Emotions and Facts – US Economy and Markets

Bugra Bakan

“We are in the business of making mistakes. The only difference between the winners and the losers is that the winners make small mistakes, while the losers make big mistakes.” Ned Davis, Market Analyst

It feels like the markets are coming close to a critical juncture, which makes the opening quote from my favorite market researcher Ned Davis, all the more meaningful. During times of change, it is easier to make mistakes. The key question becomes how big is the mistake and how long has one resisted correcting it? What I can add to the Ned Davis’ quote, is that the biggest difference between the winners and losers is that the winners correct themselves quicker than the losers, and learn from their mistakes. As the US stock market might be approaching the end of the cyclical (short term) bull cycle that started in March 2009, the winners will be those whose tactical moves will reflect the tidal changes as opposed to fighting them.

First quarter 2013 real Gross Domestic Product (GDP) annualized growth rate came in at 2.5%, below the expected 3%-3.5% range. To give you a perspective, the post WW II average is 3.5% and the current reading is significantly lower than the historical average; 28% less.

US Stocks Hit All Time High

Bugra Bakan

“The secret of all victory lies in the organization of non-obvious.” Marcus Aurelius (Roman Emperor 161  – 180)

I only discovered Marcus Aurelius in 2000 Ridley Scott movie, Gladiator. I can’t forget the scene, in which to his son Commodus, he says: “Commodus, your faults as a son, is my failure as a father.” He openly and honestly acknowledges Commodus’ shortcomings, doesn’t sugar coat a thing, and accepts full responsibility as a father; my kind of guy. These two characters in the movie are portrayed quite accurately against historical facts. As a philosopher, Marcus Aurelius points out in his quote, to the importance of the non-obvious; the unknown. If you think you’re smart by knowing all the economic facts and you’re ready to invest, think again. All the information available to you (except insider information, which is illegal) is also available to everyone else, and most likely already factored in. The key question is: what might the other investors be anticipating with this information? Because if the known has already been acted upon, the unknown is where the victory lies.

Now, of course this doesn’t diminish the importance of research and collecting data. Even to anticipate others’ actions, you need to know what those actions might be based on. A reaction to certain set of facts, also called a trend, could be identified by looking at historical data and matching similarities to gauge what could be next. This is called a technical analysis, which is always confused with charting. Charting is a small subset of technical analysis, and nowhere near as reliable as trend analysis.

A Ticking Time Bond?

By: Bugra Bakan

Q: Why do Economists make predictions to the nearest tenth of a percent? A: To prove they too can have a sense of humor.

This is my fourth calendar year writing newsletters, and second in TABC Blog. Time surely flies If we don’t pay attention to where we are today in relation to our longer term goals, we may find ourselves getting a wake up call rather late in the game. The key question for someone in my position to raise is: do you have a financial plan and how are your current financial circumstances positioned in relation to that big picture? More on this later.

In every bull market regime there are naysayers, who are not convinced. When the market is down, they warn you of a value trap. A value trap is a condition when the price to earnings (P/E) ratio is low, which is usually one of the reasons to actually start investing. Ideally, you’d rather pay less for given earnings and that’s why when prices fall, stock screeners trigger a buy signal to a value strategist. Since it can’t be that simple, what could you be missing? This is where the value trap comes in. Are you getting what you are paying for, a low quality stock? A low P/E may be a warning for deteriorating earnings, which would further push down the price of your investment and that’s when you fall into the trap.

When prices go up, these naysayers will say that the market is overbought, too stretched, due a correction and resembles the last “sucker’s rally.” A sucker’s rally is typically seen just before a peak and a sharp drop after, or will follow lows and attract those who think the bottom is seen only to find out that this was a “dead cat bounce” and there is more room to the downside.