Wall Street's Information Game
There is an increasing sense that we don't have enough information as to the issues affecting the financial sector and the credit market.
He said the sun's not really yellow,
He said the sun is really red.
He said "My friend, you're in a dream
And things are never what they seem
Oh things are never what they seem."
- How Can I Be Sure Of You (Nilsson)
The market is supposed to be an auction place where things can be valued. But things aren't always what they seem.
The long road from an auction place to a casino starts with one small step which can ultimately metamorphose into one giant leap backwards for investing mankind. Where that step began is part of an Orwellian nightmare peopled by computers and lionized by financial engineering.
The market is supposed to be an auction place but fear trumps value. The problem is there is currently a lot of paper that can't be valued.
Wall Street is supposed to be a value game and they tell us the market is always right. But how do you reconcile the myth of valuation with the fact of volatility? In my experience, Wall Street is an information game – not a value game. In Washington it's called the Beltway. On Wall Street it's the Loop. Inside information? It's an information game – not a valuation game. After all, how do you think the Dukes pay for the upkeep on their yachts?
They tell us it's an earnings game, but if we don't own a piece of those earnings, vis-à-vis dividends, how do we participate in those earnings, unless the company is undervalued and ripe for being taken over?
In my view there are few reasons for the current accelerated volatility. At significant turning points, if that's what this is, it is typical for the market to flip around violently.
After a period of years of persistent dampening of volatility, reversion to the mean is only normal. And with such a long stretch of low volatility and such a persistently low period of low volatility it seems reasonable to expect volatility to growl ferociously when it awakens from hibernation, as it started to this summer.
Fear trumps value: there is an underlying sense that no one knows what some paper is worth in the market, when paper is marked to a model. There is an increasing sense that we don't have enough information as to the issues affecting the financial sector and the credit market. Moreover, there is a fresh sense that whatever information there is, is not being shared with equanimity. You think?
There seems to be a sense that even those who are supposed to know don't know – or, that they are supposed to know and don't know what they are supposed to know.
I suppose a picture is worth a thousand words, and a picture of a head of one of the largest investment banks on the golf course smoking a "doobie" explains a lot. Can't you just hear the Investment Brothers, "Don't bogart that joint"? Leverage me up, Scottie! One day Crocs (CROX) closes at 75, the next day it closes at 48. Was the change in the fundamentals that lysergic? Did the market get it that wrong? Did the analysts get it that wrong? How can we be sure of anything in the market?
It's a great adage that the trend is your friend. But the name of the game is anticipating science of distribution and accumulation. The name of the game is managing risk when names are stretched far above historic norms from their 200 dma.
If you believe that trees grow to the sky, then you can expect reality to come crashing down to earth where a tree falls in the forest, more than philosophically speaking. In that case, you are going to have a few names like Crocs, Las Vegas Sands (LVS), and Itron (ITRI) in your portfolio on the way to hog heaven. Icarus is the poster child for high flyers and their unrealized gains that melt into losses quickly.
How can we be sure? A smart man once said, "Wall Street 'shtups' Main Street all the time. It's just a different position." If you take that as a starting premise, then many of Wall Street's platitudes such as: "Buy and Hold" and "The Trend Is Your Friend" won't be an excuse for not making your own decisions; because the truth is Wall Street has the attention span of a TseTse Fly. The Street is a good one for saying, "Do as I say, don't do as I do."
What can we be sure of? Believe what you see in the price action, until proven otherwise. When some Go-To-Glamours start to stab down and the market itself is stretched and begins to take gas, then it's probably a good idea to take some money off the table in stocks that are vertical.
At the moment Tapetown looks extremely dangerous: last week the reaction to another Fed ease, a strong GDP, and strong jobs numbers left a lot to be desired. The market seems more concerned with the notion that the patient was administered chemo last summer, but may be going into relapse. Not only may Fed therapy not be working, but also investment bankers may be finagling. If you're driving in New York and you can't find a parking spot, it may be because a ton of paper is occupying it.
With the fiscal year end behind many mutual funds there seems to be a newfound fervor to taking profits on Glamours. One can only guess when institutions will stop waddling in sync behind Huey, Dooey and Looey, or Google (GOOG), Apple (AAPL) and Baidu.com (BIDU).
Be that as it may, the S&P has tested the Maginot Line, 1490/1500, three times since October 19. With earnings deterioration creeping into the consciousness of money managers, a break of 1490, for reasons recently outlined, would trigger a Rule of 4 Sell Signal and start a potential cascade as money managers scramble to protect year end bonuses.
With a seeming universality of opinion that now that positive seasonality is with us and the market skated through September and October unscathed, and some big names expecting a melt-up, wouldn't it be just like Mr. Market to do something perverse? That we can be sure of.
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