Macro vs. Detailed Perspective
I'm a macro guy; that means I try to see the world from the 40,000 foot view. I look for big themes, long arcs, threads that run throughout the tapestry of the capital markets -- trying not to get too caught up by the day-to-day noise.
That's my biggest biggest peeve about financial journalism -- they do a rather poor job separating the noise from the signal. While the day-to-day action matters very little in the grand scheme of things, its often fodder for the tv channels that have an inordinate amount of air time to fill.
This doesn't mean the details matter any less; its just that some shorter term observations just hint at the bigger picture. For example, this week's Barron's Trader column observes:
"In recent weeks, crude and stocks have rallied in tandem, with bulls interpreting rising petroleum prices as yet another sign of robust global growth. But the two parted ways last week: As crude and gasoline both rallied for the eighth time in nine weeks, stocks pulled back hard to register their second decline in six weeks, amid increasing nervousness that rising energy costs will cut into consumers' already tight wallets."
Now, I do not disagree with anything in that statement. Its an accurate assessment of what happened this week-- but I simply believe it understates a bigger theme that is now occurring in the markets.
After many months and months of denial, there is a slow recognition of the following:
1. The Economy is slowing -- possibly dramatcially
2. Inflation is problematic --a nd getting worse
3. The consumer is being hurt by #s 1 and 2
4. The Fed may not be able to save the day -- at least in terms of a recession
Another way to contextualize this is to consider what thought sets the bulk of investors -- both pro and am -- believe may be least worthy of replacement with a different set of beliefs. . Its been my view that these market tremors are the process by which one belief system gets replaced with another.
What beliefs? Consider each of these investment postures and the belief systems they embody:
Bull into Bear
Long into Short
Cheerleader into Realist
Possibly False into likely True
Stocks into Cash
Regardless of your personal perspectives or investment posture, its worth considering what belief sets you may be swapping. Its a subconscious process, one that you may not even be aware of.
What beliefs are you reconsidering?
>
Source:
Stocks Fall Hard As Oil Hits New Highs
KOPIN TAN
Barron's May 26,2 008
http://online.barrons.com/article/SB121158245045518545.html
Saturday, May 24, 2008 | 10:15 AM | Permalink
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All judgements of truth are relative to the amount of information you have.
If I may give my favorite quote from Donald Rumsfeld, "Donald Rumsfeld
...as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know."
I know a lot therefore I know that there is a lot I don't know.
Which is why it's often so hard to know whether to be a bull or bear. Today, I'm a bear.
Posted by: Rock | May 24, 2008 10:56:51 AM
BR: "After months of denial, the is a slow recognition of the following: 1. The Economy is slowing"
First, nobody was denying "the economy is slowing". (denying Financial Armageddon but not slowing economy)
Second, between oil at $133 and ultra pessimistic Fed minutes (I think they had to be gloomy about the economy to cover their backs for bringing interest rates down) released this week (never mind that the meeting was before last two back-to-back positive leading indicators) and Buffet traveling throughout Europe spreading gloom and doom about the economy and USD, I am not surprised the market sentiment has changed so fast this week.
Third, 33-50% retracements are normal after 150 points run (from 1276 to 1426 S&P cash closing price)
33% retracement (50 points) will take us to 1376 (we are near this level and could see some buying)
50% retracement (75 points) will take us to 1350
The pullback has been on extremely low volume (low volume pre-holiday week).
I think we will regain this week's loses next week. Again, this is a buying opportunity.
Posted by: Crispy | May 24, 2008 10:59:30 AM
Thank you. It's helpful to get a measure of how you think.
Posted by: alnval | May 24, 2008 11:05:15 AM
Barry,
In regard to your stated transition in investment posture...I'm already there and have been for some time now.
Honestly, I am so pessimistic right now, while at the same time being realistic of the effects from numerous events being played out..., that some time within the next few months or years, we will may suffer a financial accident. That accident may turn out to be the investment opportunity of our lifetime.
So having said that, am I a bull or a bear? As stated many times before...I am a realist and that's the way I see it at the moment. I'm thinking patience and John Templeton's statement of "blood in the streets". These two tenets will make you a fortune if you heed their advice.
Lastly, oil will break soon. It is now at the point of changing behavior across this country. The next time gasoline demand is reported, it will be way down. (It won't make it to Labor Day.) Be patient and keep your powder dry. There will be rough sledding ahead, remembering oil is but one of the major problems we are facing right now. Don't be early and don't try to be a hero.
Posted by: BG | May 24, 2008 11:17:27 AM
Crispy --
Nobody was denying the economy was slowing?
Until it was staring them in the face, the usual cheerleaders refused to acknowledge any slowdown, and when they finally did, it was claimed the market had fully discounted it and we were now ready to rally on the expected recovery 6 months hence.
Its only the past month or so that reality has slapped these people across the face.
Alnval --
I crank out 5,000-10,000 words per week around here. If that didn't give you any hint as to what I think, I sincerely doubt one post will . . .
Posted by: Barry Ritholtz | May 24, 2008 11:18:19 AM
I wonder how useful you would find reading Thomas Kuhn's Structure of Scientific Revolutions? (if you have not already). Are there any similarities in how scientists change their thinking and how traders shift? Scientists change paradigms once a lifetime at most. It seems in your business changing one's views on what drives the world is more common. Of course there are differences; scientists don"t oscillate between classical and quantum physics as traders might between bullish and bearish.
Given Kuhn's influence I suppose there is a lot of economic literature answering my question, but I would be interested in the viewpoint of a trader, not a scholar.
Posted by: rhodium | May 24, 2008 11:28:26 AM
My personal belief is that the Stock Market has been holding out for some other form of 'Bail-Out' for the U.S. consumer, whether it be in the form of:
1) Rule changes (close "swap loophole"--which speculators use to roll over monthly futures contracts, allowing them to "effectively circumvent position limits--see Mark Masters testimony before U.S. Senate May 20), or enforcement of existing regulations (CEA), at the CFTC to limit the amounts of SWAPS, Options, Futures Contracts that Pension Funds/Index Funds/Hedge Funds can purchase in the commodities Markets, to (hopefully-- but only temporarily-- in my opinion) lower the price of Oil...
See discussions here:
http://hsgac.senate.gov/public/index.cfm?Fuseaction=Hearings.Detail&HearingID=3fe95f08-0b7d-45d0-94ea-4c4346c353de ..."Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation?"
And Here:
http://www.financialsense.com/editorials/engdahl/2008/0502.html
2) As reported in the Financial Times --Relax accounting rules on valuing highly illiquid assets using "Historical" rather than "Market" prices--Banks would apparently be freed from the requirement to hold them to maturity and would be able to sell them after two years, thereby avoiding oftten "dramatic" rightdowns-- see Financial TImes "Banks call for easing of Rules" Thursday May 22.
3) I think this current Rally has been pricing in the effects of the 150+ billion Stimulus Plan and any Home Foreclosure prevention Relief from the Senate version of the 300+ Billion 'HomeOwner Rescue' bill in which some 500,000 strapped borrowers would get cheaper, government-backed mortgages, backed by the profits of Fannie and Freddie-- instead of the U.S. Taxpayer...
It seems to me that with all of the Problems facing the U.S. consumer-- the continued deterioration in Home Prices, continued increases in Food and Energy prices, continued pressure upon the Dollar (what is the current rate of MZM growth??? ... see St. Louis Fed) that this Market should be a helluva a lot lower.
The reason we continue to see this Managed-Program Trading/ type of SellOff, in my view, is that this Market is continuing to Hold out Hope for some other form of Bail-Out thrown it's way.
Posted by: John | May 24, 2008 11:30:00 AM
"What beliefs are you reconsidering?"
The glass is 1/13th full into the glass is 12/13th(s) empty...?
Eco
Posted by: ECONOMISTA NON GRATA | May 24, 2008 11:39:56 AM
John,
All very good points.
Two additional thoughts I have are (1) once the demand for oil starts to go down in this country (at least temporarily) will the global demand continue to increase keeping upward pressure on the price of oil even though demand here is reduced ~a scary thought and (2) if the Fed uses up most of its Balance Sheet on the credit crisis, will it still have enough left to fund the PPT on the days (or string of days) when the market picks up momentum on the down side.
Posted by: BG | May 24, 2008 11:45:12 AM
***What beliefs are you reconsidering?***
I see cliff risk everywhere (consumers/financials/geopolitical) and waiting for "cliff risk" to be the next overused social meme a la 'tipping point'
If energy sells off too hard, is that a sign of credit-delevering-induced deflation?
Why is volatility so low? (a bad sign if things turn bad...as it'll mean any decline will be the unrelenting waterfall type)
What's with the divergence between GLD and USO? Shouldn't GLD be hitting new highs as well (unless it's 'cuz of the gold demand destruction trumping the investment demand)
Why am I reading this over memorial day weekend?
And as an aside, Pete Peterson's appearance on CNBC Fri. morning was great.....except CNBC picked the most useless 90 seconds as their highlights. Can't find the complete 20+ min appearance on the CNBC site.
Happy weekend all who are hard-core enough to read BP over this long weekend.
Posted by: random nihilistic thoughts | May 24, 2008 12:00:10 PM
I think G-7 should fight OPEC to bring oil prices down.
My plan:
1. Use $200-300 billion to short crude futures
2. Release oil from SPR before Wednesday inventory data (to get a huge spike in inventories and initiate panic selling hysteria)
3. Chase the speculators down to $80 per barrel by continuously shorting the futures
4. Keep releasing oil from SPR to have build-up in inventories data on Wednesdays
5. Gradually cover short positions and gradually replenish SPR at significantly lower prices during speculators selloff hysteria
6. Use profits to setup a special fund fighting speculation in the future
I guess, Paulson will go against this plan because he does not want to screw his Goldman friends speculating in oil. I say screw Paulson, his Goldman friends, and screw OPEC.
Posted by: Kung Po | May 24, 2008 12:05:56 PM
Kung Po - I was wondering on suggestions of opening the SPR; if an attack what you submitted was feasable.
Posted by: Greg0658 | May 24, 2008 12:23:45 PM
Free markets and commodities' futures.
Posted by: Chief Tomahawk | May 24, 2008 12:30:52 PM
"After many months and months of denial, there is a slow recognition of the following:
1. The Economy is slowing -- possibly dramatically
2. Inflation is problematic --and getting worse
3. The consumer is being hurt by #s 1 and 2
4. The Fed may not be able to save the day -- at least in terms of a recession"
I'm seeing a slow recognition of things that simply aren't true.:)
1. Real GDP shows a slowing economy? No. Measured by year-over-year quarterly growth, the economy isn't slowing dramatically. Measuring straight quarter-over-quarter, it's *already* slowed, past tense. Since real GDP growth has more of a tendency to mean-revert instead of continue in a trend, it's more likely that real GDP will *improve* instead of deteriorate.
2. Inflation is *not* problemmatic. CPI-U hit recent peaks of 4.3% in November, 2007 and a matching level of 4.3% in January, 2008. Now it's *lower*, at 3.9% for April, 2008. The price of *gasoline* or *oil*, specifically, may be problemmatic, but not inflation in general.
3. Consumer pain? Maybe, or maybe just enough to cause consumers to complain, which isn't the same thing. If they're really in pain, they'll vote with their feet and quit paying $3.95/gallon for gasoline, which will bring prices back down. But as long as they only gripe but take no action...
4. Fed action can't prevent recession? See #1. What recession?
My strongly-held belief that I'm seriously questioning? That the vast amount of information that's free and readily available on the Internet is empowering Everyman with high levels of understanding about the U.S. economy.
Sebastian
~~~
BR: Excellent comment -- we disagree about many of these items, but I love a reasoned argument base don data and facts.
I tip my hat to you, sir . . .
Posted by: Sebastian | May 24, 2008 12:54:42 PM
the question at hand
What beliefs are you reconsidering?
not my situation but thinking others maybe considering; children are a _______
in the money constrained world; on one end they are a source for subsidies and on the other end a source for fullfillment in other ways; which that fullfillment is across the board of both spectrums as long as the subsidies dont dry up
Posted by: Greg0658 | May 24, 2008 12:55:24 PM
Interesting, but I pay attention to none of them. I learned my craft from Peter Steidlmayer of the CBOT and use his Market Profile system to trade. All trades are made from market information (price and volume at a price) only and you track them through a bell curve. I never know news and never have opinions, I just trade. I remember one of his earlier classes in which he said that markets move dramatically when the long term trader becomes a short term; guys who hold positions for years suddenly selling or buying. All this is now much harder because of world markets, but his stuff still works. I must point out here that I am the only person I know who can trade this way, not because I'm a genius but because after years of losing, his ideas turned me around. In other words he was the first person who ever made sense to me.
Posted by: Howard Veit | May 24, 2008 1:00:41 PM
Question on volume. I have been reading about more and more volume moving away from NYSE and into other markets that are less transparent. Does this goof with volume indications?
Posted by: doug champion | May 24, 2008 1:10:29 PM
Let's consider the following secular themes:
Interest rate is low:
That encourages capital spending and production boost because many low return projects becomes viable.
Sales/Inventory ratio remains low:
When production is in step with sales any further retrenchment in consumption requires very slight adjustment in production and hence very slight adjustment in employment.So vicious loop of economic weakness would be shallow at worse albeit protracted.
Corporate sector has become a fund surplu unit:
That's a huge change from decade old pattern and one bullish aspect that is not being discussed publicly, but I bet being looked at by smart money.When the prevailing sentiment of negativity lifts and business managers and consumers foresee that Armageddon is nowhere in sight it should lead to quick pick up in spending and production which should pick up in employment.
Posted by: jagmohan Swain | May 24, 2008 1:11:02 PM
It seems to me like the Perma-Bulls look for ways to rationalize any pullback in the markets. This week it was oil's fault.
The problems that are becoming more obvious by the week, are NOT regulated to oil and/or inflation.
JMHO ... Our largest problem can be pinned down to falling home prices. Something Bill Gross has pointed out. We are now in unchartered waters in, (a) we haven't seen a repricing of real estate like the current one in the modern era, and (b) the US homeowner is currently at an all-time low on the equity position LTV.
There are going to be consequences for the nonsense that was going on in housing ... we haven't seen that yet.
Posted by: Donny | May 24, 2008 2:03:19 PM
I have been firmly in the bear camp for 6 months, but see a big obstacle in the coming months. As worldwide economies slow in the coming months, oil inventories will rise and the price will likely begin to fall. This will be wrongly interpreted generally as a huge positive for the economy, and I am concerned that this will cause a powerful rally. Of course, in the end this will be a negative for stocks, but I worry about my ability to hang on to short positions.
Posted by: William Roth | May 24, 2008 2:10:25 PM
I am reconsidering my disbelief in decoupling.
Chindia may be driven by industrials and services, but Russia and Middle East are driven by commodities. Russia is now booming on the back of $70 oil ($130 a barrel has yet to be felt). So if oil does collapse, however low, it will likely still sustain Russia, not to mention Middle East. And that's a huge market, which may in turn sustain China. I'm not saying this is going to happen, but I now think this a lot more likely than before.
As for the US, I'm as gloomy as I ever was, and that's not being reconsidered.
Posted by: Abe, NYC | May 24, 2008 2:17:25 PM
What beliefs are you reconsidering?
None.
Most of my “reconsidering” occurred on or about January 8th, when the “head and shoulders” pattern (in the S&P500) was completed.
Since then, a raft of fundamental factors have confirmed my somewhat negative views on the economy and the markets. (However, I am not entirely convinced that the S&P will drop below 1200 during 2008).
Posted by: DL | May 24, 2008 2:28:08 PM
"Interest rate is low:
That encourages capital spending and production boost because many low return projects becomes viable."
I believe you are misjudging the reasoning for the rate cuts. The present series of rate cuts have not be spurred by a slowing economy but by a financial crisis - the financial crisis has caused slowing GDP growth. The low rates are to steepen the yeild curve to try to help bail out the banks.
Capital spending can only be done by those who have no need to take on debt; until the banking industry restores balance sheets there can be no quick rebound in capital spending.
The damage to the banks is massive and ongoing - it will take years to recover. We are no where near through the loss process much less the recovery stage.
Besides, what is the driving force of capital spending without demand increases?
Why borrow cheaply and build 2-bedroom huts at low margin when the consumer can buy a 6-bedroom McMansion at foreclosure aution for the same price?
Posted by: Winston Munn | May 24, 2008 2:39:50 PM
After decades of being a Mary Ann guy, I am beginning to believe that Ginger may have been vastly underappreciated.
Posted by: rob | May 24, 2008 2:44:25 PM
William -
I too have been solidly in the bear camp for months but I don't think moderating oil prices will be enough to turn around an economy where the consumer is on the ropes, home equity is tapped out, etc. The price of oil may follow GDP downward but it won't in and of itself be enough to reverse an economic slide which has been brought about by a perfect storm of events.
The question in my mind isn't whether the market goes up or down from here but whether the descent is grinding and gradual over the course of the next few months or calamitous due to an unforeseen event (collapse of BAC/Countrywide deal, perhaps? bond insurer going belly up? large bank implosion?).
Bottom line is I wouldn't give up those short positions just yet. As Barry indicates, this week may have marked a turning point in investor sentiment with many finally realizing that there will be no quick or easy way out of this recession and there's lots of pain still to come.
Posted by: drey | May 24, 2008 2:51:54 PM
