the 3500

People like to talk about fundamentals when discussing the real economy and financial markets. It provides meaning and lends a narrative to events. It’s certainly far more useful than saying ‘car prices/house prices/oil prices have crossed their two hundred day moving average’ - this does not make for engaging dinner party talk. Friends and family, for example, often talk about the demand for housing stock, limited supply coming on stream, and other such reasons for why house prices shouldn’t fall too much.

But here’s the thing. Fundamentals are fundamental and price is price. The two are related but they are not the same thing.

Even when fundamentals are positive, the price can be too expensive. And when fundamentals are poor, the price can get too cheap. Take housing for example. Regardless of immigration trends, population dynamics, etc, it is quite possible that house prices are simply way too expensive in the UK, that the housing market has priced in all these factors and a hell of a lot more. I’m not saying it is definitely the case, just that it might be so. Right now, people are giving reasons for house prices to fall (interest rates, oil prices, etc) but perhaps houses were simply overpriced and due a correction. While any combination of these fundamental factors may have triggered a correction, they may not be the true cause for the decline.

Over to financial markets, the analysts on Bloomberg and CNBC are happy to get their air time and chatter on and on about fundamentals of stock x, or economy y, when touting their buy/sell calls, but why don’t they specifically tell us what they think is ‘in the price’ and what isn’t.

Anyway, enough of the late night blabbering. Just remember to separate price from fundamentals.

It makes it hard to make successful, opinion based trades.

You enter a trade on the basis that everyone is wrong, accepting scope for the crowd to get it even more wrong before waking up to reality. When the crowd does eventually realise the error of it’s ways, the price turns in your favour. However, it is extremely difficult to hold on to the trade and enjoy ‘being right’, because the crowd is always wrong, and if it is now moving in your favour, then you are also wrong, an equal fool.

This unhealthy skepticism leads to early culling of winners and ensures that one’s portfolio spend most of it’s time holding on to losing positions.

I few days ago, I made a bullish comment re the bank sector:

“When bubbles deflate, savvy (and lucky) investors can pick off the bargains and make a tidy profit, but buying too early can also spell disaster. One signpost of value that I’ve been looking for in the UK financial sector is bidding activity, and while a bid from either private equity house or sovereign wealth funds would have filled me with greater confidence than a bid from another financial institution, I believe it is still an important signal (especially given the premium of around 50% to the current market price) that we may be near the trough of the dip and that it may now be a good time to start investing in the UK financials as a basket.”

Look at the rally in the financials. I know things, you know, don’t say I didn’t tell you.

Truth be told, it was all luck. My view was a long-term call and I expected a bit more more downside before things got better. It was based on the simple notion that most folk did not expect the banking situation to unravel the way it has, but now that the sector, along with the economy, is the process of unravelling, many folk are expecting and pricing in much more damage than I believe will reasonably occur. Also, with the like sof Royal Bank of Scotland trading at more than 10 year lows and on a P/E ratio of under 3 according to Google Finance, one can guess that the extended period of good times that resulted from lending disintermediation  (I believe this was at the heart of the crisis) are more than priced out of the market. It’s all about relative expectations, to quote th late Sir John Templeton (pulled from a research note by SocGen analyst, James Montier):

“To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest rewards’, but few of us will find this easy.”

It’s fun coming up with opinions, but I don’t have the money make long-term investments, so my money is not where my mouth is. There are so many reasons not to believe too much in one’s abilities when it comes to assessing such calls. Perhaps, most importantly, is the idea that what happened was the result of a distribution of probable outcomes, and that this distribution will never be known. Was it a low probability event that just happened to occur, or were the odds really favouring a swing higher? Hindsight is all we have, and it is useless, especially when the sample size of one’s predictions can be counted on a single finger (that is, n=1). We will never know the truth. The time has passed.

These days, my short-term trades are few and far between, but when these trades do take place, I have learned that this type of opinion just gets in the way

In Michael Palin’s travel series ‘Full Circle’, Palin talks to Sokum, a Zen Buddhist monk. I jotted down the brief conversation that takes place between them:

Monk - With unity of body and mind we can attain our true nature.

Monk - Each moment is the practice.

Palin - As I am only here for one night, what will I be able to learn in that time?

Monk - You? But that is your problem. You must not ask me.

When I read this I think about oneness, of our perception of tasks in relation to time, of an even allocation of one’s energy, of learning from others but not without reaching deep into oneself. Much food for thought.

This piece is called ‘Cardsharps’.

Wikipedia comments:

‘The painting shows an expensively-dressed but unworldly boy playing cards with another boy. The second boy, a cardsharp, has extra cards tucked in his belt behind his back, out of sight from the mark but not the viewer, and a sinister older man is peering over the dupe’s shoulder and signaling to his young accomplice. The second boy has a dagger handy at his side, and violence is not far away.

It was the second such painting Caravaggio created. The first, The Fortune Teller, had drawn attention, and this painting extended his reputation, small though it was at this stage. The subject of The Fortune Teller and Cardsharps was something new: realistic scenes of street life were a novelty, especially with this beautifully rendered attention to little details such as the split fingers on the older man’s gloves, or the teenage cheat’s anxious glance at his master. The psychological insight is equally striking, the three figures bound together by the common drama, yet each with his own unique play within the larger play - for if the innocent is being duped, the other boy is no older, another innocent being corrupted even as he cheats his gull.’

Mervyn King, governor at the Bank of England, is leading from the front with the national call for wage restraint. He had just rejected a £100,000 pay rise (from the Times). I have respect for Mervyn King, but I continue to believe it is irrational for the average man on the street not to ask for higher wages when faced with higher costs all round (fuel, food, financing costs).

On a more positive note, we saw a hefty bid from Santander for building society Alliance & Leicester today, substantially above the current market price. When bubbles deflate, savvy (and lucky) investors can pick off the bargains and make a tidy profit, but buying too early can also spell disaster. One signpost of value that I’ve been looking for in the UK financial sector is bidding activity, and while a bid from either private equity house or sovereign wealth funds would have filled me with greater confidence than a bid from another financial institution, I believe it is still an important signal (especially given the premium of around 50% to the current market price) that we may be near the trough of the dip and that it may now be a good time to start investing in the UK financials as a basket.

The Fortune Teller (1954) by the real Caravaggio shows a confident, young man having his palm read by a fortune teller. See how she gives a knowing smile as she removes a ring from his finger without his knowing.

Watch out for forecasters and their crystal balls, I say, or you risk being conned on two fronts. First, there is the payment for the forecasts, with time and mental energy, if nothing else. Then we pay up again when we act on their predictions.

In a Financial Times piece defending speculation, the author writes:

‘Unfortunately, high commodity prices are a necessity. They provide the message that we need to consume less and to boost supplies. Speculators help not only to shape that message but also to accelerate its reception.’

I support speculation but I don’t like how the author use of words, specifically the idea that we ‘need’ to respond to the message contained in higher prices to reduce consumption/increase supplies. I find that an ugly twist on the idea that people ‘will’ respond to higher prices by curbing consumption. It’s the difference between a calling to action and saying what will be will be.

Yours,

A.Fusspot

Article Link: Speculators and commodity prices

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