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Al-Ahram Weekly 27 April - 3 May 2000 Issue No. 479 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 27 April - 3 May 2000 Issue No. 479
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Special Features Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Stock amok
By Ahmed Abushadi
The world of finance is again reeling after the swift recovery that has followed another harrowing plunge led by the United States' high-technology stocks the week ending Friday 14, April 2000. Some investors lost up to 60 per cent of the value of their shares in the process.
As usual, confidence was shaken in other markets across the globe, generally sending prices down for no fundamental reason other than to mimick the turmoil on Wall Street. This was particularly true of the Asian markets, which are still vulnerable given the suffering of their recent crises. The larger and more resilient European markets were less affected.
The effect on Egypt's sluggish market was also marginal. Active stocks slid a bit in reaction, but quickly stabilised as foreign-led trading calmed investors' jitters and restored confidence.
Back on Wall Street, by closing time on "Black Friday" (as it was dubbed by market players), the Nasdaq index of high-technology stocks lost one fourth of its value in one week. The following Monday saw investors flocking back in strength, restoring confidence and giving the market its second-biggest percentage gain ever -- up 6.6 per cent in one day.
The Nasdaq composite index is still one third off its all-time high, but economists call the decline a healthy "correction" that averts turning the huge American market into a so-called asset bubble. As an asset bubble expands, people believe themselves to be wealthier than they actually are, leading to excessive spending and inflationary pressures that can translate into higher interest rates.
Traders on the New York Stock Exchange believe it was this typical scenario that led to the recent market turmoil. The United States Labour Department reported on 14 April that the consumer price index has risen at 5.8 per cent so far this year, almost double the less than three per cent rate recorded in the 1990s.
Despite the unnerving up and down swings that occurred in New York and elsewhere, the stock market remains the stronghold for serious investors. Stock shares are by any measure still the most efficient means of responsible money management, for firms and investors alike.
Individual stock buyers make up an appreciable faction of the market and actually own shares in Coca Cola, Kodak, Microsoft, Xerox, etc. As share-holders, their investments work for them -- whether they are made in established market stalwarts, or in knowledge-based, new-economy companies. Their shares are also secure so long as their investments are based on a healthy market share and growing profits.
Those who invest the old-fashioned way -- holding on to preferred companies' stocks for years rather than for days, or even minutes, as some do today -- are handsomely rewarded with long-term gain. In contrast, according to a recent survey, a whopping 80 per cent of day-traders often lose money rather than finish the day with profit.
It is sad that despite the accumulated knowledge of past market cycles, a majority of investors seem to have short memories and cannot learn from events as recent as the crash of 1987 and the correction of 1997 -- or even their own mistakes. Once markets roar ahead, as they have done throughout the 1990s, everyone wants to buy in. Many keep buying, even when they know in their hearts that prices are too high and will have to come down.
Unfortunate investors use borrowed money and lose their limited margins (sometimes their life-savings) when nervous markets force them to cover their positions or sell. Before the recent crash, total margin debt of the New York Stock Exchange member firms topped $250 billion.
Computerised trading was blamed for the 1987 stock market crash. Today computerised trading is compounded by Internet trading. In addition, today's instant dissemination of information has a direct impact (negative or positive) on markets and market sentiment.
As was the case before the crash of 1987, share prices at the close of the 1990s were on an unsustainable upward trend, and thus were poised to fall. Company profits did not rise as much as share prices did. In some instances, annual productivity growth of 100 per cent or more for some high-tech ventures sent expectations unrealistically sky-high for others.
Similarly, share prices recently lost contact with fundamentals like earnings, yield, and alternative investment returns. As interest rates appeared to be on a rising trend, investors rushed into panic selling, losing as much as $2 trillion in the process. Yet only a couple of days later, bargain hunters were back buying into the same markets that they had just deserted.
Is this behaviour an example of financial insanity? Internationally renowned economist John Kenneth Galbraith, professor emeritus at Harvard, thinks so. In a recent comment on the inevitable business cycles well before the crisis hit, he pronounced that "Capitalism is inherently unstable."
Galbraith went on to say, "Good times bring into existence first, incompetent business executives; second, wrongful government policies ... and third, speculators."
