.
“The dollar will inevitably get a boost by the tremendous appeal of American assets,” continues a Bull, entirely deaf to the provocation. “The Dow is oversold and foreign investors are bound to see the value and bring back their cash again.”
“May I ask what appeal there is in a 3 percent (or less) interest rate? When Euroland and England still offer me quite a bit more? And when European stocks look cheaper form a < P/E valuation perspective than American ones?”

(By the way, that was the same Bear who used “may I” in order to intersect earlier. I’m sure he’s a Brit.. and he must still live in disbelief about the pound’s calamitous collapse recently!)
As the Bulls regroup, he continues: “And I should mention that the still large US current account deficit can’t help. Foreigners may begin to demand more than 3 percent to lend to you in order to finance your consumption.” (ok, when was the last time this guy looked at Britain's own pretty massive deficit?)

“How about those foreign Central Banks? The Chinese, the Saudis or the Brazilians who care far more about keeping their exports cheap than making money out of their dollars they buy?,” dares a female… Bull (I mean, should I really sayCow”?).
“If you see the data, foreign purchases of dollars have shot up in recent weeks, this will certainly put a floor on the dollar,” she remarks.

“Certainly, foreign central banks will keep on buying dollars. But historically, they have not been able to reverse a trend—up or down. They can only lean against the wind: Buy when everyone else sells.” A pretty assertive Bear, no?

Enters another Bull: “You’d only need to see recent foreign investor activity in the US”. “It’s surging! Didn’t you read that New York Times article the other day? From the Saudis to the Chinese, even the French are coming in for the goodies. And then you have those Sovereign Wealth Funds who are putting their copious capital into all these brand-name US banks. Let’s face it, America is on sale! That’s a big “dollar-positive.”

OK, I’m drained myself now. You just can’t keep my full attention after 12 hours of work without the promise of a real bull fight.. (ok, as I said, a few flying olives might do). Next time dinner’s at my place. Just make sure you bring your red capes!

Glossary: purchasing power parity, current account deficit, sovereign wealth funds, bulls, bears, bullfights.

No comments: