Here we see Mr. Peabody and Sherman about to crank up the hype machine for the rolling of commercial paper and adjustable rate mortgage resets.I don't know if it is "Wall Street," the media, someone else, all of the above but the market often confronts scary events that cause people to get very worried and then these scary events end up being nothing, or close to it.
Going in, these are all "different" but they never are. In the summer of 2002 there was genuine panic because CEO were going to have to certify their earnings. Woooo, that was going to be a bad one. It really turned out to be more of a bottom than a top.
Just recently we had the options expensing thing. This was going to wreak havoc with earnings, hmmmm not so much. I wrote about that one in December 2004, about six months before it was due to start. That one seemed to have zero impact.
I am not sure how many people are paying attention to the commercial paper issue or the mortgage reset issue but neither will matter anywhere near as much as some people fear.
There will be impact here and there no doubt but my hunch is that neither will derail the markets. Invariably there will be a dissenting comment on this but we have seen this movie over and over. The terror caused by the earnings certification was so huge and it was a non event.
The thing that happens with these is that we start hearing about them months ahead of time and so the market prices it in, the surprise factor disappears; who doesn't know there are a ton of mortgage resets coming?
While I am not a 100% efficient market guy these sorts of things tend to have far less bite than bark.
My post yesterday was a bit of a rant about learning how the market works to help remove emotion. Well, this sort of thing is a perfect example. The fear ahead of time is always bigger than the actual thing despite the fact that they are all different.
23 comments:
Roger, off topic, but I wasn't sure how to contact you outside of comments. Based on a lot of posts here recently regarding defense and some other articles I've run into citing that x period moving averages are the way to smooth out your ride, I did some tests (because I was skeptical). I posted the results of those tests on my blog today. Feel free to remove the post if it's too "pluggish", but I thought a lot of folks might be interested. In a nutshell, I'm highly skeptical that from a raw returns standpoint that the moving average idea works. Sometimes you win, sometimes you lose, just like being in the market. The drawdown (i.e. can I sleep at night) is a bit better, but I'm not sure that it's worth the risk of return (why not simply put yourself into more bonds to smooth out the ride?).
Bottom line, based on my tests, I don't think anything conclusive can be drawn from moving averages. Just my opinion.
Great observation, Roger. Personally, I tend to think it's the media. Between the breathless reporting and breaking news ticker on CNBC, you'd think that every last economic report that trickles out of Patagonia will drive the market. It's a natural result of the Balkanization of the mass media; to wit, if one watches HGTV, he comes to believe that houses are for flipping, not living in. I find that if I consume the news for information and education rather than trading insights, I avoid the whiplash that eats away at my portfoio returns.
There are big differences between the impacts of commercial paper and resets. The resets will have strong effects on the real economy. More than 2 million subprimes (many that were taken out in 2004 and 2005) will reset over the next few months and millions more mortgages for people with better credit ratings will also reset. Foreclosures will increase, as borrowers face sharply higher monthly payments. Whether there will be massive amounts of foreclosures or not remains to be seen, but spending in non-housing categories will certainly be squeezed because of higher mortgage payments. This could push us into a recession or reduce economic growth. This is not a "Wall St. thing," but a very real "Main St. event." This is not just about Dow Jones, but about Doug Jones and his family.There will be real pain out there for people across economic classes--middle class folks will be over their heads because they borrowed too much, trying to use the phantom profits in their homes as ATM machines or because they wanted more housing than they could realistically afford.
Norm G.
There's an interesting dynamic at work. First, one has the rather naive ignoring of problems (overleveraging, easy credit etc) and the possible effects. Second, one has the reaction to the "sudden" cognition of such items. I would agree that after cognition the market overacts. But we mustn't dismiss the market's remarkable ability to ignore looming issues. Now we are in that icky area of cognition but uncertainty. Makes for twitch investors/traders!
check out BillB's blog. Not too pluggish at all.
Norm, I agree people will be impacted but the impact on the market will be less than you think, IMO. The bigger thing is access to capital being impeded.
Leisa, what has the market ignored? People ignore things but I don't follow you on what the market has ignored? Maybe just a symantics thing?
I totally agree with your post. The market is a forward looking mechanism. It has basically already priced in the impact of sub-prime, funding issues, and all that. Could there be little surprises here and there? Of course. By and large, though, we have already seen the impact. That's the way it always happens. The CP, LIBOR, and other overnight funding issues will get sorted out once people start to calm down and they find that the rates they can get properly reflect the risk involved.
Symantics, yes, It think so. The market is made of people. IMV people ignored the impact of these looming issues. It matters, when it matters. And as I've learned, the people's cognition comes with hard, empirical evidence rather than the cries of risk from the pockets of hand wringers wearing their "end is near" sandwich boards!
So perhaps it is unfair to say that the people/markets ignored it until it crystalized.
Roger and Leisa,
Symantic is a company. Semantics concerns itself with what words mean to the people who use them. I mention this not as a putdown but because I believe you care about getting things right.
Linda
Bill b....I like moving averages as a tool but, yes, it can end up like a dog chasing it's tail. For me, moving averages are part of a larger strategy.
This process reminds me of the days when I played golf. Part of my enjoyment was the challenge of mastering the swing. There is no perfect swing. It's when someone finds something that fits their brain, that they can simplify, and routinely repeat with comfort.
And now that for medical reasons I have to lay down my beloved sticks, I'm at this game.
Re the mkt ignoring real risk...did I miss something here?...the tech bubble...the classic tulip bubble does repeat itself. (Leisa is one of the most delightful skeptics....over at Bill Cara elegant commentary on how there is yet empirical evidence that the global mkt will pick up the slack of our domestic mkt. To me this is the lynch pin issue.)
A lot of pessimism out there. Perhaps students of mkt history can comment, but supposably mkt tops don't occur with this much pessimism and such a narrow spread btw bulls and bears. Do we still have the classic wall of worry on our side? Roger, what do you think?
jasper
Roger, the CP reset is a real problem, but one that will resolve with the good CP getting rolled over, and the bad stuff migrating to the balance sheets of banks that backstopped it.
The mortgage resets are a bigger problem... if you benchmark it against the past resets, it has caused mortgage defaults to rise significantly. Not sure this is a big factor outside of mortgage lenders and builders, but it certainly has punch in its first order effects.
With most economic issues, the debate is usually over second order effects. E.g., how much will it affect consumption? Tough question, and usually less than doomsayers think.
Linda,
the company is Symantec and not Symantic
Bill B, the recently published "The Hedge Fund Edge" book as well as many others reach different conclusions than yours regarding moving averages.
Sami, with all due respect, I doubt if I could trust a book titled "The Hedge Fund Edge". A good title for gamblers, but for investors a contradiction in terms.
I believe that's Bill's point is that over the long run the buy & hold strategy beats the market timing strategies. Mainly because no one can accurately time the market with real consistency. I thought that this was an established fact by now among investors. (and believe me I have tried it many times myself). And please note the long time horizons in his chart.
If one is to pick and choose a more narrow time line and pick the times where the 200 DMA timing model worked, then they could always include these in their books. But even then, how much did they save taking into account the taxes and dividend losses? Not to mention the trading costs. Were these figures included in their findings as well? I somehow doubt it.
Earnings certification and options expensing got a lot of press in part because they had a strong impact on those, notably CEO's, with the money and social status to make press. In addition they improved corporate transparency and accountability which inherently make for clearer price signals and, io ipso, create stronger markets long-term so they are not great examples (note that in the absence of price signals and the ability to act upon them there can not be a market at all in any meaningful sense).
Y2K might be a better example of a big scare that petered out even though there are a surprising number of people now, including some who should know better, who seem to think it was a total non-event altogether: As someone who worked the technical side of that I can state unequivocally it was definitely a potential event and, absent the serious work of fixing or dumping the legacy systems involved (mainly COBOL-based), would have significantly increased error rate in a number of critical mainframe systems if not dealt with.
In any case transparency is essential because markets can only look forward at what is known and discount the collective opinion of market participants in that regard. The problem with the situation as it stands now is the number of unknowns and their potential impact has become rather large: Who is carrying asset backed paper, how much of it is defaulting, and can they be trusted as counterparties or borrowers even in the short-term commercial paper market is a big one; the impact of significant number of ARM resets during a housing and a, likely, economic slowdown is another big one; the impact of an interest rate cut (if one is made) on the $USD as well as moral hazard if speculators are bailed out or, conversely, the rising probability of recession if there is no rate cut is another one; and of course there is always the difficult to predict exogenous event: Oil shock, terrorist attack, etc.
So today could be a 'perfect storm' in the making or, more likely, a tempest in a teapot -- Roger's right, the fear is bigger than the projected event itself more often than than not -- but the price signals are muddy right now and the markets are going to continue to roil until they clarify. Uncertainty is a bugbear and, if there is a sense that risk can not be priced appropriately because of uncertainty (which can be expressed as imprecision in measurement), players are going to start playing conservatively, very.
One of the few things that remained clear over the past year, to me at least since I have made by far the most money there, was the growing rumble in real estate and financial institutions connected to it -- almost literally every time someone called a bottom it became just another opportunity to sell the pop -- but there is enough pessimism now that opportunities for serious profit are becoming more rare even there so I don't have many open positions now. I'm still short RE & Financial indexes though as a more general end-of-cycle hedge. FWIW
holy cow, i totally spaced Y2K. Proves the point.
interesting; and I always thought
Y2K meant 'Yours 2 Keep' (sell at
midnight 1999) I read somewhere
there is 2 trillion in hedge funds
NOW...2 trillion in Fast Money!!!
I expect higher VIX numbers is
going to be a common thing. JMO
I had heard $1.5 trillion but whatever i don't think the number is the thing, I think how much it is levered and in what markets is it levered is the thing.
Regarding Y2K....Yes, that was quite the scare. But here's a reality...that "little" event caused a great deal of bank consolidation. Why? Because the banks could not afford to update their legacy systems.
I did refuse to buy water and 55 gal tubs of oatmeal. We have guns. We figured we could forcefully get whatever we needed (kidding!) or at least protect ourselves from those trying to get ours.
Here's a scare flash from the not too distant past: Avian Flu. Remember Spring of 2006?
I am by no means an expert, but the CP problem could be quite huge. This is the first big rollover since the recent turmoil in the credit markets started. Paper of all kinds has cratered, and whether the market has the stomach to absorb this much all at once is very much an open question. If the discount turns out to be high enough, the rollover could cause some severe dislocations. Say, for example, the average haircut is 10% - that's a $150B hit. If anything, I'd say this issue has been under-hyped.
This is ytd for couch port by scott burns...dated up to tuesday...5.72%(total divided by 10)
Not sure if this will paste here:
Vanguard Emerg Markets VWO 22.91%
Vanguard Energy Vipers VDE 21.53%
Vanguard Total Intl St Idx VGTSX 9.90%
Vanguard Total St Mkt Idx VTSMX 4.69%
Amer Cent Intl Bond BEGBX 3.70%
iShares MSCE EAFE Value EFV 3.30%
Vanguard Total Bond Mkt Idx VBMFX 2.85%
iShares Russell1000 Value IWD .79%
iShares Russell2000 Value IWN -5.67%
Vanguard REIT Vipers VNQ -11.25%
52.74%
small cap value...mostly financial services and big problem for the small caps...surprised that there is an ultra inverse on this and the volume is minuscule.
That should be 5.28% total if they were equally weighed. Your decimal point was in the wrong place.
symantec not symantic, come on leisa and others.
Roger: Were you complaining when the media was hyping the upward pressure being exerted by the credit bubble? No.
Look, sometimes alarms are false. That doesn't mean that all alarms are false. This one is extremely well-backed by common sense and data. Simply put: America has accumulated a negative savings rate, and the chickens are coming home to roos.
LIBOR is down a touch, the Allison Trannie deal got done (with consessions), things appear to be mending a tad. The fear the commercial paper won't roll over in a week causing huge problems right away is way overblown--my opinion.
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