eBusiness Weekly
Rufaro Hozheri
“What’s the position on Standard Oil? Standard Oil is down by 14 percent and still dropping!
This was October 29, 1929, and perhaps one of the darkest days in the history of the US markets.
“As the market came crashing, one of the biggest market participants at the time, J.P. Morgan sat hesitantly by the corner of the chair in his office, trying to make sense out of his brokers and bankers who were debating on what action to take.
His silence and focus was that of someone plotting a master stroke plan.
Eventually, he stood and started walking towards the lobby to address journalists who were dying to ask him “if this was the end of the stock market”.
The worst is over, and everything is going to be fine, Morgan said with his big horse voice and an impression-less face, that one of a seasoned poker player. Just his word was enough to reverse the direction of the market, but for how long?
Unlike in 1929, I’m not sure if the ZSE has the J.P Morgan who tells people it is going to be fine, but one thing for sure is that the direction of the market can take a sharp change. The depressed performance on the ZSE is somewhat similar to what Americans experienced in 1929.
In both cases, the market had gone for a bull run of over 18 months. This stretch of positive gains made other investors believe that it is almost impossible to lose money on the stock market.
Everything they were touching was turning into gold. They had even gone further, to take short positions in the debt market and long the equities market with the belief that the returns from equities would cover the short position.
Now I understand the adage, “Never confuse brains with a bull market”.
Clearly most investors had failed to read between the lines. In the Zimbabwean scenario, indications by senior Government officials and even some of the authorities was that the bourse was fuelling the exchange rate and causing instability.
Now looking at it in retrospect, smart money should have left market earlier and found a safer heaven somewhere. But like Isaac Newton rightfully mentioned after losing in the South-Sea bubble in the 16th Century that you can never calculate the madness of people.
When the authorities eventually intervened the stock market almost collapsed, there was a blood day after day. Thanks to the circuit breaker than had been moved from 20 percent to 15 percent maximum gain or loss per day, it however couldn’t stop the bears, only slowed them.
Through the authority’s intervention, lending had been suspended for a while and interest rates had doubled. So essentially, cost of existing and new debt was now higher and to cover the short position investors had to exit their equities positions at a discount.
The market that was north of US$8bn shrunk to just over US$2bn in a period of five months. Advocates of investing on the market were now victims, and it seemed like there was a unanimous agreement not to admit that they had gotten it wrong.
When J.P Morgan assured journalists that the worst is over, the was a V-shaped recovery before the great depression of 1931. Well, unlike in the US here we can’t call it a recovery, at least yet. There was a dead cat bounce.
At the risk of boring seasoned market participants, I’ll explain the dead cat bounce. The idea is even a dead cat will bounce if dropped from a very high position, but only once. So given the distressed performance, in my view there was an attempt to bounce the market by some market participants.
Unfortunately, there were never enough trades to support recovery, bids were placed but when offers came, the bids disappeared. Which is why I suspect that it was an organised attempt by some market participant to turn the market.
During that bounce the ZSE started recording firm gains, with some counters even doubling in a week, albeit the insufficient trades to back the appetite. It did not last, in fact the market regressed after that.
Right now, everyone is waiting for the real bounce. Like in the parable of the talents, other market participants are silently uttering a prayer, checking their portfolios from time to time, and waiting for the right price to sell.
The other ones are putting their talent to work, accumulating scrip so that when the bulls come, they’ll be smiling all the way to the board.
