Wednesday, April 11, 2012

To Market, To Market

By Carl
It often amuses me what rationales people come up with when a market moves in one direction or another.
To-wit: an analyst in England makes a positive comment about the banking industry, and glory be! the FTSE jumps up.
The comments specifically addressed this broker's belief...a broker, mind you, not a government official...that central banks around the world will address the lagging economy with stimulus packages.
Gee, thanks for pointing that out, Captain Obvious! A central tenet to Keynesian economics gets reitertated in the national press and markets suddenly facepalm and go "Now why didn't I think of that?"
I've spoken all along about the ruthless and brutal efficiency in which markets work: since the major players use software packages to discern exploitable areas of the market-- and many of these software packages can now account for some emotional context-- this market jump makes absolutely no sense, at least based on this fuzzy rationalization.
So there's two alternatives: analysts are blowing smoke up our collective asses because they don't know why a sector filled with underperforming firms is spiking, or they're covering up for something else.
If they don't know, then they should probably shut up, but here's the thing: Analysts are paid to know.
They used to be paid to find out, but it turned out that wasn't nearly as cost-effective as having them pick up a press release and parrot it. See, I worked as an analyst (not stock, but I did analyze public companies) and we were paid a very nice salary to ask questions. We could look at a balance sheet and a profit-and-loss statement and begin to understand the deviations from the norm, and ask why this was happening.
And the rules were simple, too: FASB regulations made our job that much easier, it was all in black and white, and there were very few gray areas to hide stuff in.
The landscape shifted. As with journalism, science, education, and mortgages, what used to be pretty transparent became mystical and unknowable. And people became afraid to do their jobs, not because they weren't good at it anymore, but because they had been perceived as unreliable and basically just thorns in the side of society.
Indeed, entire industries (I'm looking at you, Mergers & Acquisitions) grew up around strategies devised to throw analysts off the scent. We ended up having to play catch up on the one hand while explaining to our clients how we had been fooled so badly (if you've ever wondered what a mortality and morbidity hearing at a hospital is like, just sit in on a bad debt meeting.)
When a person becomes scared to do his or her job, he's going to take the path of least resistance, which is precisely what the crooks want you to do. Why should I take a computer and try to work out a program that discards the grotesqueries of a financial statement to bring it back to a level I can understand in a glance when I can just rely on the public statements of the CEO and the imprimatur of the CPA?
(In case you were wondering why Sarbanes-Oxley is an important law, that's why in a nutshell: if the CEO is going to lie, he ought to be held accountable.)
Indeed, that's precisely what started happening and why I got out of analysis: we found we could duck a lot of questions by pointing to the statements and saying "And all the analysis we could come up with did not dispute his claims."
Of course it didn't! It couldn't!
We didn't know, because we couldn't know, which is what is going on in market analysis now. Worse, we knew we couldn't know, so we also knew we were passing on a load of horseshit but damned if you'd find anyone who'd own up to that.
Which is also what's going on in market analysis today.
Why? Now you're asking the right question...
I guess it comes down to this: there are two markets. There's the market you and I can invest in, through mutual funds and stock ownership and our 401ks and IRAs, and then there's the smart money market.
When an analyst throws out an excuse wrapped in a reason like this asshat did, you can bet your bottom dollar someone has worked out a scheme to make money off it. My best guess is short the banks now, and wait for the pop from this jerk's message to wear off to turn a profit, or worse, bet on the put derivatives and really clean up without risking a thing.
The analyst knows he's talking thru his hat, but if he says nothing, he looks stupid and loses the faith of his clientele (odd thing that: admitting you don't know is penalized higher than taking a guess and getting it wildly wrong.) He's strung between a rock and a hard place, and either way loses. This way just hurts his bonus less.
The really damnable thing about it is, if half as much energy was put into working out a program that truly analyzed the complexities of a financial statement and parsed out and distilled the right questions to ask, the world (at least the rest of us) would be better off and smart money could still make a decent and fair profit.
But, you know, there are still crumbs left on the table...
(crossposted to Simply Left Behind)

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