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Thursday, October 12, 2006


Barry Ritholtz

You've touched on a pet peeve of mine -- the day to day action is so noisy that attributing a specific causation is often sheer folly.

The Financial Media has become slightly more astute about this -- they used to write BECAUSE (The market did X because of Y); They now tend to write AS (The market did X as Y did ____)

Its sometimes frustrating answering their question: "So why is the market doing ___ today?"


"The driving conceit of market reporting is that everything moves for a reason – which means that a tiny move upwards in, say, the S&P 500 would be because investors were heartened by some economic data report, while an equally tiny move downwards would be because of "profit-taking" or somesuch."

Problem is, "reason" should be plural. Reasons are what drive stock markets and journalists trying to assume there is ONE reason for the activity of a particular day is not only fooling themselves but their readers.

Trends are ... er, trends. That is, it takes more that a few days for a trend to develop - and as the equity investing world absorbs relevant information trends can develop. Assuming that an index went up on one day because the price of Brent crude went down is pure balderdash. It is groping for an plausible reason, not a bona fide one.

However, if oil remains low for a significant period, then one might assume that it is affecting market sentiment in a generalized manner. One assumes that low oil prices somehow translate into more disposable income and therefore more economic momentum. But, the cause and the effect are unprovable except when analyzed historically over a highly significant period of time and considering ALL the forces that may have been influential.

Even though it may please us to think that "rationality" drives markets, a case can equally as easily be made that emotion also powers them. When the dot.com bubble bust in early 2000, people were convinced that the bubble would continue because they WANTED to believe that their return would be 30, 35, 40% ... whatever the feeding-frenzy of the press was reporting. After the sharp run up that occurred previously over only six or seven months, not many really, really, really thought that the vertiginous heights could NOT be sustained. After all, this was a TECHNOLOGY market - and technology works wonders.

Stock markets do not defy gravity. Not yet, anyway. But, the assumptions that humans employ to buy or sell stocks does defy, often, rationality. Why? Because only one historical fact matters: In the l-o-n-g run, the stock market WILL return a handsome profit. But, this current immediate-self-gratification generation is too impatient to wait. They have to have it all and have it now.

brad setser

I am kind of fond of the arguments that the RMB depreciated (from 7.9 to 7.91 -- a tiny move) because China's Sept trade surplus was a bit less than its August trade surplus (August = biggest ever, Sept = second biggest ever).

With the RMB, I think it is more accurate to always say that the market moved because traders decided that they thought the PBoC wanted it move, or because the PBoC itself made it move. Right now the PBoC seems to want to prove that the RMB moves in both directions, not just up. so it is going up.

The real point though is that there isn't really a market here. The market is a bet on the PBoC.


I am somewhat amused by which ones you thought were right and which ones you thought were wrong. An index moving up when a large company has higher than expected profits is reasonable, but oil going lower leading to the end result of markets in asia going up is at the very least questionable (Just look at Roubini's latest comments on why oil moved and Gross' comments on the effect of petrodollars on high risk assets). On the other hand, rate hike speculation is measurable by looking at the front end of the curve, and when curve is not inverting/steepening the front end does push around the backend. You can also look at interday graphs and see whether or not it moved when the inflation report/speech came out.

Of course, I completely agree that many mainstream financial journalists have to talk like they are morons (Whether or not they are is debatable). Even in the 1960's Adam Smith pointed out that "Profit taking" was just another way of saying "I don't know." It is frustrating to read these things, I'm sure many people want to sometimes tell those journalists "Why did it move? Because I just bought/sold 2 yards of it you moron."

If the topic of market commentators who have no idea what is going on but pretend to know interests you, there is a great section on this in Niederhoffer's Education of a Speculator.


Asset management should be a long-term project. Based upon one's age and earning potential, a balance of strategy is necessary across the gamut of liquid to illiquid investments possible.

But, watching markets for short-term gain is just a game of chance. When we roll the dice at a casino, do you hear comments around the table as to why a 7 or an 11 rolled up?

For the same reason, it is unwise to speculate based upon daily "market advice" or, worse, "market tips". Besides, it's a waste of valuable time that could be employed in a far more beneficial pursuit of one's own particular happiness.

Bet on the long-run and to hell with the interim. Life's to short to waste it looking goggle-eyed daily at market charts. All chart and no play makes Jack a dull boy.

I am almost convinced that equity market volatility has been augmented by the drastic reduction of equity transaction costs. The cost of the "drug" is no longer significant.


There must be a market for this type of nonsense reporting, or else it would have ceased by now. I just wonder who the buyers (readers) are.

Perhaps Bloomberg and Reuters should tag these types of stories and have a button option on their terminals allowing readers to bypass them altogether - it's a bit extreme, but it could save both the readers and the information providers significant time and money.


Abobtrader: "There must be a market for this type of nonsense reporting, or else it would have ceased by now."

Yes, a Yuppy, 20 to 35, day trader, drives a Porsche Carrera (or would like to), made a small fortune in the dot.com bubble, and did NOT listen to the hacks writing that "the market is long term, so stay with it".

That person did NOT ride the market downwards from its high in March 2000 to the pits in the Spring of 2003, only to see his/her portfolio finally beginning to recover - but presently having still another 15% to go to recuperate its highs of 2003. Why? Because they were in the market in the mid-nineties and got out at the end of 2000 when it was obvious that worse was to come.

Who foresaw this with accurate prevision? Certainly not your local stockbroker commissioned on sales. These people were mouthing "diversification", which was useless nonsense in a market decidedly headed south.

This subject has nothing whatsoever to do with economics and everything to do with market hysteria and speculative frenzy – i.e., gist for a psychologist. Applying economic notions to daily equity-market behaviour is purely spurious reasoning. IMHO.

Never put all your eggs into one basket.


Agent00yak: "An index moving up when a large company has higher than expected profits is reasonable"

Even a sectoral index moving up on the basis of ONE of its components showing profits in one quarter is folly. Companies have tweaked and can fiddle their books to show just about whatever they want. Why is Bernie Ebbers going to jail? What is Enron all about?

And, in a global market -- where accounting practices are still being argued over -- that caveat is even more true.

The dictum that one should spread the risk has prevailed throughout postwar history as the best way to protect one's equity investment. And, the best way to asset manage is to assure that the liquidity-illiquidity spread of assets is balanced (according to your particular requirements). Starting with a roof over your head. No stock market ever made a residence liquid.

Earthquakes, yes -- stock markets, no. 8^(

And, be careful of stock brokers. There was once a dictum amongst brokers, long before the present generation of investors thought that stock markets were a money printing-press. It was called the "prudent man" rule. A stock broker was supposed to sell equities prudently by advising clients carefuly based upon thier particular needs. That rule is gone with the wind ...

Word Farmers Almanac

The market feeds on fear and chaos, so nothing surprises me any more. A ceo sneezes the wrong way and a stock takes a drop, that stock can affect a whole market sector. Fear, chaos and emotions rule the market place.


WFA: "Fear, chaos and emotions rule the market place."

These all belong to an amalgam of emotions that rule the stock market. Others are "profit, greed, expectations, hopes, wishes and desires", etc., etc. - - all very human attributes.

The stock market is high-risk, high-liquidity investment. It should not be undertaken lightly.

Yes, as the "experts" say, it obtains a long-run return that beats just about any investment means (short of hedge funds). But, that fact does not excuse an investor from placing money in index funds and then forgetting about the stock market.

All investors have a choice to make: Either they are Passive (and they let their money run on Index Mutual Funds) or they are Active (and they pay for "expert" advice). Historical stats show the latter is not necessarily a better route, and Keynes reminded us that in the long-run we are all ... elsewhere.

What the stock market is NOT:
1) A machine to print money that works like an automatic mechanism yielding returns of 10 to 30 percent per annum.
2) An interesting investment because your neighbor/friend just made a "killing" in it.
3) A gambling casino where day-traders make their bets and WIN BIG every day.

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I think this particular opinion piece fails to recognize the full extent of the Mayor’s actions nor his transformation from a “reformer/innovator” into the picture of Lord Acton’s axiom about power and corruption. I’m sure if Professor Glaeser rechecks his Harvard case studies, he’ll see that no innovator remains in that role, and Bloomberg, like Microsoft, some becomes either a monopolist or a turf protector. You figure which is the case this time.

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