THE IRRATIONAL WORLD OF STOCK MARKET

Is There A Bubble Building?

N M Sundaram

IT is bizarre, it is irrational, it is illogical but it is true. The stock market exists in a surreal world of its own independent of all else, the state of the real economy, social turmoil, natural calamities, plight of the people etc. that distinguishes the real world of life and living, the real world of the people.

The manner in which the Sensex [Bombay Stock Exchange (BSE) 30-share sensitive index] has been moving skywards a oblivious of what is happening on the ground, makes a mockery of the assertion that it is reflective of the health of the economy.

One often hears from the government lobbyists that “the fundamentals are strong.” This expression can mean different things to different people. By strong economic fundamentals, one normally understands that the economy is free of glitches: that the employment situation is robust paving way for healthy development of the home market that is so vital for the economy of any country; that the economy is growing in a meaningful sense implying that it is leading to the well being of the people on whose behalf it is expected to operate; that the economy throws up commensurate savings in the process of growth; that savings get converted into investments on the basis of priorities determined; and that investments generate further gainful employment and expands the home market and therefore begets greater growth. We may as well add that there is a semblance of balance in export-import trade; that debts are manageable and the currency is reasonably stable. One may also add further that there is cushioning in the system that would protect against sudden shocks and unforeseen calamities – natural as well as man made. In other words, the economy cannot exist independent of what is happening on the ground. The stock market where the stocks of companies are traded cannot also have an existence of its own divorced from the welfare of the general economy and well being of the people.

It is interesting that the media stock analysts – both native and foreign – are usually euphoric about the robustness of the economy. They often talk of enormous confidence reposed by the investors in the Indian corporates and the economy.

STOCK MARKET HEATING UP FM CASUALNESS

In India, there are people in the know of things who have displayed caution. Among them, a member of the Rajya Sabha and member of the economic cell of the Congress Party, asked of the finance minister as to what he thought of the sharp movement of the Sensex and what he thought of the driving force behind it. The reply was wishy-washy. In fact, the minister ended up saying virtually nothing.

Thereafter too, the upward momentum of the Sensex continued unabated, oblivious to what all were happening around and reached 7400-mark to close at an all time high on July 23, 2005. It was only then the “Union finance minister P Chidambaram warned investors against undue exuberance.” He added:  "Sensex and Nifty reflect current potential of the economy. Economy will do better this year than last year. Markets by definition will rise and fall. However, your response to rise and fall of market should be measured,'' said Chidambaram, while launching the nationwide Tax Information Network (TIN). "Market is an outstanding mechanism to convert saving into investment.'' (The Hindu-July 23, 2005) He further said that ‘he would start worrying if the index reached 8000 points.’

Well, the Sensex may not have touched 8000 points as yet but it is well on the way to that mark to make the finance minister at least to start worrying. By August 5^, the Sensex reached 7756.04 points keeping a sustained upward trajectory for the seventh successive session. Even on the tragic day of disruption of normal economic activities in the country, the benchmark rose sharply. The bull-run of the earlier nine successive trading days from July 22 to August 4, saw the Sensex leap by 493 points or 6.75 per cent. Not even the fire devastation in the Bombay-High oil rig that threatened to disrupt the life line of oil production could not deter the upward movement of the Sensex. The government estimated the loss in Mumbai alone due to destruction caused by rain at a staggering Rs10, 000 crore. This loss was in addition to the loss due to Bombay High disaster. The cumulative and continuing loss suffered by the economy has been considerable indeed. In spite of all this, the Sensex has moved merrily along maintaining great momentum and is threatening to reach 8000 points. By the end of trading session on August 18th the Sensex had touched an all time high of 7921.39 points in intraday trading, before closing at a comparatively sedate 7811.33 points.

THE SPECULATIVE BINGE

A glimpse of the volatility is appropriate. On August 7, the markets witnessed the Sensex going on a tailspin and plunging by a clear 148 points on one trading day! When trading opened, the index rose further to 7781.04 before tumbling down to an intra-day low of 7594.94 points before settling at 7606.17 as trading for the day closed. Some analysts attribute this to profit taking; they justify it on the ground of the market making the needed correction. All this jargon cannot hide the reality that the stock market was being heated up in a speculative spree riding the wave of an irrational exuberance. All attempts at rationalising the development or the dismissiveness of the finance minister cannot hide the reality that a bubble indeed is building. The finance minister who had earlier said that he would start worrying if the Sensex touched 8000 points and cautioned investors against ‘irrational exuberance’ (a phraseology obviously borrowed from Alan Greenspan, Chairman of the American Federal Reserve who used it on the eve of the 2000 Dot.com bubble) in a nonchalant display of inconsistency replied in the Lok Sabha on August 8^th: “I do not accept such alarmist predictions. India’s stock market is one of the most regulated markets… I reject the argument that a bubble is building, and that the government is sleeping or that the SEBI is not doing its duty.” (The Hindu–August 9, 2005) After cautioning against ‘irrational exuberance’ only the other day, he is himself suddenly displaying a little bit of it by being dismissive of the worries expressed by others. Is it just because the Sensex did not touch the magical figure of 8000 by a whisker, when according to him the time for worry would have arrived? This is strange indeed.

ROLLERCOASTER CONTINUES

The rollercoaster continued thereafter too and the stock market has been gyrating up and down in what the analysts dismiss as ‘correction’ and ‘profit taking.’ The Sensex came down to 7595.57 on August 9, then sharply went up vertical to 7729.82 on the 10th and a further high of 7816.55 on the 11th, a sharp gain of 220.98 points in just two sessions. In between too, the gyration went on in intraday trading: for example it reached a hitherto high of 7861.26 on August 12, before plunging below the previous day mark by 49 points to close at 7767.69 points. August 12 and 16, saw the stock market plateau before climbing again. As already said, on August 18, the Sensex dropped down after reaching an all time high of 7921.39 points in intraday trading, to close at 7811.33 points, bobbing up and down all through the day. The next day August 19, witnessed further volatility and the index declined further to 7780.76 for the weekend. In the process of this rollercoaster, investors lost value or gained. The process goes on.  Who is doing this – this pushing up and pushing down the prices of shares?

Let us go a little deep into what has been happening in the market. The report in The Hindu – August 13, reporting on the fall of the Sensex by 49 points after the intraday “new peak” of 7861.26, says: “After setting an all time intratrade record at 7861.26 during morning trading, the market later ran out of steam and fell sharply as operators and retailers resorted to heavy selling pressure caused by rising crude prices and a slowdown in the activity by FIIs.” But the increase in the price of crude oil was already known.

OIL SPIKE DOES NOT DETER

By the morning of August 12, itself the price of crude rose from $55 a barrel to $66 a barrel in the international markets. The BBC and other net works kept on blaring this news since morning much before the Dalal Street opened. It was also being said that the price spike was due to sudden spurt in demand for crude by the US, which was indulging in a buying spree edging out all competitors and pushing up the prices. The prognosis is that this frenetic buying would continue and so also the price hike in crude oil. OPEC sources also attributed the spike in oil prices to increased demand overall including from developing countries like China and India and also to bottlenecks in refining. Most important of all is the fact that as in stock trading, in oil too the oil traders were in a speculative spree. The futures market in oil remained more than ever volatile. All this were quite well known. So this could not have been the reason for the gyration in the Sensex; there was no justification for prices being pushed up to an intraday record high and then being pushed down. This is pure and simple destructive dance of speculation and the FIIs are the main culprits. This was what the Congress MP from the Rajya Sabha cautioned about and this is what the finance minister evaded answering straight.

Another worrisome aspect to this is the fact that the scrips that were being traded were within a narrow band of select stocks. The spread remained thin and so were the volumes, and what is more, the presence of Indian retail and institutional investors were scarcely visible. It was the FIIs that moved in and out merrily pushing up prices (and bringing them down as fast) and raking in hefty profits.

(To be continued)