The road to hell
By Vasula Premawardhana
And all the roads jam up with credit
And there’s nothing you can do
It’s all just bits of paper flying away from you.
Look out world take a good look what comes down here
You must learn these lessons fast and learn it well
– Road to hell by Chris Rea
Come out fighting
At the opening bell of an exchange, the bulls and the bears come out fighting from their corner like heavyweight boxers. If it’s an open outcry exchange, as most used to be, it’s a cacophony of sound and gestures, and its judgment by sound. If your money is riding on it you will feel it in your bones. Everyone has taken a side and it’s an all-out war for supremacy for the day. Tomorrow is another day.
The bulls want to rally the market up; the bears want to sell the market down. Each wants something out of the market and each second counts. There’s no second in a stock market in which you can be assured of the direction it’s going to take next. Each second matters in the same way to the trader who is holding a trade intraday as to the fund manager who in for the long run.
How and why does a market turn on a pin? News! Information of new things happening out in the real world. Not just the news of dividends announcements, economic numbers, sales figures, and economic news, but also who went to war, which cargo ship sank, typhoons; anything and everything can affect the prices of stock. From the news that can affect a few stocks, to news that affect many, how many stocks will be affected is what matter? Everything is seen through the lens of the economy and economic impact.
It’s politics stupid
Politics have the biggest impact on a given day, on any given stock. Because politicians set the rules – the policies that drive the economy. Politicians control the national budgets, and by extension all the budgets of everyone – from all companies to individual households. Even the lunch money a kid takes to school depends on it.
Decisions to save or consume is made on the availability or possibility of future cash flows. That is why politicians can make or break an economy. Which is why what politicians do, and are about to do, are keenly watched by the markets, and not just by foreign diplomats as in Sri Lanka; especially in Sri Lanka.
The Colombo Stock Exchange has structural faults; its investors don’t have that many options – pun intended – to trade direction. So until such time, its investors know that it should only go up – that is, if they hope to make any money in the market; and everyone is in the market to make money; and we can only do it by buying low and selling high.
We are a market of wannabe bulls. We like to find the good in everything we see. We only like good news because we can only trade good news. We can only make capital gains when stocks go up.
When there’s bad news, those in the market have to get out of the way. Those who are visiting us from other markets go first; after all, they have places to go. And, oh! The places they go.
We, who have to be here, hold on stubbornly, like a child holding its breath.
Waiting to exhale
Holding ones breath doesn’t work all the time – as most kids find out. However, unlike a child’s eventual capitulation, a market’s capitulation can be drastic.
Yes, the market can’t hold out forever. The politicians of the day need to resolve the uncertainty very fast. A shutdown of the government for longer than the market can hold its breath will see the CSE go through its current support and test new ones. We don’t want to go there.
A market crash will make the economy’s recovery even more difficult and as we all know, this is not the time to test the market’s resolve.
Stability in government and predictability of policy
Markets trade on probabilities; it quantifies and prices in the risk – all sorts of risk – into a market. When those probabilities change or the odds change, markets react. It is necessary that stability in policy or in the minimum stability in the predictability of policy is necessary.
Therefore, it is necessary that the policymakers resolve the ongoing conflict and give proper signals to the market of what’s next, so the market can price it in. The market does not really care about the constitutionality of things – it cares about the growth of the economy.
For the economy to grow, a stable government must be in place. If a stable government cannot be established, the market needs to know when a stable government can be established.
The road to hell is paved with good intentions.