"In the 'tis-the-season' department, I think that lots of folks are renting stocks -- i.e., buying them because they believe it's a slam-dunk the market will go higher -- whether or not they have any merit. Though playing that game happens regularly, I think at this moment in time, it's occurring on a much larger and more pervasive scale than ever."
- Bill Fleckenstein on today's Buzz
"Fundamentals do not support what we see. Sentiment is all that matters here and now. But that sentiment can change quickly."
- John Succo on today's Buzz
Bill's and John's comments speak to the larger trend of risk-seeking behavior apparent in financial markets AND the economy. When I noted yesterday that fully 67% of companies were considered high yield now, versus 3% in 1980, I meant to convey this exact point.
The desire for risk is endemic among the population - we can see that in the long term measures of sentiment as well as measures of actual and expected returns on financial assets. Institutions - of the governing or fiduciary variety - both reflect and propagate the underlying risk-seeking behavior actors take. By providing "free" credit and a backstop to excess losses (LTCM), these institutions exaggerate investors' assessment of risk and thus their risk appetites.
Regular readers already know the importance I place on the work of Kahneman and Tversky on prospect theory and their proof that people make irrational economic (financial) decisions routinely. I have also noted in the past that there is a biological component to this; that these behaviors have in their basis a physiological source. A recent academic paper (here), entitled "The Neural Basis of Financial Risk Taking," speaks directly to this idea that there is indeed a physical component to this irrational behavior: Different parts of the brain are activated when people make irrational economic decisions than when they make rational ones.
So why do I bring all this up? If you can appreciate that there is a PHYSICAL basis for irrational decision making, and you already appreciate that the infinite figure phi (0.618) governs the physical relationships between and among human body parts (that is, phi is a governing factor in determining the human form), then you will probably NOT find the following too incredible:
DELL declined from its multi-year high December 9th, 2004 to its precise low on April 29th, 2004 by $8.17. The next multi-month decline from July 20th to November 10th, 2005 carried $13.37. The second decline in price is a mere $0.15 - fifteen cents - from a perfect phi relationship between the two (second decline being 1.618 times the first decline in dollars).
I have struggled in the past few years on Minyanville to balance my desire to educate with my need to keep the full theory and model details proprietary. After all, John and I have LPs to whom we have significant fiduciary duties. But the above post should lay bare the case for the complexity theory as completely as I have to date. It is a powerful - and ultimately liberating insight. I cannot stress strongly enough that readers should pursue this thread more thoroughly with their own research and reading.
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