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Friday, January 20, 2006

Irrational Lack Of Exuberance?

At first sight this news appears to be unimportant, trivial even:

Fund companies and financial advisers on Thursday warned of an atmosphere of panic and hysteria as a third German open-ended property fund was closed following a run of withdrawals. KanAm, a Munich-based asset manager which on Tuesday froze its US fund after heavy outflows, said on Thursday it had been forced to close its core €3.2bn global Grundinvest fund after €700m of withdrawals in 24 hours.

Of course our financial markets are deep enough, and sophistocated enough to handle this sort of thing without blinking. But then go back to this news earlier in the week:

Japanese stocks plunged on Wednesday after the Tokyo Stock Exchange announced that it would suspend trading of all stocks because volumes were too high.

People do seem to be nervous all of a sudden. Add to this the fact that in Japan and Germany the 'rosy sustained recovery story' has meant that funds and share prices are considerably over extended, and of course, we all should at the very least be attentively taking note.

Which is why I found this article from the FTs David Turner in Tokyo so interesting:

Japan's irrational pessimism suggests need for reflection

Many observers see this week's plunge in Japanese stocks as a case of irrational exuberance brought to a halt by irrational pessimism.

The fall appeared to most people to have little to do with fundamentals, but rather started to feed upon itself, as retail investors in particular raced to sell before their comrades could send prices down even further.

Most analysts still find many reasons to be cheerful about the Japanese market when they look at fundamentals.....

Most analysts agree with this benign assessment - up to a point....

Many analysts think the market fell for an irrational reason, but that there was a high risk of correction given the recent gains......

If such meteoric rises are built on thin air, then there is not much to stop a fall back down to earth. Mr Mohr says: "In an environment where there's not a balanced discussion of return and risk, a small problem can sometimes have a larger impact."

There are other reasons for concern. Mr Mohr (Patrick Mohr, strategist at Nikko Citigroup) thinks the "beautiful environment" which Japan has enjoyed lately, with a weak yen and continuing signs of Japan's economic recovery, is being sullied by a combination of clouds. These include recent yen strength and worries over the disruption of oil supplies from Iran and Nigeria.

So it's eyes wide open everyone, and caveat emptor I think.