What’s Going on in the Financial Markets Right Now?
Posted by Jason Apollo Voss on Jul 5, 2011 in Blog | 2 comments
Via e-mail a loyal reader of the blog asks a great series of questions that are an opportunity to address what’s going on in the financial markets right now. Hopefully he will forgive me for bringing his question into the public forum of the blog. Here’s what he writes:
“I’m wondering why the market is zooming up lately. I’m too confused to reduce my question to a simple sentence. When I get confused, I spend a lot more time than usual reading whatever I can in search for answers.
“You wrote how the Greek debt matter has been kicked down the road for now. Despite all the media hoopla, I think your argument is irrefutable. I remain surprised by the apparent euphoria post the Greek parliament votes. I don’t see any story today, for example, on people protesting in Greece since these votes. Maybe the protestors accepted defeat.
“It’s confusing to me because the market focus was all Greece all the time. Then it turned on a dime to the ISM report. A few months ago, I expected the focus would be on the end of QE2, but that’s not a popular focus now. Did I attach too much importance to the ending of QE2?
Is last week’s ISM report that meaningful?
“One thing that grips me is the timing of release of strategic oil reserves. I found this often occurs prior to a presidential election. But I think more like mid-August or so, not quite this early. I meditated on this particular decision (practicing from your book) and came up with the idea that the oil is being released not primarily to support the presidential election but because the Department of Energy (DOE) thinks it can buy back the oil cheaper later. Naturally, the idea to stimulate using oil reserves could appeal to a president up for reelection.
“Please understand that I don’t have the background to know the markets as you do. I’m starting to see all the optimism as a kind of election cycle phenomenon. However, my attempts to research this idea were not fruitful. My lack of knowledge bothers me right now.
“Regards and thank you for your recent blog posts.”
Let’s take these questions in turn…
Question 1: I’m wondering why the market is zooming up lately. I’m too confused to reduce my question to a simple sentence. When I get confused, I spend a lot more time than usual reading whatever I can in search for answers.
[Forgive me for labeling these as ‘lessons’ – I am so not trying to be pedantic – just helpful.]
Lesson 1:
Most importantly, you have to remember that the financial markets often are bewildering and make no sense, even to an experienced professional. So forgive yourself for being confused and not being perfect (from The Intuitive Investor). It’s not a big deal. I’m confused regularly, too.
Lesson 2:
Markets create very high levels of uncertainty and all investors have to get comfortable with the uncertainty. I tend to think of the job of the investor like surfing. You paddle like hell (do your research) to get up on the board (be invested) and then adjust to a force very powerful (a wave) that you have no control over and whose undulations are unpredictable and uncertain. If you do this well you hopefully get a nice long ride (make money).
Lesson 3:
There are as many ways to make money as an investor as there are investors. This is a good thing and a bad thing. What it means is that there are literally hundreds of investment books and workshops out there that espouse that they “are the way to really make money.” Often these various methods contradict one another.
But investment results are measured objectively, not subjectively. Which leads me into…
Lesson 4:
What matters is if your method and its tools are in accord with your personal understanding of how things work, and if that potent combo makes you money. That’s it. Everything else is just bluster. This is something that I talk about rather incompletely in The Intuitive Investor (I want to redress this is a second edition, if I should be so lucky): zero in on what your strengths are as an investor.
It may be shocking to regular readers of the blog, but I don’t consider one of my strengths to be evaluating “the markets.” My real skill set is in evaluating businesses and their managers. My thought is: why not spend my energies evaluating the quality of businesses and their leaders and then let them work for me to figure out the complexities of the financial markets and product markets?
Question 2: You wrote how the Greek debt matter has been kicked down the road for now. Despite all the media hoopla, I think your argument is irrefutable. I remain surprised by the apparent euphoria post the Greek parliament votes. I don’t see any story today, for example, on people protesting in Greece since these votes. Maybe the protestors accepted defeat.
It’s confusing to me because the market focus was all Greece all the time. Then it turned on a dime to the ISM report. A few months ago, I expected the focus would be on the end of QE2, but that’s not a popular focus now. Did I attach too much importance to the ending of QE2?
Is last week’s ISM report that meaningful?
Lesson 5: Remember some of my recent posts when I said that in the height of the dot.com era on record trading volume days that “the market” averaged just 0.6% of investors? Its very easy to get wrapped up in the idea that the market represents some broad coalition, but it doesn’t come any close to representing a broad coalition.
There were days in my career when I knew for a fact that I was the sole buyer of an individual security because I knew how many shares I bought versus the volume of shares traded. I was the market that day and certainly didn’t represent a broad coalition of investors.
I wish that business news reporters were forced to talk about what percentage of investors traded each day, but they aren’t and they probably wouldn’t. In the absence of such information just remember that “the market” is really just a few folks.
Lesson 6: Given the above. You have to know that the news each day is going to be considered important to only a small minority of investors. Those investors are those that find it important enough to trade on that news. Those are investors that have something specific at stake that the news affects.
But then there are investors that are trading for their own reasons having nothing to do with the news at all. Perhaps they are done with their analysis of a business and want to buy shares at that company’s current share price. This trade exists independent of the news of the day.
So most investors each day just sit on the sidelines. But the impression given by the nightly business news is that “everyone and their brother in law” is trading.
In answer to your question then and in terms of The Intuitive Investor.
Lesson 7: As you have done here, you can use intuition to tune into the feeling of each of the issues you have named. But in my opinion it sounds like you have made a mistake, you started off in Principle II: Paradox. That is, you began the process ignoring Principle I: Infinity.
Specifically, you seem to have assumed that the Greek Debt Crisis was important just because it was in the news. You also mention the Institute for Supply Management (ISM) manufacturing report and the Federal Reserve’s second Quantitative Easing (QE2) program where they printed money and pumped it into the economy starting last fall and just having ended.
Each of the above issues is, and was, important to a certain group of investors.
Lesson 8: But what happens if you expand the intuitive process using Principle I: Infinity to broaden out your focus and examine the entire “mood of the market,” as I did in my “Intuitive Assessment of Investment Climate” on 17 May, 2011? Here I said that it felt like there was a chance of a big decline that was ultimately borne out by the subsequent track of the market.
By expanding your focus to the “mood of the market” you skip past all of the granularity of those who are affected by individual issues, like the Greek debt crisis. Instead, what you capture in your intuitive assessment is the mood of those wanting to trade now.
To me the current mood of the market feels elated. That usually translates into market rises and ones that tend to ignore negative news. If you should choose to narrow your focus (Principles IV: Action and II: Paradox) to the Greek crisis you might find, as I did that the folks concerned about the crisis seem to have just wanted some sort of cohesion from the Europeans. This constituency of investors seems to be satisfied that the problem will be resolved.
Regarding the ISM report, this seems to be a big contributor to the rise in markets and feels to me as if it has introduced, for lack of a better term, a new theme to the financial markets. That’s another way of saying that a segment of investors has been waiting for good news on the economy and they seem to be satisfied that this was important news of just that.
Regarding QE2 ending. To me that feels like a non-issue completely. Dating back to last fall I generally felt that most investors didn’t really care. Unfortunately, as a critical evaluator of the investment climate, I know that QE2 will ultimately prove to have been an important choice on the part of the Federal Reserve. All of that money is a massive inflationary pressure. Right now it seems that a lot of that money has ended up on corporate and bank balance sheets and remains largely unspent. But it will be spent. Then those investors who have ignored this issue will ultimately be stung by QE2’s effects.
By the way, to me it doesn’t feel as if the Greek protestors have accepted defeat at all. If anything, it feels like they are reorganizing. Greek society is close to fracturing in my opinion. At that point it is very likely that the Greek debt crisis resurfaces as an important event for a lot of investors. One of the reasons for my post on the non-resolution of the Greek debt crisis is that, in my opinion, this issue will resurface again.
So to summarize: you started your intuitive process too narrowly cast (in Principle II: Paradox) by assuming that the news stories that were being reported were the important factors.
Question 3: One thing that grips me is the timing of release of strategic oil reserves. I found this often occurs prior to a presidential election. But I think more like mid-August or so, not quite this early. I meditated on this particular decision (practicing from your book) and came up with the idea that the oil is being released not primarily to support the presidential election but because the Department of Energy (DOE) thinks it can buy back the oil cheaper later. Naturally, the idea to stimulate using oil reserves could appeal to a president up for reelection.
You should certainly trust your own intuitive process – the result of your meditative process sounds solid.
As a former oil analyst I can tell you that the release of strategic oil reserves almost always is a signaling event. The U.S. imports so much bloody oil that the release of reserves doesn’t really affect the supply and demand of oil worldwide. But what it does do is signal to OPEC that the U.S. is offended by the lack of oil production and the U.S. is getting prepared to do something about it. Effectively, a release of oil from the strategic reserves is a dog bark, warning of an imminent bite unless the irritating behavior is ended.
Because the release of oil is predominately a signaling event, it is certainly a political, not economic, event. It is also another way for Barack Obama to convey to the public that he feels their pain. But as an investor, I usually categorize a release from the strategic reserve as just another thing that contributes to the noise, rather than signal, of investing news.
I know that this is a very long answer, but nonetheless, I felt it was an excellent series of questions that demanded a public response.
Jason
Thank you, this helps me a lot. It feels kind of humbling to get such a detailed and thoughtful response to my questions, to receive this attention.
Despite reading The Intuitive Investor carefully, it had not occurred to me that I went straight to Principle II (Paradox) instead of starting at Priciple I (Infinity). This is the kind of error that could be made repeatedly without correction, so I truly appreciate your instruction!
Also, I appreciate the insights about the strategic oil reserve release, the Greek debt situation and QE2.
Thank you!
CJ,
Not a problem. I felt that your question was very thoughtful and certainly deserved a proper response. Chances are that if you had the question then someone else had or has similar concerns.
By the way, when I say that you should begin with Principle I: Infinity, it means to start from that beginning place of vast possibility. You actually then use Principle II: Paradox to narrow the scale down to the probabilities of concern. I think that you just needed to increase your scale up from the football to the stadium level in order to see the game.
Jason