One of my favorite contrarian indicators

Happy, happy Friday to each of you!

In today’s post I wanted to alert all of us to one of my favorite contrarian indicators. Oh, but before I get ahead of myself, I should describe what a contrarian indicator is. In short, a contrarian indicator is a real world event, whose interpretation, suggests that we should do the opposite of what the event might suggest. On the way up the financial markets (aka during a bubble) a contrarian indicator is our barber relating a hot stock tip to us. Barbers have no business centering their casual conversations on investing. When every person has an opinion about the ever-burgeoning stock market and what to do to become an instant millionaire this is a contrarian indicator to sell. Does this make sense? So one of my favorite contrarian indicators is to do the opposite of what the business press advocates.

Specifically I wanted to highlight an article in the Wall Street Journal by one of its more renowned contributors, Brett Arends. The story appeared on April 22, 2009 and was entitled, “Why I’m Staying Away From Bank Stocks.” Mr. Arends says:

“Many are wondering if the crisis is now over. Are happy days here again? And is it too late to get on board.

“I wish shareholders the best. And maybe this rally in banking stocks will keep going. I have no idea – I never try to foretell short-term moves in the market.

“But I wouldn’t touch banking stocks with a 10-foot pole. If I had any shares I’d be looking to sell.”

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Mr. Arends then goes on to list 10 reasons why he would not invest in banking stocks. I leave to each of us the dissection of his reasoning. But the point is that journalists are usually among the last to know when it comes to investing well. If they were investment geniuses then they would most likely start their own money management firms.

See, investors are actually investing cold, hard-earned cash in banking stocks and in the financial sector, in general. Mr. Arends is writing a column where the consequence of getting it wrong is that his reputation takes a slight hit. If his call on the direction of financial stocks doesn’t pan out he can always hide behind, “I’m a journalist, not an investor.” So I see Brett Arends article as a contrarian indicator, and along with many actual affirmative indicators, that the economy must be getting better.

As I hope each of us knows, I am deciduously examining the news for harbingers of the direction of the financial markets, either up or down – because I am an investor, not just a blog writer. My money is where my words are. The most positive sign, and it is a very positive sign, is that the engines of economic growth, technology firms, are saying that their results have bottomed and that they are seeing signs of recovery.

If we will recall in a blog posting some time ago I said the real driver of economic growth is not increasing demand for goods and services, it is innovation and new found efficiencies. We cannot ever lose sight of that fact. But what happens when new ideas and new idea creators want to make a business of their new ideas? That’s right, they need financing for any new endeavor. And that is what the financial industry is designed to do: facilitate innovation, growth and recovery. So let’s ask ourselves rhetorically, when the economy recovers, how will the financiers that facilitate the recovery fare? Thought so. Let’s also ask ourselves, if we have no financing industry how will that vacuum be filled? Can we all see that the industry is a necessity and that it will never go away? Before their were investment banks, there were banks. Before there were banks there were money-lenders. Before there were money-lenders there were relatives willing to help us out. Etc. Investing is the story of those with excess resources facilitating innovation by those with a surfeit of resources, but for a price.

I hope that each of us has a wonderful weekend!

Respectfully yours!

Jason