Resilient expecations

Let's see, we had a 8.5% drop in durable goods orders (that is a pretty telling economic indicator), the dollar is stubbing its toe and oil is increasing--and the markets along with it.

Jeffrey Saut stated on Monday, something that I very much believe. That is, the opportunity for investors is where there is a gap between perception and reality in the market. To be sure, it is also a place of great danger, because you can be right, but your timing can be so off, that being "right" eventually only means having your money spirited away currently.

First off, I'm happy to say that my MIND is doing terrifically well, up 11.37%, and that ERF is continuing to perform well, up 8.39%. Both are tied to oil, and oil has been steadily going up. Now, you think that would be bad for the market. I also own some KRY, a gold miner, and that has gone up 30% since my purchase. These successes soften my worthless puts on the DOW and S&P that will expire in DEC.

John Murphy stated recently that commodities peak AFTER the stocks peak, prior to bad things happening. Commodities are definitely on the rise. But this rise is NOT tied to resurging economic activity. Has the market peaked? I wouldn't hazard a guess, but we clearly can see that the market has had renewed vitality and commodities are now better performers with energy gaining almost 2% yesterday. I'm also mindful that in a slowing economy commodities move downward.

Yesterday we had a stronger than expected GDP number, but that also came after another noted investment house (1) recast 4th quarter GDP as zero. How I have made sense of the market that makes no sense is this: Concrete information has outweighed "forecast" information. Concrete information comes in the form of backward looking "confirmed" glorious news: wonderful corporate earnings and confirmed 3rd quarter GDP growth. Plus, we also have great liquidity and lots of folks willing to throw themselves on the rails to board the train that got away while they were buying their put tickets!

As people are imperfect synthesizers of information, they will fall victim to their biases/emotions. You do, I do, we all do. Accordingly, if you have a positive OR negative outlook, your lens will filter for all of the things that support your view, and you'll dismiss ideas contrary to your view. The positive bias has great corporate earnings, some sliver of positive news on home sales increasing (never-you-mind it's at deep discounts), GDP being greater than expected. These are concrete things that stave off uncertain future information like expected decline in corporate earnings or slowing GDP.

I would contend, then, that for those with a positive bias on the market, there is a disequilibrium in the amount of weighting they have placed on positive news v. negative news. Perception does not equal reality. Until that balance changes and a tipping point reached where the positive news gets eroded by negative news, we'll continue to have liquidity and performance anxiety fuel the market's surge. But after year end, performance anxiety takes a break and 4th quarter earnings will become reality (remember lots of folks warned). The earnings and forecasts will be the most telling, and if the numbers are bad there is no performance anxiety propping them up. BUT, for folks like me looking for dour numbers, if the numbers are good, that's a different fuel altogether.

And for any that want to say that the market is a perfect discounter, I would argue that the bond market was wrong about interest rates most of the last 12 months. Ultimately the market gets it right--and market corrections are nothing if not a supreme act of contrition for wallowing in perception rather than walking in reality.

(1) Deutsche Bank has also lowered their forecast:

In light of continued weakness in the economic data, we are cutting our fourth quarter real GDP growth forecast to zero from the +1.0% that we were originally predicting.