Oct

3

 Why is it that when oil rises from $60 to $75 per barrel, interest rates from 4.5% to 5.5%, and gold from $500 to $700, 99% of the commentary is how bearish and 'Steve Roach like', this is for the stock market and real estate? Also, how come the Fed has 'no choice but to tighten', even though when the reverse happens, (because of the effects pointed out in our review of the bestselling travel book, and most recently regarding the first stop being the best), there is supreme quiet about things being bullish.

Andrew Moe comments:

The authors of these bearish articles have absolutely no idea what the forward direction of the market will be. Instead, they are most interested in getting eyeballs to their pages and this is done via sensationalized stories of imminent demise.

As quants, we are already trying to drive our car by looking in the rear view mirror. Introducing news is like putting a blindfold on and trying to drive by listening to a backseat full of drivers who are each looking in a mirror of their own — many of which do not even point to the road behind.

"Watch out for that grain silo"
"Don't hit the canyon"
"A herd of cows is in the way"
"Wow, I look good today"

GM Nigel Davies adds:

One has to ask: what is the motivation of the bears? In most cases they have no positions in the market, instead deriving their income from their views.

What will they choose to write about? Well, nothing attracts attention quite like disaster (car crash, plane crash, market crash), probably because it is an affirmation for those who never take risk. The market may go up a million percent without them, but they get to delight in a 5% drop, or at least salivate over the thought of it.

J. T. Holley offers:

Those who disregard paths of least resistance, Gresham's Law, the Law of Ever Changing Cycles, etc, and cling to "black and white" fixed trading systems seem to always have a sense of permanency to the direction of markets. The exception to this is when everything is running its natural course and they "think" they will try being a contrarian, just at the wrong time. DailySpeculations, more importantly than anything else, has a spirit of teaching and espousing "seeing things as they are" and utilizing tools to do so. Other authors do not do such, as it is easier for them to attach their feelings and decisions to those things that are in the direction of loss or some voodoo formula.

When oil goes from $20 to $40 to $60 to $80 it is easy to not do any math on supply and demand and project it to $400 a barrel, and then have fiction fill in the lines. With the markets it is so easy to be a bearish contrarian and cherry pick evidence from days of yore, and to do this at the wrong time when the odds just do not have it in the stack of cards, and the game has changed. I have always wanted to ask someone what he would do if he timed a 60-90% downside move and shorted everything "under the sun" (no explosion) and also bought every single available put option while it was happening? "So you won, everyone is broke, the banks cannot pay you because of their own runs at the doors, pestilence, vermin, and gloom is the theme and you are going to tell me you have a smile on your face?"

It is the sense of permanency that they attack, and their disregard for change.

Scott Brooks mentions:

Three things sell best to the masses; envy, greed and fear. Therefore, if you want to sell your writings to publishers, you must employ one of these methods.

As I sit around at holidays listening to my relatives (who have a very blue collar mentality) talking, I have to bite my tongue to keep silent (risk being murdered by my wife if I start another debate with the mentally unarmed) listening to the sky is falling mentality. These people love fear.

I also listen to them talking about greed. Their new get rich quick schemes or poorly thought out business opportunities. Or complaining about all the money that is being made by someone who does not deserve that much money ("no one is worth that much money" … as I sit there and smile and hold my tongue).

So the masses will greedily chase returns from the investments that they wish they had purchased last year (as is probably true of the highly intelligent "accredited investor"). They will over-react to anyone telling them the sky is falling and run away from what they should be embracing, or embrace what the should be running away from. And they will elect politicians that will stick it to those that "have more than they deserve".

That's what the writers like Abelprechursaskyisfallingallthetime are selling too; fear, greed, envy. And it works (well, for them to earn a paycheck, at least!)

Thomas Miller contributes:

When the commentators get particularly bearish, it seems no one mentions the incredible growth and upward trend in corporate earnings, which are still growing nicely. To test this I suppose one would have to count and track the number of bearish articles in numerous publications and "experts" on CNBC and compare that to market actions over time. It would really be another sentiment indicator. Probably time consuming, but my guess is that it would be of value.

Jeff Sasmor adds:

I would submit that stocks are products sold to various types of customers. Like autos, so your stockbroker is actually a new/used car salesman. I am not being flippant.

My attitude is based on being someone having gone through the IPO and road-show process as a company officer and becoming quite friendly with one of the underwriters.

Sushil Kedia comments:

Behavioural Finance is a website with a long list of plausible explanations for the Permabears maintaining their stoic silence now, but mounting the rooftops the moment their original framework appears on the markets' horizons. Some of the ones that caught my attention immediately were:

  1. Cognitive Dissonance
  2. Communal Reinforcement
  3. Illusion of Knowledge
  4. Curse of Knowledge
  5. Selective Thinking
  6. Self Deception
  7. Framing

Ronald Weber adds:

Following Mr Sushil Kedia's comments on behavioral finance, may I mention the Investment Office website which contains (among others) information on behavioral finance on the left side of the navigation, under "market characteristics" (not yet optimized for Apple!).


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