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.