Zeus and his scaleThe market is infinitely fascinating and various. Except for my leaves of absence I have traded every day for 32 years about 8000 days in a row straight. But I can't imagine what happened at 3:59pm EST when the market went up 1/2% in a second to NYSE close. The close the last day of the month is always a heroic one. Apparently all the pessimists, usually the useful idiot who thinks that because the politician in charge isn't doing things their way, the market will go down. So they sell and sell and sell and market their positions up. But today it was counterbalanced by the behavioral finance biases with the terrible close of August 30 staring in the face. Zeus took time off from romance to weight the two forces on his balance scale before making his terrible decision as to Hector or Achillles bull or bear but how?

Rocky Humbert writes:

I recall a similarly bizarre closing spike on the day of the exact March 2009 low. The memory is ingrained because I left some MOC buy orders in the stock market (as I was en route to meet The Chair for dinner,) and my mild irritation by those "bad fills" is, in hindsight, laughable.

The primary similarities between then and now is the sub-20% AAII bullish sentiment reading, and the widespread acceptance that the USA is in a state of permanent non-prosperity. The primary difference between then and now is that corporate bond yields are several hundred basis points lower, and the President's approval rating is rock-bottom– with mid-term elections just around the corner. 

Kim Zussman writes:

Quote: The primary difference between then and now is that corporate bond yields are several hundred basis points lower, and the President's approval rating is rock-bottom — with mid-term elections just around the corner. EndQuote

Another possible difference is SPX 1-year change:

3/08-3/09 -33%
9/09-9/10 +8%

Rocky Humbert replies:

Kim's entirely correct comment may be an illustration of the cognitive bias known as "Investment Anchoring." See entry on behavioral finance.

Is there any reason to argue that stocks are a better investment only because they've declined 33% over a ONE-year period — versus arguing that they're a better investment because they've decline 31% over a THREE-year period (which they have)?

It's this sort of price anchoring that got people bullish on Intel at 40 (down from 70) in 2000, but bearish on Intel at 18 (up from 12) in 2010. Both statements ignore the intrinsic value of the business — of which a share represents, and eventually reflects.

Ralph Vince comments:

C'mon Rocky!

You know all-too-well it (equities) reflects a big bag of smoke! Just like Real Estate in a Post-Kelo America, there IS no intrinsic value to what pirates control.(Har har har!)

It's the big bags of smoke…..but there are a very small and finite bags of different colored smoke we can put our monopoly play money on (real estate, stocks, fixed income, etc), and that means that most of the bags will always have some of this ocean of monopoly money on them.

Rocky Humbert retorts:

I believe you just gave a working definition of speculation. Which is a distinctly different activity from investment. Both activities provide opportunities for profit (and loss).

If you are (un)willing to sell me the perpetual royalty stream from your books at either 2x or 25x last years' cash flow, I believe that I will have proven my point.

Kim Zussman writes:

This is the technical vs fundamental analysis debate: Are future returns predicted (better or at all) by past price movements, or metrics of the business and economy?

Ex post they are often predictive, but it is hard to show which is worse, ex ante.

Can it be shown that fundamentals best predict a company's earnings stream into perpetuity, and that this prediction is also accurate in long-term stock price forecasting?

Ken Drees writes:

Years ago in econ freshman college my professor used too talk about hot dogs and hot dog buns as complimentary goods. He also noted that hot dogs came in packs of ten and that the smart bun people bagged buns in packs of 8 so you would need two packs of buns–and that the other unused buns would eventually go stale and be tossed, beefing up overall bun sales. If we now have 7 pack hotdogs HN brand (I did notice this recently, due to a common food tactic of smaller quantity at same price (tuna 5oz instead of 6oz) and 99 cent chip bags containing only 2 ounces of chips–years ago a 99cent bag could be shared)–could bun people be far behind with a 6 count bun bag? 

Vince Fulco writes:

In many ways, the public investor class has been marginalized. Their companies are:

1) run by a professional mgmt team which often has little incentive structure to pursue known shareholder friendly strategies. Enhancements to pay packages for the C-suite and employees, in the form of options or restricted stock awards, can just be reset in times of company, industry or economic troubles lowering the bar until it can be stepped over. When managers fail, they still walk away with compensation that would make a pro baseball player blush.

2) Represented by a board of directors who are protected mightily by directors and officers insurance, beholden to the mgmt team through cross-board relationships and whose compensation has no bearing on their duties or outcomes.

3) manipulated by savvy specs who can construct structured products to destabilize the nature of the more senior securities in the capitalization structure. Unimpeded by common sense regulations, the (previous) ability to buy many times more CDS than a company had debt outstanding and then attempt to wreck it for the sake of an improved position in bankruptcy court is reprehensible.

Where are the owners' yachts?


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