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Bottoms No Place for Fundamentals Alone


New factors rule out old playbook.

Every now and then I come across sayings or comments that capture the essence of the current economic and/or market environment. This morning, I found in my inbox the following words from Paul Tudor Jones II, which I strongly recommend that all investors take a moment to consider.

Here are 3 excerpts from his recent comments:

"When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form. The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced "100-year events" every 5 years."

"I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation."

"Today there are young men and women graduating from college who have a tremendous work ethic, but they get lost trying to understand the logic behind a whole variety of market moves. While I'm a staunch advocate of higher education, there is no training - classroom or otherwise - that can prepare for trading the last third of a move, whether it's the end of a bull market or the end of a bear market. There's typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign."

Investment Strategy Implications

Stocks are currently being impacted for a whole swath of issues: November 15th and hedge fund redemptions, capital gains that inspired investment sales in anticipation of tax increases next year, fears of a global recession, concerns about FAS 140 and QSPEs, or S&P 500 earnings closer to $50 with a 10 or less P/E ($50 x 10 = 500).

You can add to this mix a creeping suspicion that I have about the General Motors (GM) bailout and the appearance of a deal between the Democrats (and President-elect Obama?) and the auto unions regarding a thank you (payoff) for delivering Michigan and Ohio.

As we can see from this list and Tudor Jones' comments, the reasons for the rise and fall of stocks goes far beyond pure fundamentals alone.

The bottom line to the bottoming process is that fundamentals are not, never were, and never will be the sole answer for why stocks gyrate as they do at the end of a move, be it a bubble or panic.
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No positions in stocks mentioned.
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