BT: How investors find reasons to buy (02 Jul 2007)

How investors find reasons to buy - or sell

By R SIVANITHY
SENIOR CORRESPONDENT

IT'S always interesting to see how investors are always able to find a reason to buy or sell in earnest when it suits them. If you like, it all depends on whether you prefer to view the glass as being half empty or half full. The determining factor? Momentum. If prices rise for no apparent good reason, the tendency is for market players to convince themselves that they have either missed something or that their previous assumptions were wrong.

Last June, for example, when the US Federal Reserve raised its short-term interest rates for the 17th consecutive time in the current cycle by 25 basis points to 5.25 per cent, analysts confidently declared that it was the end of the tightening cycle and that the next move would be a cut, perhaps coming as early as the end of 2006. As a result, stocks soared, ending a steep, two-month long down-cycle that had been triggered by interest-rate fears.

In January this year, when oil crossed US$60 per barrel and US Q4 GDP growth of 3.4 per cent surprised on the upside and stocks fell, the tone changed because everyone suddenly expected the Fed to keep rates steady at its March meeting. Noticeably silent were the experts who had a few months earlier urged their clients to buy because rates were to be cut.

In March, people rushed to buy stocks because it was claimed that the minutes of the Fed's meeting hinted at an impending rate cut and the language supposedly demonstrated a move away from a hawkish stance. The US Treasury market duly priced in a 50 basis-point cut before year- end and stocks hit all-time highs.

As pointed out in this column on April 6 ('What exactly did the Fed say?') the markets got it wrong. The language used by the Fed was nowhere as accommodating as experts would have everyone believe and if anything, suggested that core inflation was still a concern and that rates might have to be raised or at least be kept steady for the rest of the year.

Following the conclusion of last week's Federal Open Market Committee (FOMC) meeting, this view has now been proven true. The Fed did not lower rates and Wall Street is now convinced that there will be no loosening for the rest of the year. Oil is close to US$70 a barrel (a 10-month high), the 10-year Treasury yield is above 5 per cent but perhaps worst of all, the US economy is stalling - last week's Q1 GDP figure showed the slowest expansion in four years. Stagflation, anyone?

Still, as stated earlier, it's always possible to find reasons to buy (or sell) depending on prevailing momentum. To see this, look no further than the penny sector, where syndicates and manipulators - no doubt with the aid of major shareholders - have managed to generate considerable momentum in 'junk' stocks, thus inducing retail punters to find reasons to buy.

A popular inducement to buy has been the laggard theme, the idea being that if something - a stock or a country - hasn't risen as much as others, then it has to eventually become attractive, hopefully sooner rather than later.

Today's market is replete with the laggard argument - Citigroup's 'sell Singapore, buy Taiwan' last week for example, was founded on the argument that Taiwan has lagged everybody else. Secondline activity is founded primarily on laggard reasoning - if a sector leader for example, has been ramped up to a particular level, then analysts use that lofty valuation to justify recommending a buy on others in that sector.

The upshot of all this is that currently, the market wants to continue to find reasons to keep buying, though it knows at the back of its collective mind that it might be prudent to take a little money off the table considering - other reasons aside - that the third quarter is traditionally a quiet period. Still, much depends on the prevailing momentum and, of course, how convincing the laggard argument proves to be.

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.