“Regardless of how you feel inside, always try to look like a winner.  Even if you are behind, a sustained look of control and confidence can give you a mental edge that results in a victory” Arthur Ashe: 1943-1993.
While the 2008 US Presidential Election campaign will be discussed and forensically analyzed for many years to come, there is no doubt that a powerful combination of youth, first time voters as well as a spectacular harnessing of the internet (in particular Web 2 tools) were ultimately responsible for Barak Obama’s win.
The Obama Presidency also heralds a seismic shift for traders and investors as the heady days of laissez faire free market capitalism comes to an end and a more regulated, less speculative landscape emerges.   Stock markets around the world were momentarily energized by this momentous victory.  In Europe most indices had risen substantially by the 4th November.  For example the Dutch AEX, having fallen to 231.50 on October 27th surged to 291.13, a reversal of over 25%.  The German Dax rallied from a low of 4014 on October 24th to a high of 5301 on November 4th, a gain of 32%.  The London FTSE too rallied from its low of 3665 on 27th October to a high of 4639, a gain of almost 27%.  However, by the end of the week all had fallen back by an average of 10%.  Optimism may have entered the markets but volatility was far from dead.
Market volatility was even more pronounced in Asia and the Pacific Rim.  The Hang Seng of Hong Kong posted a one week gain of 43.5% from its multi year low of 10,676 on October 27th to a high of 15,317 last week.  India’s Nifty too gained over 43% during this same period.  Japan’s Nikkei too gaining over 30% but like the European indices these too failed to consolidate these gains and fell back almost 15%.  The US markets too rallied but like all the others failed to capitalise on their gains.  Hardly surprising as the October US Non Farm Payroll numbers on Friday put the US job market squarely into recession.  The speed and magnitude of the decline in the lack of new jobs underlines both the severity of the September credit crisis and the magnitude of the task facing the new President.
Elsewhere market falls were also the result of dramatic interest rate cuts.  In the UK the Bank of England cut base rates by unprecedented 1.5% while the ECB restrained itself to a 0.5% as central bankers and governments all try to avert an economic meltdown and attempt to steady the financial ship.   Neither cut in interest rate did much for either the British Pound or Euro.  The carry trade continues to unwind and investors and traders bail out of anything which smacks of speculation, hence the continued falls in oil and other commodities.  As has been mentioned before the worst is far from over for either the UK or Europe, with Asia and the Pacific Rim now catching the tail of this worldwide financial hurricane.
An interesting take on the entire credit crisis has been suggested by Liam Halligan whereby he suggests simply locking away all top bank executives regardless of type and refusing to let them out until they fess up to each other, admit their mistakes and reveal what toxic investments they are actually holding.  An AA meeting for addicted bankers – ie bankers addicted to debt and risk using other people’s money.    We can but hope!
In the meantime what of the future and how to profit from the enormous changes which will result from this Presidency?   If, as expected, governments bring in more stringent regulations for markets and financial instruments in an effort to avoid future asset bubbles traders and investors may have no choice but to look at conservative asset classes such as bonds and simple deposit accounts.    Calm, orderly market conditions with no volatility can appear seductive but dangerous as traders and investors soon become frustrated with little or no return from their safe haven investments.  Ironically it is at this point that many turn to trading and investing in more volatile instruments in an attempt to achieve higher returns.
Trading Tip:   It is often tempting when shares prices are falling (or in this market plunging) to be tempted to rush in and buy because they look cheap.  Beware and do not be tempted to rush in too soon – even though the likes of Warren Buffett and Anthony Bolton are now saying that this could be the time to buy.  The likes of Warren Buffett have such deep pockets he can afford the market to take a further turn for the worse.  He also takes a very long view.  Shares are always cheap for a reason.  Panicky investors have pushed prices down to unprecedented levels – the CBOE VIX recently reaching 80 while others are just plain rubbish.
Two classic tests for a cheap stock are a low price/earnings ratio (P/E) and a high dividend yield.  Falling equity markets quickly throw up “buys” on both measures.   For example a share priced at 100p with a full year dividend of 5p per share and forecast earnings per share for the next year of 10p, then the share price is 10 times  forecast earnings, so the p/e ratio is 10 while the dividend yield – the annual dividend as a percentage of the share price is 5% (5p/100p x 100%).  However, if the share price suddenly collapses to 50p with earnings and dividends remaining unchanged, the P/E halves to 5, while the dividend yield doubles to 10% (5p/50p x 100%).  The stock now looks much cheaper in relation to forecast earnings – a low P/E – but also offers a higher income return, but is it a buy?.  Not necessarily, as investors in supposedly cheap, high yielding bank shares, have been finding out to their cost.
The moral of the above is that when markets are in such turmoil and upheaval even tried and tested indicators are suspect and cannot and should not be used in isolation.     Patience is the virtue as we wait for the dust to settle on the fallen.
Good luck and good trading.
Anna