Day after day the media reports on the "reasons" that the market is moving up or down. Nobody seems to challenge these reports even though they are often patently bogus. And since the reports seem to change every day, we just get used to the idea that nobody offers a real explanation of daily market movements. So just like we simply have to accept that our portfolios are worth 40% less than they were last October, we have to accept that nobody will bail us out or even explain why the market moves up or down every day.
Yesterday, for example, there were two "explanations" offered -- both of which are silly. One was that investors were buying stocks yesterday in anticipation of a Fed rate cut, the other that investors were snapping up bargains. Yet just a little analysis suggests that both "explanations" are probably wrong. The Fed rate cut explanation makes no sense because the market has been anticipating a 50 basis point cut since last week -- if this was news why didn't the market rise last week?
The other -- that investors were snapping up bargains -- is also shaky. That's because a lower stock price does not necessarily mean that the stock is a bargain. Investors must evaluate a stock based on its price in relation to some measure of value -- such as its earnings growth or its net worth. But most analysts agree that 2009 earnings projections are not worth the paper they're written on. Some anticipate that earnings will decline 35% or more next year so P/E ratios are meaningless. And for many companies -- particularly those holding asset-backed securities -- net worth as stated on their books is a fiction that does not reflect the diminished value of this toxic waste.
So what does move stocks up and down every day? I don't know. But I think that if we had access to the trading records of the biggest investors -- what they bought, what they sold, and why they did it -- we would be able to piece together the reasons that the market moves up and down every day. For instance, if huge hedge funds had major short positions in VW and news came out that boosted VW's stock, the hedge funds would get a margin call requiring them to buy VW shares to pay back their stock loans -- that would cause a buying panic which would spike VW stock.
Of course, such information is not readily available to the public. Instead, we are conditioned to accept the absence of real analysis. No doubt, the recent collapse in stock prices will scar many investors who have or will soon pull out their money from the market and never return. But for those who continue to invest in stocks, the inability to understand why stocks move up and down every day eliminates a pillar that could boost investor confidence.
And it's that lost confidence that leaders must rebuild on a more solid foundation if we are to ever hope for a viable financial system.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
Heinz looking good after the second quarter?
Why isn't Bank of America updating its shareholders on CEO situation?
Will Rich Ross really have a positive impact on Disney's movie operations?
Reader Comments (Page 1 of 1)
10-29-2008 @ 10:59AM
Jeff said...
Some idiot uses a causal relationship for any two major media events of the day, and then stocks soar, tumble, or slide. This has irritated me for a long time.
10-29-2008 @ 11:45AM
Virgil Bierschwale said...
I believe you have touched on something here that has a lot of us concerned.
The media no longer reports the news.
They do attempt to influence the news.
I believe their management should rein them in, but on the other hand we have all of these talk shows that attempt to tell us what we just heard in a presidential debate and people seem to love it even though I personally detest it.
Somehow we need to force the media to report the news as facts and to stay out of stating their opinion using their position to get it in front of people.
Virgil
http://www.KeepAmericaAtWork.com
10-29-2008 @ 12:09PM
william lindblad said...
Yup, you right about the media, however this has been going on for as long as I can recall. As far as buy on rate cut expectations - I am sure that some did just so and the same can be said for "bargain hunting". Reasoning is in the same league with opinion, which varies greatly. Trying to apply logic and good judgment to a system that is frequently the opposite is foolhardy.
To cite a great example:
A few years ago dish and DTV were talking merger - that is until the FCC said "no way" as it would be nothing short of a monopoly. In a manner of a few months at least two street advice guru's were proclaiming that the deal would still happen. Sometime I wonder why these people draw a paycheck. The FCC said no and there was no Congressional support either - hence it never happened.
Market run on rumor and speculation - not logic.
10-29-2008 @ 12:32PM
Iridium said...
All you have to do is look at the top 20 percentage gains or losses in the history of the stock market and you find almost all of them happenning in the past 4 months.
The entire flux of the stock market has been a few huge hedge funds trying to flip around all of the stocks they hold. If we were able to see who was buying and selling we may see hundreds of thousands of shares being bought and sold by a single few traders.
Hedge funds are unloading entire companies, thousands of shares built up over many years. Then they are buying thousands of shares in other companies. All while trying to short some companies and go long on others.
This is total market turmoil. The stock makret has just become completely unglued. Just look at what happenned with VW. Hedge traders were ready to short the stock and they got caught. Pannick buying sent the stock soaring to 1000 euros a share making VW the largest company on Earth on paper.
Trading needs to be suspended while we work this whole economic situation out. If not companies that were doing fine a month ago might be wiped out by a single trade.