Why equity markets didn't bounce?
"It is all about the economy, stupid" has become a widely respected political mantra. It is time now that this adage be adapted to "it's all about shareholders, stupid!" Share values were not a central concern during the first 6-9 months of the credit crunch crisis and shareholders have been ignored. We now have to stand that view on its head and put shareholders first; it is either that or totally nationalise the major banks as Iceland has done. Part nationalisations (directly or via convertible loans) are the best solution today by at least ensuring that governments will now care about the value of shares.
The rate cuts briefly lifted the FTSE 100 into gains, but jitters refluxed once again, and the index closed down 5.2% to 4,367 (lowest close since Aug. '04, and 12.3% down this week - on track to be biggest weekly fall since the Oct. 1987 - and 32.4% year to date). One reason for this is that the measures need comment & analysis. There is too much news & data to compute and investors need time to get over cynical fear and gain confidence. Many small investors will take the view that it is sensible to wait for some institutional confidence is apparent. HBOS leapt 24.5% recovering half of the 40% it lost on Monday, supported by confirmation of acquisition talks proceeding with Lloyds TSB. Other banks and all other FTSE100 stocks remained under pressure, with Barclays, Lloyds TSB, HSBC and Standard Chartered losing between 2.4 and 11.5%. The FTSE 350 banks index lost only 2.7%, which is positive news.
Even my young doctor asked me this afternoon why the stock markets were not responding positively today? I felt suddenly cheery on entering her examination room and we'd just discussed how many new patients she's got recently with acute anxiety attacks and depression-related problems from among Edinburgh's 31,000 finance sector workers?
The answer is that Monday was about recession fears and the banks got hit anyway with a few marked out for specially rough treatment on the back of ratings agency downgrades. Tuesday was about the banks. They were singled out and fell while the rest of the market just stood still in shock and awe. Today was all about recession fears again, especially now that Asia has got the message and is suffering massive capital flight to the USA (strengthening dollar). Tomorrow will be about the banks again and we should see rises unless some big bank collapses all in a heap suddenly - unlikely, and that is probably exactly why Fred cancelled his own and Killip's shredding for fear of spooking matters at this critical juncture for the credibility of the UK and other governments' initiatives - as several newspapers painted the scene - this is the last chance saloon.
I told my doctor that Bill Jamieson at The Scotsman is casting a pall of gloom all round by saying this is the end of the world as we know it. She said all her patients, whether bankers or not, are all panicking about what's happening. I reassured her, as she listened to my heartbeat, that Gordon Brown says he leads the world in rescue-nomics, leading with a plan to part-nationalise our biggest banks to avert ‘unacceptable’ damage like any good doctor would, by going to the ‘heart of the problem’, and that he is urging the G7 and the EU to follow Britain’s lead in diagnosis, prescription and prognosis. My blood pressure and vital signs, however, all seemed normal today. I told her it was because she'd changed her perfume since last time she checked my pulse and got a nice laugh. As any ageing lothario of an investment banker or Labour politician will tell you, in these days of trouble 'n strife the old jokes are the best.
Guest post by Banking on Economics