Macro Analysis and Market Application

Wednesday, August 01, 2007 | 09:02 AM

One of the odder things about doing whatever it is I do for a living is the multi-stage process it requires. It can be at times challenging and frustrating and fascinating and confounding.

The first stage involves attempting to suss out what is really going on in the world. What are the macro conditions like? Inflation, employment, growth, retail sales all add up to an environment of differing interest rates and corporate earnings. That leads to market action that is made up of trend, momentum, internals (a/d, volume, etc.). These in turn lead into a complex interplay of psychology, where sentiment is at various turns rational and at other times irrational and still other times extremely irrational.

From this analysis, we then need to identify what is true, but not yet recognized, and what is false but widely believed.

Ironically, all of the above is the easy part.

The harder part involves taking that analysis, and figuring out how and when to apply it to the markets: What asset class to own (equity, commodities, bonds, cash); what sectors within equities to concentrate; which stock within these chosen sectors to own, when to rebalance portfolios.

And that is before we even start to discuss the timing element of when the analysis will finally be reflected in the markets.


The challenging and fascinating part of this is the intellectual challenges involved. Why is this conounding and frustrating? Its mostly due to Algebra.

Long ago, thanks to my math and science background, I have developed a focus on not the outcome, but the process. That was how all of those math classes got graded: You needed to show the formulas  that led to your conclusions. Anyone could get the correct answer through a random but not reproducible approach. The goal of calculus was to teach the methodology, so that you increased the probabilities you would end up with the correct answer in the future.

Markets don't quite work that way.

Consider the long list of folks who have been right in their analysis, but wrong in the timing of the market reaction to this; Then think about some of the weaker bullish arguments -- there have been an enormous run of absurd arguments, false theories, ridiculous analyses. Regardless, these get overlooked by many as the markets continued upwards. Right answer, wrong process.

I never hear the Bulls argue "Markets go up most of the time, so just buy stocks and tough it out through the weak periods." I recognize the truth of that statement, but I also recognize it makes for a lousy marketing campaign. So instead, we get what passes for analyses like The Fed Model (flawed), Money Flow (spotty record), Random Walk (junk science), Earnings emphasis (non-correlated). 

Many of these strategies have been unequivocally proven wrong -- but because their ultimate conclusion was to buy, the erroneous process gets overlooked.

Until now . . .

Wednesday, August 01, 2007 | 09:02 AM | Permalink | Comments (42) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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Tracked on Oct 12, 2007 10:24:17 PM


It'll be fun to revisit this post of yours in a couple of months.


BR: I believe what I have written above about the process versus the outcome is true -- regardless of whether markets are up 1,000 points, down 1,000 points or at the same levels 6 months from now.

You obviously missed the main point of the discussion.

Regardless, I bet you are an outcome kinda guy -- so any discussion on process simply doesn't resonate with you.

Posted by: Bill aka NO DooDahs! | Aug 1, 2007 9:15:34 AM

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