To my mind
IS THERE LIGHT at the end of this dark tunnel? That’s a question for which everyone is frantically seeking an answer – though they can’t even agree about just how bad things really are. Economists, notorious for always covering the entire spectrum of possibilities, are more than ever living up to that reputation. That doesn’t help investors much when they try to make sense of the current economic climate, which shows little resemblance to what’s been written in textbooks over the decades. Even the holy grail of market forces has been turned on its head by unprecedented bail-outs – in effect, nationalising some of the world’s leading banks.
This confused state of affairs has forced analysts and market commentators to resort to strange “indicators” to provide some indication of consumer sentiment and the state of the economy. One of those barometers, the so-called lipstick index – dreamed up by cosmetic house Estée Lauder chairman in the 2001 recession – doesn’t work for what’s currently happening in the world. Those who support that index say the sales of lipstick in the dark days of 2001 increased by 11% in the United States, apparently because women who had no money for luxuries consoled themselves with a new lipstick. The theory is further “supported” by the claimed 25% increase in cosmetic sales during the Great Depression in the Thirties. However, sales of lipstick fell in the US last year, in tandem with the economy – perhaps an indication consumer confidence is now indeed lower than in 2001.
Other extremely unscientific indicators quoted by so-called analysts include the length of women’s dresses: the shorter the dress, the more optimistic the consumers and the markets are in a bull phase. On the other hand, so the theory goes, dresses lengthen in a pessimistic market.
Serious analysts will presumably disparage such flippancy. Unfortunately, comments by highly regarded market analysts are now so wide-ranging that investors trying to make sound investment decisions are left vacillating. They aren’t even in agreement on whether SA is going to escape a recession or not. In addition, the favourable rating accorded to SA’s banks, because – unlike the situation in the US, Britain and other leading countries in the developed world – they haven’t been contaminated by the sub-prime crisis and other irresponsible behaviour has been criticised as too high by some observers, alleging artificial support by local institutional investors who don’t have many other options when investing their clients’ money.
Add to that price:earnings multiples – which no longer seem to be a realistic indication of what to expect from companies – and no wonder investors bombarded with such confusing signals feel they don’t have the foggiest notion of how to plan for the future.
That uncertainty, the consequence of an almost all-encompassing lack of confidence in the market, is even causing the shares of well-run companies (which, among other things, are cash-flush) to collapse. Seek them out. They’re the ones that stand the best chance of emerging unscathed. Exactly when seems to be a question that will keep commentators occupied for some time to come.