Zbigniew Piekarski warns investors about believing the reasoned arguments and explanations of economists and market analysts.

On April 21, The Conference Board announced that the index of leading indicators in the United States decreased 0.2% in March as half of the components that make up the index declined. The weakness in the leading indicators index is a signal that growth will remain sluggish going forward. The result was worse than the consensus estimate of -0.1% and was the second straight month of negative readings. The index has been flat over the last six months, only advancing 0.2% since last September.

The diffusion index, which is essentially the ratio of components that have improved vs. the components that have deteriorated over the last six months, stands at 45.0. A reading of less than 50.0 indicates that a larger proportion of components have weakened over the past six months.

CNBC had an economist from a bank in New York discuss these numbers after the release. He opined that these numbers were not indicative of the future and were more reflective of past conditions, such as the Iraq war and other unusual problems. He thought that the numbers coming out at the end of the week on first quarter GDP could be up as much as 3%, and would be more indicative of the future course of the American economy.

This is the standard "displacement activity" of the Jabberwockies and Jubjub birds. If the data does not support their preconceptions, then it is ignored due to "one-off factors." If it suits, then it becomes supporting evidence of their "reasoned" arguments.

The U.S. markets seemed to agree with the pundit's prognosis as they raced ahead on April 22. The stated motivation behind this movement was the rumor that Saddam had been captured. On April 23, they peaked, and started to decline the next day.

On April 25, the first-quarter GDP figures were released and fell far short of most analysts' expectations, increasing by only 1.6% against a consensus of 2.3%. A few hours after the figures were released, a "technical Jabberwocky" discounted the "correction" that was in evidence by the reasoned argument that "this bear market is at an end; for it has lasted longer than most other bear markets in recent history."

He supported his convictions that the bull market was around the corner by saying that more than 60% of the S&P 500 companies beat expectations in this reporting season and that this boded well for the future once the uncertainty of the "Iraqi peace" was behind us. His one qualification was that if SARS (Severe Acute Respiratory Syndrome) entered the U.S., then all bets were off.

He failed to mention that the estimates were revised lower by the very companies that managed to beat their own lowered forecasts. They did it by throwing budding consumers out of work. He also failed to mention that 2001 was the year of interest rate cuts; 2002 was the year of the fiscal stimulus; and that in 2003 there is a lack of ammunition in order to stimulate the economy.

As the attention span of the average "investor" is only a few weeks at best, the repeated "rhetoric" of the public explanation of what is happening on the markets must always compress the reasons into something that is happening NOW. This is because the flow of money from the private punter must continue in order to keep the financial institutions afloat and the Jabberwockies in their jobs.

If I told you that the average bear market lasts 13 years or so, you would not invest today. On the other hand, if I kept saying that the stock market would improve if the economy improved and that we have reached the bottom and the worst is behind us, then you would carry on investing. I will then continue to explain away any further "downside" as due to "one-off" factors which are totally unexpected (like SARS), and that the economies will rebound once these are out of the way.

The financial institutions and their minions may not be able to control the peaks and troughs of the markets, but they can control investor psychology and, provided they all sing from the same hymn sheet, they will keep the punters' money flowing in. The advice to invest in gold, property, hedge funds and specific sectors only occurs once the trough has passed and once the performance statistics reflect that the markets have produced a positive return in the past.

The average punter has been conditioned to accept three basic ideas: that one must buy and hold "for the long term;" that "one cannot time the market;" and finally that "we know best." Provided those ideas hold, then the real purpose of the markets is fulfilled - that of providing the largest gains to the fewest holders.

The equity market is, and has always been, a very efficient mechanism for transferring wealth from the many to the few while at the same time providing a handsome income for the Jabberwockies (commentators and analysts), Jubjub birds (economists and academe) and Bandersnatchers (salesmen). And long may it continue to be so.

On the WSE: There is a saying on the London Stock Exchange: "Sell in May and go away; come back on St. Ledger Day" (a horse race held in early September in Doncaster, England, since 1775). The WSE is clearly reflecting the current state of the Polish psyche, which is being affected by two Neverending Stories. Will the Lords of Rywin unmask the real intention of the Hobbits? Will there be a sequel to "Jestem jaki jestem?" The continued rise of the TechWIG confirms that both are a load of hot air that will soon deflate but will never be resolved to anyone's satisfaction. The WIG and the WIG-20 are predicting that "Bylem, jaki bylem" is in the planning stage.

Zbigniew Piekarski is a portfolio manager based in Warsaw. He can be e-mailed at zbigp@bipnet.pl