Better to shy away from risky equities markets

Maswood Alam Khan from Maryland, USA
0Fund managers and strategists are equipped with profound financial knowledge and expertise they had gathered in their schools of finance and earned through researches for years. Their forecasting practices based on their acquired knowledge and experiences helps them read the rapid pulses of a myriad of data streaming out every split second from stock exchanges operating all over the world. These gurus are blessed with more than a sixth sense—perhaps a seventh sense—to decipher the hidden meanings out of those fleeting data based on which they draw graphs that reflect the market behaviours.

Graphs thus drawn give signals of the market behaviours; but the colours of the signals are not necessarily the same colours as are conveyed to all the readers by the big screens mounted inside the halls of the bourses or by the small ones of your personal computers mounted on your study tables. The signals, more often than not, give different meanings to economists, fund managers, financial analysts, the general investors and common readers.

An upward or downward trajectory of a graph on a particular stock may mean, to a common investor like you and I, a time to jump on the bandwagon moving up the hills or down the valleys of the financial world. But the same trajectory may prod a fund manager to choose on behalf of his or her clients a course quite different from those chosen by the majority of the investors who are oriented by a popular mindset but not groomed by the financial eruditions. That is why many general investors bank on advices made by the learned fund managers of proven track records to decide how to manage their portfolios—of course, for a fee.

During the last seven months of my stay in the United States, I did not work in any place and so I did not earn a single dollar. But by a sheer serendipity, I met one Indian American, the owner of a number of outlets selling apparels in different malls in Maryland and thanks to his advice I am about to earn some money for a job I had never dreamt about. My job—a rare wonder of unbelievable wonders—was only to read and that’s all! It is a fascinating story of how a man is paid in the United States only for reading with a view to earning knowledge!

I was introduced with an Indian lady and her mother while I was waiting along with them in the lounge of the motor vehicle administration (MVA) office in Beltsville before appearing in the test on traffic laws and rules in our attempts to get a driver’s license. I was narrating to the lady about the plight of my being unemployed for the last seven months. The lady wondered why I didn’t apply for a job in a bank given that I was a banker in Bangladesh. I told her: “I am too old to start a job in a bank which runs on a system that I am not oriented with. Moreover, I am indolent and do not really like to start a career that would demand my rushing to office in the morning and sweat over a job like a teller or a clerk in a bank branch and come home fatigued at night. To be honest, I don’t want to injure my vanity by choosing a job that will allow my acquaintances to mock me”.

The lady perhaps narrated to her husband the story about my background and my present hapless status in America. After a few days, the lady’s husband telephoned me and said: “Mr. Maswood. I have come to know about you from my wife and my mother-in-law. They praised your way of expressions. I am sure you will not be frustrated if you listen to my advice”. “I am ready to follow what you would advise me, sir,” I replied.

The Indian American said: “You were a banker and I want to make use of your banking experiences in a company that I am going to open soon. The company would be a kind of an investment company, like a Trading House. I will engage smart people to use their talents in investing in stocks on behalf of my proposed company. You would be one of those. You have no risk to undertake because the company would provide the necessary investments and you are to invest your knowledge only. Your job is to earn and invest knowledge about stocks and other options. I would advise you to read for a day and earn knowledge about the capital market in the United States. And you will be paid for spending your time for reading”.

“What? You will pay me for my reading?” I expressed my surprise. “Yes, your reading would be a part of the training I would require you to be equipped with,” the gentleman tried to reassure me, but I still felt anxious. “People in America cannot afford time to read unless they are paid for reading,” he explained.

So, I read on the internet and also in the libraries. I spent many hours browsing websites on the internet and reading books in Barnes and Nobles trying to learn about a variety of financial instruments, especially about the derivative markets and how values of different instruments depend on so many underlying variables and how variables determine the prices of other financial instruments. I have been immersed in a different world of finance for the last few days.

The derivatives, however, that I found most interesting are futures, options and swaps. And the behaviour of an American company I have found most interesting and is deemed, by some investment gurus, the barometer of the American economy is that of “Standard and Poor’s”, what in short is reputedly known as S&P. The ratings made by S&P about the best of the best companies are also regarded by the scholarly investors as the real best. You can read those analyses and ratings in “Google Finance for free”.

The “S&P 500” has been widely regarded as the best single gauge of the large-cap US equities market which is a free-float capitalisation-weighted index of the prices of large-cap common stocks of 500 leading companies that are actively traded in the United States. These 500 companies are the leading industries of the US economy, capturing 75 per cent coverage of US equities. The stocks included in the “S&P 500” are those of the giant companies that are traded on the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ. The index has over US$ 4.83 trillion benchmarked, with index assets comprising approximately $ 1.1 trillion of this total.

Though I did never risk my own money in any stock market and neither have I any intention to do so in the future, I have been kind of addicted to reading at least the news and views about the capital markets in the United States. Of late, the first thing in a newspaper I set my eyes on in the morning is what the gurus are forecasting about tomorrows in the financial world, and why.

Nowadays, people in the United States are not comfortable with the health of their national economy, though there are signs of economic recovery. Consumers are afraid of the future; they have not yet started spending money the way they used to a few years back. Neither are they investing as much money in the capital markets like in the past. They are gripping cash tightly in their hands and their hands are buried deep inside the pockets of their trousers while moving around the malls. They window-shop and go home empty-handed, keeping their cash unspent.

One of my friends the other day said: “The day is not far away when OPEC may ask the United States to pay their oil bills either in gold or in SDR because American dollar may lose value in leaps and bounds in the next few weeks. So, Maswood, if you have money, buy gold to protect the value of your money”. “Why not one should buy a house now that the price of house in America has dropped?” I asked. “No. The real-estate prices may further go down,” my friend warned.

But, big rallies in hard assets such as gold, silver and oil too ended in an ugly slump last week. Gold fell by about $12 per ounce and silver crashed 30 per cent in its worst fall since 1980. Oil, which was until recently worrying investors with its sharp ascent, fell around 15 per cent. The price of copper, known as the “metal with a PhD” for its ability to act as a predictor for the economy, given its wide-scale industrial applications, has fallen too—to a five-month low.

US equity markets initially soared on May 9 on news that Osama bin Laden was killed by US forces in Pakistan, but lost momentum just after lunchtime, finishing the day in the red. The Dow finished the day down by three points while the S&P 500 and the NASDAQ posted losses of 0.2 per cent and 0.3 per cent, respectively.

There are two schools of thought as to why commodities are slumping. One is that the Federal Reserve’s $600 billion program to buy Treasury debt has influenced investors to divert funds to commodities and equities, creating a bubble in those assets, which is now starting to burst.

Declines in oil and metals prices are being seen by an increasing number of fund managers and strategists as a signal to get out of riskier areas of the equity market.

The growing concern is that stocks had priced in an overly optimistic path, and the recent breakdown in commodities and the shift to apparently safer equities suggest that no alternative is safe as long as consumers don’t feel safe spending their money in the capital markets transacting stocks, in the derivative markets trading options and futures, selling or buying long or short, or in the malls with consumables like toothpastes, pizza or apparels at display.

The sign of impending weakness in the American economy is in the offing. So are the ominous dark clouds gathering overhead in other economies of the world!

Should you buy gold or real-estate as a way of hedging against your currency risks? Better you follow what S&P suggests!

The writer can be reached at e-mai :

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