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Barry Ritholtz: No Room For Feelings In The Market

FYI: It's the time of year when predictions are in order. Not by us, but by other people. We have spilled plenty of pixels on why forecasts are folly (see this, this, this, this and this); we won’t revisit that well-trod ground, at least not today. Instead, I wanted to discuss the rather annoying tendency of commentators to extrapolate market sentiment to well, infinity and beyond.
Regards,
Ted
http://www.thinkadvisor.com/2014/12/18/no-room-for-feelings-in-the-market?t=theory-strategy

Comments

  • edited December 2014
    LATEST MEMO FROM OUR CHAIRMAN, HOWARD MARKS
    Memo to: Oaktree Clients
    From: Howard Marks
    Re: The Lessons of Oil December 20,2014 © 2007-2014 Oaktree Capital Management, L.P. All Rights Reserved.(excerpts)
    "Over the last year or so, while continuing to feel that U.S. economic growth will be slow and unsteady in the next year or two,
    I came to the conclusion that any surprises
    we're most likely to be to the upside. And my best candidate for a favorable development has been the possibility that the U.S. would sharply increase its production of oil and gas. This would make the U.S. oil-independent, making it a net exporter of oil and giving it a cost advantage in energy–based oncheap production from fracking and shale–
    and thus a cost advantage in manufacturing. Now the availability of cheap oil all around the world threatens those advantages. So much for macro
    forecasting!

    There’s a great deal to be said about the price change itself.
    A well-known quote from economist
    Rudiger Dornbusch goes as follows:
    “In economics things take longer to happen than you
    think they will, and then they happen faster than you thought they could.”
    I don’t know if
    many people were thinking about whether the price of oil would change, but the decline of 40%-plus must have happened much faster than anyone thought possible.

    On the other hand
    –and in investing there’s always another hand–high levels of confidence,
    complacency and composure on the part of investors have in good measure given way to disarray and doubt, making many markets much more to our liking
    .
    For the last few years, interest rates on the safest securities–
    brought low by central banks
    –have been coercing investors to move out the risk
    curve. Sometimes they’ve made that journey without cognizance of the risks they were taking, and without thoroughly understanding the investments they undertook. Now they
    find themselves questioning
    many of their actions, and it feels like risk tolerance is being replaced by risk aversion.
    This paragraph describes a process through which investors are made to feel pain, but also one that makes markets much safer and potentially more bargain-laden.
    http://www.oaktreecapital.com/MemoTree/The Lessons of Oil.pdf

    Elsewhere; A look at the commodity bubble in the 2000-08 period.Just an observance of the past for me personally.I have no opinion on his bullish outlook for oil. Article from Seeking Alpha.
    Lawrence Fuller, Fuller Asset Management Dec. 20, 2014 2:55 PM ET
    The Oil Price Plunge - Fiction, Reality And Opportunity (excerpts)
    "Shortly after the tech bubble burst in 2000, institutions began to allocate billions of dollars into commodities through the futures markets in an effort to capitalize on growth in the developing world. Commodities became a new financial asset class. The continual and escalating flow of funds into a buy-and-hold strategy of a basket of commodities with no sensitivity to price led to a parabolic move upwards in prices prior to the financial crisis in 2008.

    The regulatory body for the futures exchanges (CFTC) exacerbated the volatility by exempting Wall Street banks from the limits under which traditional speculators operate. As a result, a hedge fund can use a Wall Street bank as a counter-party to speculate on commodity prices for financial gain with no limitations. It is important to recognize that the vast majority of oil futures contract holders never take delivery of a single barrel of oil-they simply roll over the contracts. As a result of these changes in market structure, futures prices now dictate spot prices.

    There was no greater evidence of commodity prices divorcing from fundamentals than the surge in oil to $147/barrel during the summer of 2008. That parabolic move occurred six months into what we now call the Great Recession. There were no lines at the gas pump. There was no outcry from oil-importing nations that they were unable to obtain the oil that they needed. That move was fueled by speculative investment flows into oil futures contracts in a herd mentality. The herd was being steered (over a cliff) in part by deluded research reports from Morgan Stanley and Goldman Sachs that were forecasting prices of $150 and $200/barrel, respectfully. Just a few months later the price had collapsed to less than $60/barrel, but not because of a commensurate decline in demand or increase in supply. Institutional investors and speculators were being forced to deleverage and unwind long positions in the throes of the financial crisis and stock market meltdown"
    http://seekingalpha.com/article/2770205-the-oil-price-plunge-fiction-reality-and-opportunity?ifp=0
  • Problem: 24/7 financial news cycle, Solution: you must learn to filter garbage, take ONLY what YOU can use (to make money), file the rest into useless, then make your OWN decisions
    Predictions: are for entertainment purposes only, have fun with them, do your own:
    I predict we will make good money in 2014,esp. after 2013, and we will make money again in 2015, write that one down for your first 2015
  • Enjoyed this memo from Mr. Marks, as usual.

    Think Scott, Junkster, others will too.

    Here's link to pdf, JIC:

    http://www.oaktreecapital.com/MemoTree/The Lessons of Oil.pdf
  • @Charles - thank you for that. Ironically I had been thinking about OAK the last few days and was going to hit you and Scott up for the investing thesis. I couldn't get a firm grip on it. It's starting to sink in.
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