Trader’s Narrative

Jim Rogers and Warren Buffett are on different sides of the recent government bailout. Rogers calls the US more communist than China, adding that the Fed bailout is “socialism for the rich“:

If the video doesn’t show up, you can see it here.

Buffett sees things differently: “I wouldn’t change anything in the plan myself,” adding in his own interview with CNBC. “It’s the best deal and the most sensible deal available now.”

More relevant links at news.tradersnarrative.com

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’

As the Fed Funds futures indicated, we got a 50 basis point cut. And since this was what the market expected and had come to rally for ahead of time, we got a muted response. I wrote early this morning:

“If we do get exactly 50 basis points, we could flail around and end the day unchanged for the most part.”

The text of the Fed announcement hints that there will be more rate cuts to come:

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

The Fed’s scramble to lower interest rates is much more than just a preoccupation with the housing market or the stock market slide or the liquidity crunch or the multi-billion dollar Societe Generale fraud or any other one variable. It is about the US economy’s inevitable slide into a recession.

With the interconnectedness of world economies, you can bet this will quickly seep into Europe and Asia. I’m already hearing from friends and family overseas that business is slow.

Here’s an updated graph from Google Trends:

Notice how the first blip coincides with the Asian “flu” correction in the spring of 2007. But now its off the charts!

So the Fed came in with a 25 basis point cut, as expected by the markets, and everything went to hell in a hand basket. Hmm, I wonder if you can tell when, exactly, the news came out:

The bond market closes at 3pm, while the equity markets close an hour later. So stocks had one more excruciating hour of pain.

Within less than 2 hours, it had erased almost 4 days of uphill climbing. This is what I wrote a few days ago:

With the impending FOMC decision, traders are going to be twitchy and nervous. Although a 25 basis point cut is baked in, until we get confirmation, the market will probably not trend.

It is all about expectations in the market. Since a quarter point cut was already expected and priced in, the market had rallied accordingly in the days leading up to it. The only thing that would have kick started another rally would have been a half-point cut.

Recession Forestalled?
According to Morgan Stanley, recession may be inevitable now. In a new report written by the bank’s chief US economist Dick Berner (the resident bull) the prime culprit is the credit crunch which has lasted more than 17 weeks and brought the housing market to its knees.

…financial conditions have tightened significantly further as the price of credit has risen and lenders have made credit less available. Money-market rates have risen significantly, and yield spreads over those money-market rates on loans have stayed high or widened.

The bond market has already priced in the next rate cut in January - another 25 basis points. And into the summer of next year, the Fed Funds Futures market is now estimating a federal fund rate of 3.75%.

No, I don’t want the Fed to cut rates because that would give a hyper boost to the stock market. And no, I’m not calling for rate cuts because of the housing market, the sub-prime meltdown or the subsequent shutdown of the collateralized debt market.

Rather, I believe the Fed should cut rates immediately because that’s what the market has been trying to tell it for too long.

Take a look at the chart below. It compares the 90 day treasury rate (black) to the Fed funds rate (blue). As you can see, the Fed funds rate follows the market set short term rate.

But the Fed got out of step with the bond market sometime this spring. As the rate fell, the gap between the two became more and more obvious. The two have not been this out of step in a long time.

The collective vote of the market is loud and clear. No committee, no matter how esteemed and knowledgeable, can know as much as a diverse and free market.

So this is my crazy call: the Fed will (or rather should) cut rates sooner rather than later.