Glaring Groupthink In Financial Markets

"It is dangerous to be right in matters on which the established authorities are wrong."

-Voltaire

I don’t think American economic history has ever seen such a powerful level of groupthink in her financial markets. This, of course, is primarily a supply issue. In terms of participation, The New Reality is that there has never been more people willing to get in this game. Whether it’s an oversupply of manic media, money management firms, or the 34 million plus online brokerage accounts in this country, no matter where you go this morning, there they all are…

Being in my seat provides an interesting vantage point. To get here, I drive through the “make money” mecca of Stamford in the wee hours of the morning and see that most of my sell side competition’s lights are off. By the time I get to New Haven, my inbox is lit up like a Christmas tree with people who agree/disagree with my firm’s points of view. While I don’t spend my time with group-thinkers, I am privy to plenty enough of their thoughts. Short Starbucks, long McDonald’s anyone?

Do I have baggage in this business? Don’t we all?...

After having a great run being overly compensated in the hedge fund business, remember that I was basically fired at the end of October 2007 for being “too bearish”… so, pardon the pun, but I BEAR the cross of my own experience in not trusting the “established authorities” in this business. If it comes across as my having an axe to grind, I apologize for my inability to communicate – I’m grinding alright… grinding to be right.

So away from John Mack and “The Masters of Herd Island” that I went off on in yesterday’s note, what are the most glaring groupthinker points of view I have staring at me from my notebooks this morning?

1. “we’re overbought”

2. “the consumer is never going to be the same… its over…”

3. “earnings are going to kill the market, watch…”

4. “Ivy is bearish on housing, haven’t’ you looked at foreclosures”

5. “we’re overbought”

6. “Meredith is saying this bank is going to… that will be a disaster”

7. “China really looks good now… this is how you should play it”

8. “Tech has moved to far too fast… its over…”

9. “we’re overbought”

Are we overbought? Even Cramer went live with the Doug Kass call on that front last night. But are we really overbought or just getting ready to rip this line of groupthink up and into the right of into its final crescendo?

There is a big difference between stock market operators and stock market commentators. Most pundits, including those regulating US markets, say that market timing is not possible. In fact, on the Series 65 exam, you must check the box that says market timing is BAD, or you get the question wrong…

Understanding that not doing macro or not managing your market exposure around a macro call implies a massive amount of systemic risk in your portfolio is one thing. Understanding that the art of managing money is having a narrative fallacy of an investment process that provides you money to manage is completely another.

So what if you could be more right than you were wrong in calling markets? Would you use it? Is it any different than using the Master of Herd Island “one on one” approach to trading around a stock? Is the perceived edge associated with having sat across from a CEO in one of Wall Street’s finest hotel conferences any different than understanding a mathematically relevant market correlation that begins to dominate?

The New Reality is that there is edge in understanding the behavioral side of markets and the glaring groupthink that’s embedded therein. Next time someone tells you that we’re “overbought”, ask them at what price. Like the answers to the aforementioned 9 considerations, I am sure you’ll find the specificity of the answer enlightening…

At the beginning of this week, I said China was overbought on the Goldman call – the Shanghai Composite Index closed down again last night, locking in her 1st down week in the last six. I’ll say that, in the immediate term, that the SP500 will be overbought at the 874 line, and I’ll refresh my risk management model every 90 minutes of trading so that my answer to the question changes as the cold hard facts do.

The “established authorities” aren’t allowed to put these kind of a calls in print – making market calls isn’t what they tell their clients they do, even though that’s what they are doing more and more here every day…

Looks like great weather for a BBQ!

Have a great weekend with your families,

KM