I’ve been quiet for some time because there hasn’t been much to write about. But after yesterday’s stock market rout, why not chime in? What’s worse is that as I write this the futures are predicting another rout – but we have a big employment number coming and time will tell how today plays out. Anyway, what’s a little rout after the 5 year run stocks have had. Here are a few thoughts to go with your morning paper, or more likely iPad news:
Jay Shenk Resume
There is a lot of prognostication going around which attempts to predict what the stock market will do based on past trends. You see this sort of thing all the time—sometimes it is correct, but often it’s simply randomness which would equal out in the long run. Correlations do not necessarily show ‘cause and effect’, although the news media often presents them that way. Remember the study of eating a good breakfast with eggs—it led to better performance at school. Did it really, or was it a correlation based on the fact that getting a good breakfast was also correlated with having an involved parent who stayed at home, or perhaps being from a wealthy family that could afford good breakfasts, or even perhaps a maid to cook them? The reprinted article below gives a classic example of what looks to be a predictor, but obviously isn’t: There is a strong correlation between who wins the Super Bowl and how the stock market performs. Makes you wonder about financial advisors vs. flipping a coin.
There’s an interesting exchange where you can make “bets” on various stock indexes, commodities and events. It’s called NADEX. For instance you can bet that the S&P 500 will be over 1720 at 4:00 this afternoon. It’s somewhat like options except they are daily and weekly. You have a defined risk and reward which is based on the odds participants place on that situation happening. I have been playing with a demo account. I was contacted by someone from the exchange who sent me some handbooks about various strategies. The handbooks have charts and graphs talking about premium decays and the like technical stuff. I’m very reminded of options and futures books that lay strategies out like they are mathematical formulas – all very scientific and genius looking. Well reasoned and thought out, rational, sane, erudite, academic and totally impressive. The best minds are hard at work figuring this stuff out.
There is a commercial on TV for Prudential Insurance. It states that while people are living longer, the retirement age has remained the same. Thus you have more retirement years. The spokesman asks “how will you have enough money to enjoy all those years?”, the inference being that Prudential knows how to do that. Excuse my inherent cynicism but this Holy Grail lies in knowledge of what the future will bring. I’ll admit that it is a noble question for the normal person, and one we’d like to have the answer to, but there are so many variables that it is impossible to give any certainty.
There’s an old joke I heard Woody Allen tell that goes back at least as far as when the Poconos were a big vacation spot….there were two older ladies sitting in a restaurant in the Poconos, complaining about the food. The first said, “The food here is terrible.” The second lady concurred saying, “That’s for sure, and not only that, the portions are too small.”
That’s how I, and most of us, feel about Wall Street—the place is terrible—they crashed the economy and the compensation is outrageously high, but the worst part is that the participation is too small by at least one person—Me. I’m not part of it, earning those huge salaries and bonuses.
I just read a piece from a technical analyst (chart and number stuff) where she was pointing out how such and such was bullish while such and such was bearish - you know the old economist type commentary of “on the one hand, but on the other”. While it all sounds quite interesting and educated, I find myself asking “why she is doing this”?
That answer is really very simple – she’s trying to make money. She’s doing this by attempting to compare the line-up of certain statistics today with some past line-up, and base today’s action on what happened after that previous line-up. I wonder what the odds are that she will be correct? That’s the question! I can’t tell you how many times, over all the years,” that I’ve seen these proclaimed set-ups turn out differently than the writer’s prediction.
Once again I’m going to have a little fun with a guy who claims to be a technical analyst that uses the Elliott Wave Theory. And yes, it’s easy for me to be a back seat driver but this does illustrate the same type of problems that I repeatedly talk about with these “gurus”.
The Elliott Wave Theory is really far out stuff that attempts to put human behavior into up and down cycles or waves. Each cycle has 5 waves of different dimensions and durations. It got a lot of attention in 1987 when a fellow named Robert Prechter used it to call that year’s crash. Of course, like what usually happens to these gurus, Prechter has done nothing since. He is still in business somehow, but my take is if there are enough of these guys constantly making calls, someone will eventually be right. The problem then is that people will believe and follow them after their famous call, not understanding that the call was pure luck.