Thursday, November 06, 2008

Put it under your hat


As we awake this a.m., we see that the world has had a follow through day to the downside. I suppose the temporary euphoria leading up to our country's national election has not been replaced with the realization that the worlds' economy is a mess.

There's a reason for my hat picture. It has to do with the saying of "Put that under you hat." Not too long ago, there was no cognition (though the facts were there) that the world, in addition to the US, was slowing down. Now the facts are inescapable and the market is going through its process of price discovery.

While some will argue that the macro picture does not mean much, and that you should watch fundamentals and/or watch technical analysis, I just don't agree with it.

First, with respect to fundamentals, witness what is happening to the banking stocks. NO ONE has currently figured out the fundamentals of these stocks because of the obliqueness of their assets and liabilities. Dick Bove just three months or so ago was saying that bank stocks were fine that these write downs were "balance sheet losses" and did not affect cash flow. I never understood his comment as a bank's assets (unlike a manufacturer's assets) are designed to be repaid. And....if they are not repaid, it kinda sorta affects cash flow. If you make it a practice to follow analysts, you are destined to lose money.

Second, with respect to Technical Analysis, the technicals tell you part of the story. A stock may have risen far beyond any reasonable fundamental underpinning. It doesn't mean that it will not rise further, but you have to be able to assess the risk. I think that some fundamental information, flawed though that it may be, is helpful in filling in the blanks. However, armed with some sense of the backdrop to all of this fundamental and technical stuff, the macro view if you will, you are better equipped to see 'potential' for misrepresentations (to the upside or downside) of the stock price against its 'true' value. (HMO pricing power, and fuel surcharges on the rails are two examples of fundamentals that were ephemeral, but lobbed out by every analyst who said they loved these sectors. I knew differently--and simple logic was all that was needed to prevail). Remember Musashi: Become ware of what is not obvious.

Also, when you see what I'm going to call 'outlier' information -- early information that abrades against the consensus view--it makes sense to 'put it under your hat'. Think about it. Be informed by it. Build a thesis around it with respect to sectors and stocks within sectors that will be helped/hurt by it. Then wait like a spider to see the fundamental and technical confirmation of your thesis.

News of China's slowdown becomes more widely reported every day, now. Helene Meisler on Real Money mentioned something about 8 months ago that always resonated with me (but before the topping and fall of the Shanghai market): that China had already completed the bulk of its building for the Olympics. Quite reasonable, but the wider media was not reporting it, but rather sticking to the worn stories.

As we move through these murky waters of trying to find a bottom, your putting things under your hat and watching and waiting patiently like a spider will serve you well. I promise you that the wealth of information under your hat is likely to outstrip that of what you hear in the popular media. Having a good system for organizing and referring to you hat system info is also a good idea. I cannot say that I have any tips on that.

2 comments:

Glenn_in_MA said...

"...If you make it a practice to follow analysts, you are destined to lose money."

Now that's an understatement!

I like Geoff Johnson's macro insights on RM (he only seems to post to the Columnist Conversation feature). He's a low key type of guy with infrequent posts, but I think he uses very sound logic and judgement to back up his views. Perhaps more importantly, he doesn't abandon his views easily. To me this is the major problem with a lot of these analyst types. They just seem to be constantly reacting to the daily noise in the market signals rather than the strength of signals and their smoothed-out trends.

Anyway, Geoff posted on a nifty methodology he uses to gather info that dovetails nicely with your "hat system" concept. Here it is.

Geoff Johnson
Personal Chinese Informant
11/5/2008 3:11 PM EST

"One great way to get a decent news stream on China (or anything) is to use Google Alerts. I put in phrases like "china slowdown" and "china manufacturing" and it emails any news with those phrases that hits the web. You have to endure a lot of useless hits to get the nuggets that count, but it does seem to get me the trends in the news anywhere from a few days to a month before it begins to hit our shores. It has also enabled me to build up a good cadre of go-to websites for Chinese news and analysis."

"Over time I find myself getting a good steady picture of how their problems are unfolding and getting nice little details and color that offer incredible insight. For instance, it turns out their slowdown is not much different than ours. First, housing has slowed (starting back in December '07), then auto sales slowed, then sales of durables, namely autos, slowed, then autos piled up in inventory, now commercial real estate stopped, then manufacturing slowed and now it is slowing more, etc."

"Perhaps the best data point was when a homebuilder was selling units in a high rise for a price lower than what early buyers paid and the early buyers stormed the builder's office and ransacked the place. I bet Bob Toll is happy he doesn't sell homes there! Laid off workers also are quick to protest, too. I would not be surprised if the Chinese government has their hands full if their down cycle is deep."

Leisa said...

Glenn, I did read that at RM. I thought it was interesting. It is a good way to 'put things under one's hat'.