Why Won't This Market Go Down?

The fundamental reason why this market may not go down (when for all intents and purposes it probably should) is because there are still plenty of investors still sitting on the sidelines just waiting for it to fall to get back in.

I hate the idea that the market level is in fact set by supply and demand rather than fundamentals. But you would argue that supply and demand are a part of fundamentals. Yes and no. Yes in the sense that the market is simply a market with prices set by supply and demand. But no in the sense that the market does not always reflect the fundamental economic reality of an asset.

When supply and demand are more a function of sentiment than economics, then perverse outcomes tend to happen.

Inherently Distrustful Of Macro Commentary

I am inherently distrustful of macro commentary, especially if it tries to come up with some pseudo-conspiratorial explanation for what happened attributable to countries, actors, or politicians.

There is usually some truth to what they point to, but the attributing of such calculable intent when none was recognized previously is a stretch. 

Obvious Beforehand

It is obvious to me that the market will shortly (before July) have a 10%+ pullback in response to concerns about declining profit growth and mean reverting profit margins.

This conversation has been had over the last year but has yet to have effect.

Just saying!

P.S. I say this because I have a decent sized short position and it is getting hammered and I expect I'll be stopped out shortly - not long before the market loses its courage. It is also equally unlikely that I will reinitiate a short position in time to take advantage of the pullback - just the way things seem to work out.

P.P.S. This post points to the importance of behavioral issues, patience, courage, conviction and downside risk management/limitation. 

Declaring Failure and Moving On

This is a very rough note. I think it could be fleshed out into a very meaningful article, but for right now it is just some top of mind reflections.

My underlying framework post-GFC was one where the business/investment cycles going forward was going to be more compressed (timewise) and more volatile. I was also heavily influenced by the new normal meme and how the economy was going to be stagnant as it worked through a balance sheet recession.

If I were to attribute a reason to that belief I would ascribe it to my ideological bias toward market economics and the belief that the market had not been allowed to clear properly due to significant artificial interventions. It was also heavily influenced by the recent traumatic past and the idea that modern markets/economies were more integrated, interrelated, more complex than ever before, and were consequently prone to momentum and cascade effects.

Financial marketwise this has not played out and I must declare failure and move on. I think the reason why financial markets have not reflected those beliefs is due in large part to hindsight bias and the massive trauma effected upon the psyche of market participants who endured the brutality and existential angst of a market implosion that could have gone even further. Investors have been fighting the last war. They have been overly pessimistic. They have been unwilling to give the Fed (or the govt) credit for stimulus. The market has climbed a massive wall of worry the whole way.

We are now at a point where the market is coming around to the idea that the Fed may have steered us over the canyon and to other side. The economy may be gaining sufficient strength to be self-supporting and a new cycle of more normal growth is going to ensue (even as the stimulus disappears).

That is the hope. We shall see how things pan out in practice.

More Than Just the Folly of Forecasting

"We have reached that time in the year where everyone is speculating about the prospects for equities in the year ahead.  As usual the consensus is that the market will be up 10% in 2014.  I have been an observer of strategists' estimates for half a century and I can tell you that as a group they always think the market will be up 10% in the following year whether stocks were up 20% or down 20% in the previous year."

- Byron Wien

There is something even more insidious here than just the folly of forecasting. The Mercenary Trader cuts to the chase in his breakdown of the mallady.

Think about the magnitude of what Byron Wien -- a guy who has been in markets longer than most traders have been alive -- is saying here. The collective Wall Street strategists who are bullish for the coming year are ALWAYS bullish. EVERY year. By an amount just enough to be respectable without getting them in trouble. So why should anyone care what they say or think? Their two cents isn't even worth two cents. It has negative value because it's a waste of time. They should be laughed out of town.

And why aren't consensus strategists laughed out of town? Why does the same crap get play year after year? Is there anything more irrational or lame than paying attention to utter bullshit, that has proven itself worthless, year in and year out, over and over again? Why do investors do it? Why do investors care about predictions that virtually never deviate from a standardized norm, and thus have almost zero information value?

A pet theory: It is in part because institutional investors are not the savvy, sharp group that biased product promoters and academic apologists would have us believe. To a large degree they are a group of underpaid (relative to the size of assets they manage) identikit MBAs in matching suits and ties, trying hard to avoid career risk while making decisions that don't get them fired. In the process of making those decisions, sticking close to the herd, or the established norm, is generally the safest thing -- and this "don't make waves" attitude is generally weak-minded, which leads to a weak-minded embrace of useless predictions as a pastime and a crutch. It's the same thing for establishment forecasters, by the way, which is why their predictions always cluster. The nail that sticks out gets hammered. Our general view is that, with a handful of notable and important exceptions, the supposedly high and mighty money management environs of Wall Street are actually closer to a bunch of drunks propping each other up via consensus embrace of mutually poor solutions and broadly irrational practices, not unlike the historically hidebound and sclerotic Japanese zaibatsu or Korean koretsu (big dumb corporate managements entrenching each other through cross-holdings of shares).

Bernstein on Forecasting

Bernstein wrote an editorial in the Spring 1996 Journal of Portfolio Management on forecasting that was a classic. Titled, "Fearless Forecasters, or Fearless Forecast Consumers."

After highlighting the ridiculousness of forecasting he drew the following conclusions:

(1) The question is not whether wildly wrong forecasts will happen, but what we do about the high probability that wildly wrong forecasts will happen.

(2) We should study expert forecasts as evidence of the state of expectations, but not as any kind of measure of what the future holds in store.

(3) We should concoct scenario forecasts because they force us to consider wide changes and even discontinuities.

(4) We should put more effort into managing risks and considering the consequences of being wrong.


He ends with, "pretending to believe that forecasts are going to be right may be the greatest risk of all."

Good Point from The Black Swan

Do not try to predict precise Black Swans - it tends to make you more vulnerable to the ones you did not predict.

Rather...

Invest in preparedness, not in prediction.

Hold Fast...Then Fade The Fading Seasonals

I am inclined to hold through to some ambiguous point in the first or second quarter 2013. I think the momentum and the seasonals are going to work in that favor. But I suspect resolution to the Fiscal Cliff and a burst of levity due to new year optimism will be worth fading.

It seems to me that the accumulation of obliviousness (classic market action - climbing the wall of worry) will peak and give way at some point to the weight of cumulative fears.

2012 has been a good year for the market. I don't think 2013 will be as good.

The Crux of the Matter

“If you can look into the seeds of time,
And say which grain will grow and which will not,
Speak then to me.”
– Macbeth, Act 1, Scene 3


Stole this quote from Crossing Wall Street this morning, but it reminded me of what I had been reading in Taleb's Black Swan.

And now for something completely different

When I look back over my posts, there is a lot of negativity.

Am I that much of a sadsack? I guess so, and yet, it ain't all bad.

We may be heading into a slow patch, but the future is known. Progress, development, and economic growth are in the long term forecast.

Not only that, but I'm hopeful culturally and generationally we are learning some valuable lessons.

Strategic Forecasting

Q. Why do we look at the future? Ans. Because it's in front of us.

One thing about the strategic planning/forecasting process that irks me a little, is the fallacy that once we have completed the process we feel as though we have a good handle on what the future holds. We pat ourselves on the back and smugly think we have mapped out the future with our clever intuitions and powers of reason.

And it is this hubris in the face of history and personal experience that irks me. For, we all know that predictions of the future are in general way off.

I think the process of looking at the future is important, as it can identify important variables or trends to keep an eye on, but it should only serve as a general framing within the framework of a more flexible process by which new inputs are entered into a perpetually changing evaluative description.