Sunday, August 19, 2012

This time it's different

Uh oh, I said it! The dreaded "this time it's different" phrase harking back to the the peaks of bubbles pasts when people ignored the basic principles of trading, analysis and the economy.

This time it's different.

No, earnings still matter (remember I am a technical analyst so this is heresy). Price to advertising in a dot bomb stock was bs. Price to earnings in 1999 was infinity in that case and we know what happened.

What is different this time is what is driving the stock market. It ain't corporations although yes, I'll admit there are profits being made. No, it's not interest rates 0which have not really moved much since they got down to ridiculous levels.And no, it is not even supply and demand. Who is buying? Certainly not retail.

Ah ha! You were waiting for me to give you something to blow holes in. Markets can rise on low volume and have done so many times in our recent memory.

Way back when I used to take non-air conditioned NYC subways to work (good times!) in the Merrill Lynch municipal bond market (now that was good times - seriously) I learned the concept of "putting them away." That meant bonds were sold to actual investors who would hold them for a while and effectively take them off the market. Big blocks of bonds were traded back and forth among dealers until their retail and institutional networks absorbed them - which is what you really want in your market, no matter what it is. You want the end customer demanding supply. You did not want dealers playing, thinking they could make some money on your mis-priced new underwriting.

Sound familiar? Who is doing the trading these days? Hedge funds? High frequency traders? Scalpers? None of that put shares "away" in true demanding investor hands.

So is the market different? You bet it is.

Again, the principles underlying value are the same. What is different is where the "demand" is coming from. Hey, give me trillions in free money and I'll buy plenty of stocks. The demand is artificial thanks to central bank meddling.

Do you know what is really different? Thinking the market is signalling something for the economy down the road.   Here is a quote from someone I do respect:
Price is the best indicator of the economy - it moves up before the good news hits the headlines. Therefore, some good news is coming. 
Before the money dropping helicopter arrived, I  believed that with my heart and soul. But now, rather than forecasting the economy it is forecasting what the central banks will do.  The good news referred to in the quote is QE 3 and QE 4.

Yes, this time it is different. Not they way the naive thought in the bubble era or the condo flipping era or even the beanie baby buying bubble but they way the truly smart think. This time, however, the smart are wrong. 


VN69 said...

I still can't figure out if the headlines actually work with the market to make things happen or if they are merely the excuse for what did happen. Do we really want to believe people who flip billions change their minds more often than those who flip burgers like they say? Basically it's a money game and pretty much anything goes.

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