The Comme Si, Comme Sa Market : Surviving In The New Paradigm



Quite simply, we have been in a bull market, which is dead (long live bull…!!!) The limited space allotted to me in this magazine does not allow me to prove this with facts, but I would point to the technical charts, with a sharp tooth at the end, to rest any arguments about that.

Declaimer: This article was written in June 2008, and some of the data points may be outdated.
The  Cost of Carrying Dollar and Japanese Yen

Just one little caveat before we proceed. The cost of carrying Dollar-funded positions is fast going to zero; and the cost of carrying Japanese Yen (JPY)- funded positions, could be negative. That is, you could borrow in JPY today at 2%, and pay 102 Yen to get a Dollar. A year later, you can have changed to Dollars at Rs.40, get back almost the same Dollar, and find yourself getting 110-115 Yen for the said Dollar. Since you only pay 2 Yen as interest, the balance would be profit. That is what I mean by negative interest.

Some smart people might be reading this article, and choose to do just what I have postulated above. If they buy the right Indian stocks, i.e. that did not run up during the recent bull run, or come out with IPOs, they might make a lot of money. Which stocks?! Ah, you will need to pay me some for that, what?!

To finish first, first, you have to finish. I have long waited for this big spike downward, to start discussions on ‘what next’. Even as people are veering around to the consensus view that this is the start of a bear market, I want to stand apart (as usual) and point out just how it’s going to be ‘different’ this time.

I just don’t have enough space to do it all in one breath.

Lay investors tend to think of markets in terms of bull and bear phases. Usually, this implies sharply rising or falling markets. In actual practice, there is a third, widely prevalent category which I will call the range-bound market.

Bull Market

Bull markets happen either when there is a steep earnings upmove, or, more likely, there is a sharp rerating of valuations. While earnings across an economy rarely grow steeply, except in commodity economies like Chile, Kazakhstan, or South Africa, in most broader economies, a bull cycle is triggered by a drop in the cost of capital and an increase in the supply of funds to a market. The source of such sharp incremental supply (of funds) may be domestic savings, or international, but bull markets are usually started by what is a monetary phenomenon.

Bear markets, on the other hand, are usually triggered by bubble collapses, which convert euphoria into a climate of fear, with large paper losses all around. And actual bankruptcies in the over-exuberant retail day trading population. This reduces the velocity of money, market liquidity drops dramatically and conservatism sets in.

Then comes a long period of ‘readjustment’. This is the grey area, which is usually misclassified by laymen as belonging to one or the other of the previous 2 classifications: either doubtful ‘bull’ or doubtful ‘bear’.  This is the range-bound market, what I call the comme si, comme sa market. During this period, there is high volatility as Mr. Market tries to make up his mind, moving from bouts of mild euphoria to cautious optimism to down-in-the-dumps and back again. This is the period you are seeing now. If you want to know where I am just now, I would think the middle (cautious optimism) just about describes it.

Just for the record, we are NOT in a classical bull market now, so let us set that debate at rest. With rising inflation, the outlook for interest rates cannot be bullish. So, like I have been saying for a long time, Real Estate and other denizens of the bull should be RIP!

The difficult debate is about the bear market. We now hear numbers like 9000 as a forecast for the Sensex, which somehow tells that maybe now, that will not be seen (just because people have started talking about it). We are seeing a PE contraction, but it is still not clear that we are also going to see an earnings contraction, market-wide, at least. That is where the confusion lies, which makes it a stock picker’s (and volatility trader’s) paradise. You get to pick great multi-baggers with limited downside. Even as the cost of capital has risen, the cost of a mistake is dropping very fast.

History tells us that these (range-bound) markets make up almost 60% of the total time axis, with classical bull markets making up about 25% of total time, and bear markets making up the rest. However, since such markets are characterized by great Volatility, that is synonymous with Risk. That is why these periods leave the average investor stone cold, either asleep at the wheel or actively exiting the markets.

The ability to trade your portfolio average down to the market lows demands two special forbearances: one, that you were not part of the excesses of the bull market (see my column of Dec 2006), which would leave you alive and still kicking around in today’s chaos. So, if you were into large Real Estate cos or the power IPOs, I am not addressing you. Two, how much cash outside the market do you have just now, as a percentage of your Net Worth? Start nibbling steadily, and make the market pay for your book losses from now on. I would think that 50% of the excess is already bled and a trader who puts in 1% of his Net Worth with each 1% drop in the market cannot go wrong.

There are statistical techniques to ensure that your portfolio holding cost tracks the bottoms of the market, with a similar trajectory. These techniques do not maximize profits, but they do ensure that you cannot lose money in a statistically significant manner. If you operate to outperform a stagnant market, redeploying your profits into your portfolio to wait for the inevitable upmove, you will not do too badly. You will, however, make some opportunity losses as the market turns up for a bull run. The attitude you should keep is another of the forbearance: that you do NOT seek to MAXIMISE profits, but merely to beat the cost of capital.

If you are right in your assumptions about the range-bound market, you will emerge from this market with earnings in the form of stock, and a larger portfolio to ride the next bull market, whenever it happens. If you teach yourself to handle this well, you will stop celebrating even bull markets. Just develop a ‘payback mentality’ that focuses on retrieving cash from the market, without increasing your holdings till you have recouped the book losses on your portfolio.

This is part art and part science

This is part art and part science. Intelligent investors may write in to take help in learning more about stock selection, portfolio construction, and ‘beta monitoring’, i.e. the monitoring of your portfolio holding cost against the market bottoms and tracking the relative movement of your portfolio against the market averages. The major rules are the forbearances again: DON’T maximize gains, optimize return expectations, reinvest back into the market, and save, save, save…!


Nifty started from1/01/1994 
30% trading rule valid upto30/07/19992036
Then again from 26/03/2001 to10/09/2003898
Upto 10/06/2008 5274

Conclusion: over the last 14.5 years, if I had operated with a trading rule for the Nifty with a 30% VaR, I would have been right 55.63% of the time. There would have been Opportunity Losses from 2/07/1999 to 22/2/2000 (235 days) and again from 4/08/2003 to date, i.e., 10/06/2003 (1772 days: total 2007 days, 38% of total 5274 days) and Cash Losses from 22/2/2000 to 16/03/2001 (388 days, 7.35% of total 5274 days). My prognosis is that this cycle will repeat the same ratio.



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