Fear and greed in the 2007 stock market: a tale of gonzo investing

By R SIVANITHY SENIOR CORRESPONDENT (Source: Business Times)

POSSIBLY the most renowed book written by the late, great American journalist Hunter S Thompson is Fear and Loathing on the Campaign Trail '72, a wild and detailed account of his coverage of the 1972 US Presidential election for Rolling Stone magazine.

He subsequently went on to write a whole series of bestselling Fear and Loathing books that popularised 'gonzo journalism' a manic, full-tilt and often profane style of writing in which the writer lives within the story and often exaggerates it with personalised embellishments.
If Thompson were alive today to witness the current stock market boom, you'd have to wonder whether he'd write a book on the present mania and call it Fear and Greed in the 2007 Stock Market

To be sure, the present bubble in penny stocks bears all the hallmarks of 'gonzo investing' (if we may be allowed to borrow and tweak the term).
Punters have whacked stocks ten-fold in less than six months and incredibly, are still hell-bent on continuing to inflate what is already a devastatingly massive bubble.

Worst (like the dot-com mania of 1999-2000), most of the companies involved are fundamentally unsound with poor financials to begin with.
In many cases, vague speculation of a reverse takeover (RTO) accompanies the rises, as if there are that many foreign or domestic acquirers stupid enough to spend large sums of money taking over failed companies, assuming their debts and cleaning up their balance sheets just to get listed here. (aC: Haha, I like this description; people are just buying blindly whenver there are rumours of reverse takeovers)

You can't help but get the feeling though, that everyone knows that RTO stories are no more than flimsy fabrications aimed at covering up major syndicate manipulation (as are many of the other stories and announcements that accompany large price gains). Then again, the principle of 'caveat emptor' which is the perennial fallback as far as regulators are concerned, says that if everyone knows the game is a scam and everyone accepts the risks, then it's OK to leave things as they are. (aC: Well, the risks clearly falls on your retail investors then)

And what of blue chips? Here too, fear and greed intertwine, although 'gonzo investing' bears a tad more legitimacy in the form of programme trading and economic justification born from rationalisation in hindsight. (aC: Do people actually just leave their computers on and let the programs do the investing for you? It seems theoretically plausible but is it practical?)(aC: Hindsight benefit: I have seen so many "genuises" because of their hindsight wisdom)
By now, observers would be familiar with the way all markets move as one, the high degree of correlation undoubtedly due to the widespread rise of computerised buying or selling based on changes in predetermined parameters.

They'd also recognise how experts have glibly changed their tune about US interest rates being cut by year-end but because momentum and liquidity have remained high, have continued recommending investors buy and keep buying.
Fear however, will play a part in the early part of the week - Wall Street's Friday slump looks set to bring prices down in the early part of the week as will news of China's interest rate hike.
Thereafter, things get hazier. The US earnings reporting season has kicked off - not too auspiciously it would seem with Google and Caterpillar missing targets - but the best that can be said that Wall Street looks headed for another volatile week.

The same can probably be said for the local market. Headwinds as far as blue chips are concerned will come from Wall Street grappling with its inner demons - inflation, interest rates, skyrocketing oil prices, a crashing housing market and an economic slowdown, while it'll be interesting to see how the China market copes with yet another rate hike to cool off the economy.
On the other side of the fence sits a grim defiance instilled in all investors to buy the dips and keep buying because of a belief that they can't go wrong. In short, it's all about fear and greed - in that order.

(aC: Well, I have predicted correctly that the slump on Wall Street on Wed will persist longer but I see many clueless investors still jumping onto the equity bandwagon on Wed, Thurs and Fri this week, chasing the prices up thinking that everything now is at a discount. Using Fri as an example, the STI opened 107 points down and close at around 85 points still down no less, but that is evidence that some ppl have chased stocks up for about 20+ points. Given the overnight slump of 200+ points on Wall St, I expect the week starting 30 July to be a continued downtrend in the market)