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Investment view

Capitulation is a word that is receiving a significant airing in financial circles just now. According to the Oxford English Dictionary, it means, among other things, the action of surrendering on stipulated terms. If anyone knows what the stipulated terms are for capitulation in this market, I would be grateful if they would share that information with me. The last few weeks have been far from pleasant for most investment professionals. Giving the “C” word such a high profile is an indication of the desperation being felt in many circles.

You know there is a problem in this industry when share performance elbows aside the war against terror and shenanigans among our leaders to secure pole position in the news. Unfortunately, the poor performance of equities has been sharing top billing with more financial stories than I can ever recall coming together at the same time. The Sandler review, the growing pension problem and yet more US accounting scandals have made this industry singularly newsworthy. As the saying goes, no news is good news. It is bad news that hits the headlines and bad news there is aplenty at present.

According to those theorists who endeavour to plot the likely direction of markets through the use of charts, the average bear market delivers a fall of rather more than 35 per cent. The decline in headline indices on both sides of the Atlantic has certainly exceeded the average while in more specialised sectors, such as technology, the bear market has been more savage. Perhaps of even greater significance is the fact that this decline shows no sign of ending. This particular down cycle looks like setting a new standard for longevity.

Yet some assets are positively flourishing as a consequence of the discomfiture of equities. Bonds are a case in point, driven in no small measure by renewed demand from pension funds and insurance companies. Hedge funds, too, are enjoying a popularity that may yet end in tears. Not only are conventional managers abandoning long-only funds (market speak for buying and holding) to embrace hedge funds, despite lacking experience in running these highly charged vehicles, but the public are beginning to view this as an area of salvation as conventional funds continue to erode their wealth.

But it is in the art market that spectacular new records are being set as the seriously wealthy find alternative ways of putting aside money for the future. The news that Rubens&#39 The Massacre of the Innocents fetched nearly £50m demonstrates that there is still cash around in these difficult times. It appears that paintings nearly always rise in value when financial assets are having a tough time. Indeed, this particular sale topped a record last achieved in those difficult days, more than a decade ago, when markets were still suffering from the hangover of Black Monday.

But to return to capitulation, popular wisdom has it that this takes place when the last bull finally gives up on the equity market and sells any remaining equities. Capitulation is thus the time to buy. Unfortunately, it is not signalled any better than any other turning point in the market. There are plenty of analysts who will tell you that the signs remain gloomy. Capitulate? They have surrendered already.

Many quantitative tools have been built around the subject of capitulation. Credit Suisse First Boston has a Tactical Capitulation Indicator and uses its own Global Risk Appetite index to decide when the deed has taken place. It seems there is no end to man&#39s ingenuity when it comes to trying to determine which way the market will go. Yet the solution is simple. We need more buyers. The market is dominated by sellers who are using market rallies to lighten their load further. Capitulation? It feels more like a slow surrender to me. Unfortunately, I do not know the terms on which it is taking place.


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