Sucheta Dalal :Misplaced optimism on the bull run?
Sucheta Dalal

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Misplaced optimism on the bull run?  

Aug 22, 2005

When the Bombay Stock Exchange (BSE) turned into a limited company after 130 years, the capital market regulator chose to mark the occasion with a flamboyant, if bizarre, prediction for a regulator. Even before the benchmark BSE Sensex had struggled past the 8,000 level, Madhukar, wholetime member of the Securities and Exchange Board of India (Sebi), stunned the gathering by predicting the Sensex would leap to 16,000 before 2005-06 ends. Possible, he later told the media, due to good economic fundamentals and completion of the BSE’s corporatisation.


If the Sensex indeed touches 16,000 before the financial year is out, Madhukar will be a BSE legend. And if it doesn’t, he needn’t worry; he has excellent company among those who dared make bold market calls, although regulators are scarce in that crowd.


In 1999, BusinessWeek began the review of a book titled Dow 36,000 by James K Glassman & Kevin A Hassett as follows: ‘There’s an old saying on Wall Street: when a bull appears on a magazine cover, sell your stocks and head for the hills.’ That year, at the height of the dotcom bubble, there were three book titles, each more bullish than the last. Dow 36,000 predicted the target would be reached in three to five years, which means its time is up. The Dow Jones index closed at a modest 10,559 on Friday.


Dow 40,000 (by David Elias) predicted the figure would be reached in 2016, giving him a decade to be proved right. And Charles W Kadlec, who wrote Dow 100,000: fact or fiction?, predicted it would be reached by 2020. Unlike Mr Madhukar, they had all bought enough time, if they were wrong, for people to forget their predictions well before target day.


• The record of anticipating the end of a bull run is uniformly poor

• There are gathering indications that the current run may not last


Big bull runs have always brought out the gambling instinct and have permanently tarnished many a reputation. The biggest damage was probably in the boom, crash and Great Depression of 1929. On October 16, 1929, just 10 days before the crash, Irving Fisher, a brilliant economist and professor at Yale, had infamously said: ‘Stocks have reached what looks like a permanently high plateau.’ In November 1929, Fisher remained as stubbornly bullish and claimed: ‘The end of the decline of the stock market will probably not be long, only a few more days at most.”


In fact, most brilliant minds had failed to anticipate the events leading to October 1929. In 1927, John Maynard Keynes predicted: ‘We will not have any more crashes in our time.’ And in 1928, Myron E Forbes, president, Pierce Arrow Motor Car Co., said: ‘There will be no interruption of our permanent prosperity.’


In India, too, the big bull runs of 1992 and 1999 had triggered over-the-top prediction of peaks that would be scaled by the Sensex. In 1992, it was an otherwise ultra-conservative BSE chief who suddenly turned aggressively bullish and predicted the Sensex would soon touch 10,000. In 1999, the Unit Trust of India chairman got carried away by the Ketan Parekh-led bull run to make similar predictions. Both bull runs ended in a massive crash within a few months.


The fact is, the Sensex had closed 30 points down on the day of Mr Madhukar’s prediction. The speed with which foreign investors have been pumping money into Indian stocks has also slowed, and investment managers such as CLSA say Indian markets seem headed for a correction, with those of Korea and Indonesia. CLSA further says the market is showing signs of increased speculation and predicts a significant 15-20% correction. In fact, Sebi is struggling to keep abreast of market manipulation, rampant speculation and fake media reports.


The worry is not about regulatory and technical factors alone. Though economic growth and corporate earnings continue to remain strong, the economic news looks increasingly negative. A whopping Rs 40,000 crore will go into the bottomless pit called the Employment Guarantee Scheme, to be inflicted without addressing concerns about leakage and corruption. Deciding not to divest government equity in public sector undertakings is a setback. Increasing oil prices and the government’s populist play in refusing to increase petrol prices or rationalise hefty duties on fuel are other factors inducing nervousness. So, did Mr Madhukar have any business joining the bullish euphoria, to make a prediction that should embarrass any regulator?










-- Sucheta Dalal