Markets: Of oohs and aahs! - Views on News from Equitymaster

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Markets: Of oohs and aahs!

Oct 31, 2007

With the benchmark BSE-Sensex crossing yet another coveted mark, we are hearing more of that ooh-ing and aah-ing that comes from watching things incredible. Incredible it is to watch what cheap money can do to asset prices within a span of few days, weeks and months. Incredible it is to watch by what amount investor wealth has risen per minute or per second. And, incredible it is to know that so many stocks have hit their all time highs at one go. Then there are mentions about how a stock has returned more than 6,500% over a span of past twelve months. This stock has been bought to such an extent that it currently trades at price to earnings of 186 times and price to sales of 407 times its trailing 12 months numbers - so much for growth that has yet to take place? You shall hear more such stories making the rounds, as the markets (a.k.a. Sensex) makes further inroads into the higher territory.

While there is nothing to take away strong performance that companies continue to record and the consequent impact on their stock prices, what we are really worried about is the speed at which market participants are factoring in future growth prospects, though duly helped by liquidity that continues to flow into the system. What is ironical is the fact that these days, announcements of bonuses and stock-splits also lead stocks to move up sharply! Why? Because people think that these actions make stocks cheaper. Cheaper? Really? Not at all! And the most unacceptable part is that even top managements of some of these companies are claiming how such an action (bonus/stock split) shall make their stock 'affordable' to investors.

Concerns like an almost US$ 100 per barrel crude, political squabbles at the Centre, rising food prices and their consequent impact in consumer price inflation, and a possible global financial crisis, seem to have taken a backseat to 'cheap' money flowing here and there. And if the US Federal Reserve were to reduce interest rates further in their monetary policy meeting scheduled for today, money will become cheaper still! This must be sending shivers down the spine of Dr. Reddy!

Anyways, while such heady situations bring in factors that cause the 'greed' element to rear its face, investors need to practice utmost caution and not give in to temptations that rising markets like these bring with them. Or, you never know, the 'ooh' and the 'aah' can be followed by 'ouch'!

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