Wednesday, November 2, 2011

Doug Kass - How to Survive an Emotionally Driven Market

While we wait for Mr. Bernanke to come down from Mount Olympus to talk to us plebs, I wanted to highlight this piece by hedgie Doug Kass - one of the better articles I've read in a long while on the nonsense that is the current market, and how to deal with it.  Perhaps I liked it because he repeats some of the concepts and themes I've commented on, but he takes things in a much broader direction.  Lengthy piece, but worth the read!

Some snippets:

  • Emotion is taking over the market. On any given day (or maybe any given hour!) the U.S. stock market can swing by several percent based on a rumor, a flimsy blog or by a statement by a central banker or world leader.  In one brief four-week period, the fear of return of capital has been replaced with the fear of an inadequate return on capital as fear of the downside has been replaced with fear of missing the upside.
  • I have long written that the crowds usually outsmart the remnants, but in today's emotionally charged and volatile market (which demonstrates no memory from day to day) confusion reigns and the crowds seem to bend with the emotion (and news) of the day.  What's causing these rapid changes in sentiment, and how should the average investor responds.
(Kass points out the dominance of the hedge fund crowd - not in total assets, but in dominance of trading, along with the EFT+HFT duo I've complained about.  He takes it a step further with the 'business infotainment' [my words, not his] media as well....)
  • Arguably this manic crowd behavior (manifested in the ups, downs and insane volatility that follow) is reflected in the mood swings from depression to euphoria that have been goosed and exacerbated by the media, by performance-chasing investment managers and by high-frequency trading, momentum-based strategies and levered ETFs.

Kass goes in depth into each of these items - but since I have not spoken much about the media I'll highlight that piece - I love his idea of disclosing how much advertising dollars the guest's firm has spent on that channel.  Truth in disclosure!

  • The business media's role is to objectively and without prejudice tell "the score"; provide a market perspective (in describing what the market is doing and why); present other professionals' opinions of individual companies; analyze the economy, economic releases and news; and interpret government and central bank policy -- all for the purpose of improving the public's understanding of the market's influences.  But too often media coverage becomes theatre.
  • The media is too often positively biased (though there are occasionally some exceptions) and their objectivity is sometimes lost in their cheerleading and chorus of "Everything's Coming Up Roses."  Who can blame them for the use of their bully pulpit, as there are obvious reasons for this. The media has a vested interest in stocks rising; their audience (and ratings) contract in times of market downturns and advertising suffers. If things turn really bad, their salaries and employment status may be adversely impacted. The market's theatre (sometimes of the absurd) is far more exciting when stocks are in the green rather than in the red. As a result (and almost regardless of market environment), bullish "talking heads" who appear in the media routinely outnumber bearish "talking heads."
  • A little-discussed secret is that representatives of significant media advertisers (print, radio and television) often appear with greater regularity than other "guests." This helps to explain, in part, the media's sometimes limited criticism of glib, formerly wrong-footed bulls (names are excluded to protect the guilty!) -- many of whom failed to see the drop into the debt and equity abyss in 2008-09 -- compared to the relative quickness in criticizing recently wrong-footed bears like David Rosenberg, Nouriel Roubini and Meredith Whitney. 
  • Perhaps in 2011 it should be legally mandated that guests/talking heads in the business media disclose that their employers are important advertisers on the platform on which they are appearing. After all, when I or anyone else mentions a stock in the media, a disclosure of ownership in my hedge fund must be made. For example, BlackRock Vice Chairman Bob Doll's appearances on Bloomberg might disclose BlackRock's significant business/advertising relationship with Bloomberg. And, as another example, Jim Paulsen's frequent appearances on CNBC might disclose that Wells Capital Management is a significant advertiser on the network. 
I love that idea... and now I see why Jim Paulsen and Bob Doll are on CNBC seemingly every week.


The latter part of the piece discusses hedge funds and HFT.  Then Kass gives 8 steps on how an investor should deal with this emotionally charged market.... some of it is relatively canned advice but some good ones in there too.

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