Friday, August 12, 2011

How The Markets Really Work

Despite all the high-minded statements about market efficiencies and the alleged clairvoyant talents of the fast money crowd, here's a cartoon* that illustrates how the markets really work.
*Source: The Economist. click image to enlarge.

Talking Head Alert

A segment of my most recent appearance on with Tracy Byrnes is posted.

To view the interview, click here.

Wednesday, August 10, 2011

Beyond the Sound Bite: An Interview with Robert Steven Kaplan

It isn't everyday that we get to hear the former vice chairman of the Goldman Sachs Group share his thoughts and insights into the current economic and market environment.

Currently, Rob is professor of management practice at Harvard Business School and co-chairman of Draper Richard kaplan, a global venture philanthropy firm. Rob is also the author of the just published "What To Ask The Person In The Mirror": Critical Questions for Becoming a More Effective Leader and Reaching Your Potential.

In addition to discussing key aspects of his book, my podcast interview with Rob produced several very insightful thoughts on these most turbulent times, including the "series of sagas" investors are coping with, the implication of the changing structure of the market (e.g. capital impact on commercial banks during market swings, initiators and accelerators, pro-cyclicality), and President Obama and the question of vision and leadership.

To listen to the interview, click here.

Tuesday, August 9, 2011

Talking Head Alert

I am headed to Stiletto City (a/k/a where you can watch me attempt to describe how the policy response to the Global Stock Market Panic of 2011 will determine if the experience will be like 1987 or 1929. Segment begins around 1 PM (eastern) and can be viewed at

Friday, August 5, 2011

The Global Stock Market Panic of 2011

Here are two data points* that suggest that the drop in stocks is the 2011 version of an old fashioned stock market panic.

The valuation table lets the market tell you what P/E and S&P 500 operating earnings fit the current level. From this one can decide which combination makes the most sense. Unless earnings are about to fall off the cliff and/or their risk factors have risen dramatically, the P/E combination of a below average P/E of 14 times $95 is the most central point. Other combinations imply plunging earnings with rising P/Es (not logical) or plunging P/Es and rising earnings (also, not logical).

The chart shows the one month performance of selected global markets as of 12 noon (eastern) today. The point here is simple: unless one believes that a global recession is just around the corner and that emerging markets and high quality European companies are going to impacted in such a way that global growth and corporate profits are about to fall off the cliff, then the synchronized plunge makes no sense. Yes, one could argue that developed economies and the higher risk components within are at risk. But does that mean everything at every level is about to come to screeching halt, including those areas where growth is good and profits are both of a high quality and strong?

Investment Strategy Implications

The most logical culprit for this global stock market panic is a momentum-driven-hedge-fund-induced-high-frequency-trading-exacerbated panic than a justification for a global economic catastrophe lurking just around the bend. If true, this is a powerful indictment against the failure to appreciate the changing structure of the market. Also, if true, then investors should recognize this for what it is: a panic within a bull market correction.

*click images to enlarge

Vintage Farrell

Yesterday, legendary technical analyst, Bob Farrell, published a one pager describing the extremes the market has come to in a very short time frame. The title says it all: "Capitulation".

The advice Bob renders is to avoid trying to catch the falling knife but the extremes reached yesterday are a reference point from which a test will likely ensue in the coming days. Should that test succeed, then the odds are favorable that a multi week rally will follow. Or as Bob puts it: "An initial rally will likely be a one or two day affair because all those who were buying the dips will now be selling the rallies. If the benchmark lows hold on a retest, then the market could set up for 2-3 weeks of recovery."

To be clear, Bob does note that a lower low may occur and that may set the reference point at a lower price point (his avoid catching the falling knife). However, my take of his advice is: if the 1 to 2 day rally is followed by a probing of yesterday's closing of 1200 and that does not produce another wave down, then the retest would be considered successful.

Thursday, August 4, 2011

Talking Head Alert!

Bloomberg radio today around 4:15 PM (eastern). Taking Stock with Pimm Fox. A little chat time with Pimm and Courtney.

Discussion will likely include my newly created reverse engineered valuation model: the Best Fit P/E Model. Also on tap - why the demise of the bull may be greatly exaggerated and some thoughts on Tuesday's NYSSA Market Forecast event.

Tune in, if you're so inclined.

Note: The updated MGP data is posted. Left side of this page.

Wednesday, August 3, 2011

Fanfare For The Start of the Bear Market

According to many market and media pundits, the bear, with much fanfare, has arrived. I am, therefore, pleased to provide some exceptional fanfare music befitting the occasion. Let the misery begin!

A Father/Son Conversation About Bear Markets

Son: Hey, dad. How do bear markets get started?

Father: Well, son, after stocks have been going up for a few years they then go sideways for a while. While they go sideways, the price and its moving averages begin to converge. At the same time, markets begin to diverge from one another.

Son: What happens then?

Father: Well, stocks begin to rollover, going down in a rather gentle manner.

Son: Why is that?

Father: You see, son, investors are still big believers in the bull market. So, when the price starts to go down they don’t believe it will go much lower. In other words, they are complacent at the start of a bear market.

Son: Is that what is happening now?

Father: No, not exactly. Yes, stocks did go sideways for a while. So that part of the story is true to form. But the moving averages have not crossed, nor has the longer term moving average, its 200 day, which has yet to roll over and point downward. Also, when the sideways action was occurring, very few divergences emerged between markets, and those that did were very minor.

But that’s not the big thing.

Son: No? What is?

Father: Bear markets are sneaky. They start out with disbelief as they gently rollover. Kind of like a sleepy bear waking up from his long winter nap.

Son: Well, dad, that doesn’t sound like what I see on TV today.

Father: No, son, it isn’t. What you see and hear today is fear. And fear is not how bear markets start out. Fear is a characteristic of bull market corrections and end of bear markets, not at their sneaky, sleepy starts.

Of course, this is way bear markets have happened for more than 50 years. So, maybe this time is different. But you know what they say about that?

Son: No, dad, what?

Father: The four most dangerous words in the investing vocabulary is “this time is different.”

Son: Thanks, dad. You’re the best!

Monday, August 1, 2011

NYSSA Market Forecast

Tomorrow I will moderate the summer edition of NYSSA's signature event series:

The 14th Annual NYSSA "Summer Market Forecast"

Panelists include:

* Robert Steven Kaplan, former vice chairman, Goldman Sachs
* Phil Orlando, CFA, Chief Equity Market Strategist, Federated Investors
* Phil Roth, CMT, Chief Market Technician, Miller Tabak + Co.
* Don Rissmiller, Chief Economist, Strategas Research Partners
* Sean West, US Policy Analyst, Eurasia Group

We will cover the key issues impacting the economy and markets. Needless to say, there will be no shortage of areas to explore.

To learn more about the event and to register, click here.