Trader’s Narrative

The magazine cover indicator is a great contrarian sentiment measure because once a topic has reached massive public penetration and put on the front cover of a magazine, the trend is about to finish.

But once in a while we get conflicting covers. And in such a case, the question then is, which one is right? which one do we fade?

A recent example is the cover of Time and the Economist in the summer of 2005. They both came out within days of each other and had very different views of the housing market:

After the Fall
The symbolism of the brick in free fall left no doubt what stance The Economist was taking on this issue. Although housing prices were going up like there was no tomorrow, the Economist was asking about what would happen after the inevitable fall.

I remember reading this while in Europe because I could see first hand the freakish gains in real estate and the avarice that it had fueled over there. Published: June 18th, 2005

Home $weet Home
Now contrast that with the cover on Time showing a man happily squeezing a house in a bear hug. Note the $ instead of “S”weet and the taglines: We’re going gaga over real estate, Will your house make you rich?, Super hot markets, It is time to buy-or sell?, The case for renting.
Published: June 13th, 2005

For some perspective, here’s a chart of the housing bubble (superimposed on that of the internet bubble gone by):

Source: InvesTech’s Housing Index is proprietary composite of the most sensitive stocks in the housing sector.

So which one of those covers should you have listened to?

Obviously The Economist. I myself tried in vain to point out the danger of such a hyper-inflated bubble to a relative who was heavily invested in European real estate. I was given a laundry list of why the argument in the Economist article didn’t matter or was wrong.

But why?

Not because one magazine is inherently better but because one magazine (Time) is geared to a more general audience while the other (The Economist) is targeting a very discerning readership. Plus, if you had read both articles, you couldn’t have noticed that Time’s was simply “fluff” while the Economist one was bursting at the seams with data and more data.

My point is this: to get a really good contrarian cover indicator, look for the most general audience publisher. Don’t go for specialty publications.

The full Economist article (minus tables and graphs) after the jump:

Continue reading ‘When Magazine Cover Indicators Clash’

Paul Krugman writes in today’s New York Times:

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.

But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.

We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

I agree. Although it doesn’t absolve the millions of Americans who got mortgages which they did not understand for houses which they could not afford, using a system of valuation rigged to artificially pump up prices… the bulk of the blame has to be liberally heaped on the previous Fed chairman.

He poo-poo’ed repeated concerns about derivatives and who refused to acknowledge a full-blown real estate bubble even as it inflated under his nose.

Of course, now he not only agrees that there is and was a bubble, he now even calls it by that name and goes as far as calling it a “global housing bubble”. But just to be clear, it isn’t his fault in any way whatsoever.

Retirement does wonders for the brain.

Speaking of Greenspan and his attempt to white wash his legacy, I found this hilariously biting cartoon (see below). It is of a penguin at a book signing, admiring the “comedic genius” of the Maestro:

Penguin: “I have to hand it to you Mr. Greenspan — you are a comedy mastermind!

Penguin: “Remember when you were helping to inflate the housing bubble with historically low interest rates — and urging people to take out adjustable rate loans? What a classic! Pure comedy gold!

Penguin: “And what sense of timing you have! I love how the pause between the setup and the punchline can last — well — years! Like when you urged Congress to social security by raising the payroll tax — which disproportionately impacts low and mid-level earners!”

Penguin: “Two decades after American workers began paying the higher rates you asked for — you used the surplus they created as an argument in favor of Bush’s tax cuts for the wealthy!”

Penguin: “And then after those tax cuts lead to soaring deficits, your response — and this is priceless — was to propose cutting social security benefits! I don’t think Stephen Colbert could have done better!”

Penguin: “And to top it off now by claiming that you were actually opposed to the tax cuts all along — what can I even say? I stand in awe of your comedic genius, Sir.”

Greenspan: “Would somebody please taser the penguin?”

Click to Enlarge Cartoon

Credit:
“This Modern World” by Tom Tomorrow
at Salon.com