Leonard Mlodinow: The Drunkard's Walk: How Randomness Rules Our Lives (Vintage)Great insight for investors seeking to distinguish real indicators from random noise.
Kate Kelly: Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall StreetGood read, good info -- a building block for anyone trying to figure it out. What the heck happened!??
Michael Shermer: Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time
Graham T. Allison: Essence of Decision: Explaining the Cuban Missile Crisis (2nd Edition)A seminal work on decision-making.
Mancur Olson: The Logic of Collective Action: Public Goods and the Theory of Groups, Second printing with new preface and appendix (Harvard Economic Studies)
Andy Kessler: Wall Street Meat: My Narrow Escape from the Stock Market Grinder
Roger Lowenstein: When Genius Failed: The Rise and Fall of Long-Term Capital Management
Robert A. Caro: Master of the Senate: The Years of Lyndon Johnson, (Vintage)
Ken Uston: Million Dollar Blackjack
Edwin Lefèvre: Reminiscences of a Stock Operator (A Marketplace Book)
Neil Browne: Asking the Right Questions: A Guide to Critical Thinking (8th Edition)
Ralph Vince: Portfolio Management Formulas : Mathematical Trading Methods for the Futures, Options, and Stock Markets
Malcolm Gladwell: Blink: The Power of Thinking Without Thinking
Brett N. Steenbarger: Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology (Wiley Trading)
Robert J. Shiller: Irrational Exuberance
Gene Epstein: Econospinning: How to Read Between the Lines When the Media Manipulate the Numbers
Edward R. Tufte: The Visual Display of Quantitative InformationThe authoritative work on the subject.
Murray Edelman: The Symbolic Uses of Politics
Gary Belsky: Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
Laurence H. Meyer: A Term at the Fed : An Insider's View
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It is almost as if the news came from two different worlds. First, there is Europe. Colin Barr (one of our featured sources, now writing more fine articles than ever in an expanded role) explains why you should not "sweat Europe". His article cites several good sources explaining why there will be an eventual solution and contrasting this with the failure to recognize solid domestic news. Regular readers will recognize these themes from my work of the past month, but it is nice to have Colin and his sources in my camp. Please read the entire article.
By contrast, the focus of interest for policymakers and for the "attentive public" has already moved to new subjects. As an investment manager it goes with the territory to know what is going on. I want to know what is happening and what might happen next.
I have had a number of questions about what I read and how I decide what to follow. I attempted a summary for today's WWA piece, but I quickly realized that it is too complicated. I read too many different sources, each providing something valuable.
For the moment I am going to make a broad generalization about a duality:
Is Greece the next Bear Stearns? Is Spain the next Lehman? These are the questions emphasized in the financial media. One of the worst features of CNBC is the penchant for taking a stupid question and posing it to people who could not possibly know the answer.
The very posing of the question biases the entire enterprise and reduces the value of their information for the individual investor. The problem is that CNBC is catering to their (ever-declining) pool of current viewers and not offering help to the broader audience they desperately need.
This is the reality, and we must recognize it. I will do my regular analysis from this perspective. I will start with the "real world" in the analysis of the "good" and the "bad." We'll look at Europe in the weekly attention to the "Ugly." But first, a little background.
Background on "Weighing the Week Ahead"
There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
Last Week's Data
The actual data from last week generally beat expectations . If you had just been reading the news flow from the US, you would never have predicted the wild swings and negative bias. Let us take a closer look.
The Good
The economic news hit the right notes for the key indicators.
The Bad
Some of the economic data were a little soft.
The Ugly
The daily trading was ugly, although the net change for the week was not dramatic. It was all about Europe.
The European story continues to dominate financial markets, even though most have moved on. Here is the challenge for traders.
The Truth about Europe
A reasonable projection of impact for the US is not that significant, which is why most people have moved on to other challenges in the wake of the responses of the European Union and the IMF. The New York Times emphasizes this point, which you could also have read on "A Dash" in this article.
Another good approach is to follow actual data. The TED spread (treasury over eurodollar) was a good indicator of stress in 2008. While it is slightly above normal levels (38 bps or so) and shows an increase over the month, it is nowhere close to the 350 to 460 bp's of 2008. This provides little support for those using the domino analogy.
The Rumor Mill
During Wednesday's trading a rally was turned into a major loss because of an article in the FT. The story was interpreted as an indication that China was going to dump Euro's from their reserve holdings It was a "scoop" and the impact was dramatic.
Any knowledgeable observer would be skeptical of such a report. The Chinese have embarked upon a tilt toward more European exposure. A change in policy, as improbable as that might be, would be likely to affect future buying, not current holdings. Most importantly, as net exporters the Chinese are likely to be stocking up on all currencies until and unless they adjust exchange rates. This is what you should know before trading on this rumor.
The market reacts to headline news, so the rumor-based selling was dramatic. If you were a trader, you had a chance to pounce on the headline, but you needed to cover before the expected overnight denial. It all took only a few hours, spread over two trading days. If you were an individual investor you had to avoid a major blunder.
As expected, the revised FT story came out here.
The conclusion they reached is that "investors were left guessing" about China policy. Another interpretation would be that their scoop-oriented reporting introduced the uncertainty. When a story is implausible, why not really nail it down before doing something that generates a big market swing? The original story had plenty of qualifications and nuance, but no one reads that.
It is like crying "fire" in the theater. The FT is one of my featured sources, but this needless roller coaster was not good for most investors -- only for very sharp traders.
And finally, Friday's trading saw steep selling from a Fitch downgrade of Spain's credit. Fitch joined S&P. Both are concerned about growth prospects given planned austerity. Presumably they would also have been concerned in the absence of austerity. Despite the inevitability and predictability of these ratings, they do have an impact for some holders of debt.
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