Who let the bulls out?

“It was the best of times; it was the worst of times.” These words are the opening sentence of the Charles Dickens classic A Tale of two cities. It is an apt description of the current state of affairs on the region’s two major stock exchanges. To continue in the style of Dickens — It was a time of celebration; it was a time of sleepless nights and hand wringing. In Jamaica, the rally on the JSE picked up terrific momentum and sent the composite index soaring to unprecedented levels. Records tumbled across the board, with the first three months of 2004 now being described as the highest, the fastest, the longest, the strongest and any other superlative you can think of. In the south Caribbean an identical event is occurring in Trinidad.

The rally on the TTSE has taken off and all previous records have tumbled as the bulls rampaged the streets of Port-of-Spain, bringing into effect the same superlatives used to describe Jamaica. Jamaica celebrates and Trinidad doubts. But what has most captured my attention, apart from the absolute intensity of the rallies, are the diversity of reactions to the rallies. For while the Jamaicans appear to be celebrating their rally, their counterparts in Trinidad are busy falling over themselves, second guessing, questioning and trying to explain their rally. The Trinidadians are all holding their breaths expecting- the bubble – to burst at any minute and the Jamaicans are doing the exact opposite.

In fact, despite the already phenomenal growth in the composite index of the JSE, there are strong indications from investors that this rally is expected to go even higher. One of Jamaica’s leading unit trust companies has reportedly announced that it will be restructuring its portfolio to increase the weight in equity to take advantage of continued growth in equities. Now I am rationalising that unless you’ve had a bit too much sun, you don’t make a structural change like this unless your expectations for this rally are most definitely on the upside. 

But before we go any further, here are the basic stats on the rallies in Jamaica and in Trinidad. With the first quarter of 2004 not yet ended, in Jamaica the index is up 36.42% for the year, having accumulated 24,614.84 points. Let’s put this in perspective. These are more points than the index has ever gained in any single entire year previously. From a quarterly perspective and again on a point basis, the composite index on the JSE is trading 242.90% above the five year first quarter average. On an annual basis, it is 75.05% above the five-year average. The market breadth for this rally is 89.74%.

As with any true rally the commensurate volume is just as impressive. Volume for the first quarter 2004 is trading at 140.13% above the five-year- first quarter average while on an annual basis it is just 5.90% below the five-year- average. Volume in this quarter is already higher than in any other quarter in the market’s history. Bear in mind there are eight trading days left to complete the current quarter. The rally has actually been in effect for some time with this index recording nine consecutive quarters of gains, the difference this time is that the current quarter is 643.13% above the average for those 9 quarters. Similar numbers show up for the TTSE composite index in Trinidad. The index is currently up 19.65% or 136.39 points; this is 12.18 points below the 148.57 points recorded for the entire year 2003.Trading for the first quarter of 2004, is 201.55% above the five-year first quarter average and 65.10% above the five year annual average.

For volumes the market is trading at 49.38% above the five year first quarter average but is 46.55% below the five year annual average. The breadth of the rally in this market is 84.38% and there are five trading days remaining in this quarter. Over the last 9 quarters the Trinidad and Tobago index has declined only once, in the second quarter of 2003, and the current quarter is 597.17% above the average for this period. Like Jamaica, this quarter is the best performing in the history of the TTSE. Now when you examine the numbers above you can see why the use of descriptive words like, phenomenal and unprecedented and the excessive use of superlatives. You may also be able to understand the nervousness of the Trinidadians. Basically this is all new to them, they have never seen this kind of growth before (which technically means that Jamaicans should also be nervous, but they don’t appear to be) and you can understand the need to try to explain this strange phenomenon.

Caribbean Markets defy standard text book analysis

The explanations are coming fast and furious, text books are being dragged out, gurus are being quoted and referenced with terms such as, irrational exuberance and stock market bubble all being thrown into the mix. Well let me just add one more term to the mix for good measure – self fulfilling prophecy. You see, if you tell the market often enough that what is happening is not real and that it will crash, the market will eventually believe you and it will crash and in so doing you would have predicted and then caused the outcome. expected that in an environment with a majority of investors fitting this description, those investors would continue to demand and buy stocks at increasingly higher prices over and above what would be considered acceptable by a short term fundamental assessment?

This is even more likely when you consider the other investment options. With the after tax interest rates resulting in other options yielding little or no returns, where else would an aggressive investor put his/her money if not the stock market? And while there seem to be this strong focus on interest rates, perhaps I should point out that while the fall in interest rates might have triggered this current rally, the stock market had been performing well for quite some time before June 2003 when this rally started. In fact between 2001 and 2002 the TTSE recorded 14 straight months of gains; and in the 29 months between November 2001 and March 2004, the index has only had two months in decline.

Again isn’t it possible that an investor, satisfied that the economic conditions are acceptable, that there is nothing on the horizon to seriously disrupt long term economic performance and having studied the performance of the stock exchange and realising that this market has a good track record may very well decide to continue pumping money into stocks even if interest rates do increase? Now all of this is mere speculation, I don’t know if Trinidad has a majority of aggressive investors. The point is I doubt anyone has bothered to study Trinidadian investors with the intention of profiling them, understanding their mind set and then try to gauge their reactions to certain stimuli.

More importantly how would one know if there was a fundamental shift in the thinking, evaluation methods and behaviour of investors? Similarly how would one detect the presence of new investors whose methods of evaluation are different? Instead analysts seem content to simply draw on theory and worse, on the history of the USA for expectations for how investors in Trinidad and the Caribbean should react and in fact appear disappointed when we don’t behave as expected. So they are content to simply borrow terms like, irrational exuberance, simply because prices have gone up a little too fast for the comfort of these analysts, or because they can’t see an immediate explanation. But why should the Trinidad investor be like the American investor?

Is it so unthinkable that we may have our own characteristics which may result in investor sentiments and reactions which are not necessarily explained by established theory and certainly not by the history of other peoples.

Barbados goes its own logic defying way

Take Barbados, for example as a country overflowing with conservatism. In an environment where the after tax interest rates have fallen significantly below the rate of inflation, Bajans continue to dump millions of dollars into commercial bank deposits. Why? Because this is where they are most comfortable and maybe they are not prepared to sacrifice that comfort for higher gains. Even if it doesn’t make economic sense, for the majority of Bajans the stock market is simply not an option. The point is, that this is the nature of the Bajan and nowhere in established theory will you find an adequate explanation for what is presently happening in Barbados.

The point I am making here is that it is time we started doing research on our own markets and their investors with a view to understanding them and that until such time as we do so, we will always be guessing at explanations for developments in the market. More importantly shifts in the mentality of the market may not be identified until after the fact. There is a crying need for research into Caribbean Markets. I recently read a most stimulating article by Ian Walcott who lamented the fact that business failures in Barbados (and I will extend the argument to the Caribbean) are not documented.

In fact his lamentation went beyond just business to include our history. He evidenced this by the acute shortage of history books written and of course the absolute absence of books written on successful business men/women in the Caribbean. One of his conclusions were that as a result, we never really know why businesses fail ( and by extension we don’t know why they are successful). But we all assume that we know or worse, that we understand. The tragedy of the TTSE rally and the current debate is not that it could end but that it could come and go, and those who said it will collapse will feel justified if it eventually does (as in, I told you so) but none of us would really know why it started and worse why it ended.

This article courtesy: TheCaribbeanInvestor.com

It was published on March 23, 2004