In the City
In and out
Tony Rudd
Now that the immediate shattering impact of the drop in market values has been absorbed, the participants in this great drama have an opportunity to examine the working efficiency of the vessel in which they have been travelling. On the whole the thing has worked pretty well. Despite the gaping hole in the hull and the somewhat uncomfortable list, the electricity is still functioning, the lights are blazing and the engines (at least some of them) are quietly turning over. However some peculiarities can be noted.
Most obvious is that the jobbing system in London has produced what one might call a discontinuous auction market. On what was expected to be 'Black Monday', namely the first day of the current Stock Exchange account, the market opened some 29 points (on the Financial Times 30-Share Index) lower than it had closed on the previous Friday afternoon at 474. It made a fairly sharp recovery during the day but still ended some 17.2 points down at 457 at the close. The next step saw a really resounding rally on Wall Street which opened 15 points down on the Dow Jones Index but then recovered on a substantial volume of trading to close no less than 18 points up. This truly triumphant performance meant that everybody in London came in on Tuesday morning full of renewed confidence. The market as a result opened no less than 20 points higher than it had closed on the Monday evening and closed 23.7 points up at 480. That was the end of the fireworks. The rally subsequently over the next few days petered out.
What was so remarkable, though, about the Monday and Tuesday performances was that the London market didn't really travel the distance between the various points on the index in the way that Wall Street covered its ground; it just hedgehopped from one level to the other. It is doubtful whether the great British investing public really appreciated this. They probably thought that some clever people got out before they did on the way down and in before they did on the way up. In fact these discontinuous jumps were the result of the jobbers trying to protect themselves from extermination. On Monday morning they knew full well that the public would be sellers. They opened the market in response to this expectation and pitched their opening prices at levels which in their opinion would fully protect their positions. The reverse happened on the Tuesday. They knew that everybody would be coming in as buyers and so they opened the market appropriately higher to avoid being wiped out by the 'bulls'.
These tactics are quite understandable. In one-way markets such as these, the jobbers who have not sufficient capital to absorb these huge swings in buying and selling pro tect themselves. But London does present a contrast to New York. On Wall Street on that Monday the American market actually covered the ground; it didn't hedge-hop from one position to the other but fought its way up in heavy trading. Those who wanted to buy at the lower level did so and those who wanted to take a profit higher up were equally accommodated. Perhaps the 'specialists' who carry out the marketmaking function equivalent to that of our jobbers in London, have more capital or are more willing to take a risk, or both. However, not to be unfair to the jobbers, it may be that their tactics are the product of a thinness in the market which in turn is a reflection of the institutionalisation of British equity shareholding, to which we have referred before in this column. There is a tendency for institutions, pension funds, insurance companies and the like, not to sell stock at all in the kind of conditions through which we have just been passing. They just sit tight with what they have got, their most active policy being to sit on cash and refrain from commiting new money to the market. They don't sell; they just don't buy either. So with them out of the market, it is left to the few private investors to make the running. There is no doubt that the unit trusts were sellers in response to the public selling units a few weeks ago. This provided some volume and probably was responsible for at least part of the actual fall in prices. But so far as real volume was concerned, that was it.
The question now is to what extent this character of 'thinness' in the London market will impact itself upon the performance. It could be, for instance, that a second wave of weakness in prices reduces the level to, say, around 400 on the Financial Times 30-Share Index. The snag is that the market could reach that level on pretty small volume. If it did (and quite a few people think it likely that it will do so), will it mean that the whole new bear market will have completed its movement within a few short months? Or would it be the case that many potential sellers, frustrated by the fact that they couldn't sell effectively into a market which was so thin, will gradually unload during 1982, thereby keeping prices at a depressed level?
These are questions which are of considerable interest to people in the market. They compare recent movements with the charts of earlier bear markets in the Sixties and the Fifties and, indeed, before the war. But, the fact is they may not be comparing like with like. We are in a sense in new uncharted territory in that the nature of the UK market has very much changed these past ten years. Wall Street however remains very much the same as it always was. Indeed, its volume has hardly ever been healthier. It is the reverse of the sticky London scene. It will be interesting to see which animal, the tortoise or the hare, gets to the bottom of this bear phase first.
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