Poor Cues from the Market as to 'Good' or 'Bad'

Here’s the bitter truth about the “financial crisis.” Things were never as bad as people thought, and now things are not as good as people think. Over the last six months, there was too much pessimism around what was going on, and now we are moving toward too much optimism.

Why is this happening? One reason is that too many investors and commentators take cues from the stock market and use that as a fundamental barometer for whether things are “good” or “bad.” This is reflected in media commentary by these pundits who go on TV and say something like this:

“The market doesn’t believe it.”

“The market is saying this….”

“What the market is telling us.”

The market is a poor substitute for doing fundamental research on stocks, yet millions of people use it as the Oracle of Delphi instead of what it really is – the uncontrollable collective mass hysteria of terrified investors and short term traders.

Bank of America (BAC) traded as low as $2.52 last month and peaked two years around $47. Which was correct? Neither. Bank of America was never worth the 2-3 times book value it traded at when it peaked, nor was it ever worth as little as the 15% of book value it traded at in March 2009.

Yet now everyone is breathing a huge sigh of relief, as the crisis is over, and as evidence of this, the stock market is cited as the determinant of that conclusion.

Here’s the bottom line. Don’t use the stock market to tell you the fundamentals of our financial system, as it is a terrible indicator of those fundamentals.

Comments

[Larry House:]

"The market is a poor substitute for doing fundamental research on stocks..." Are you serious? The market means EVERYTHING! The fundamentals don't matter if the market doesn't care. The market is the judge. Many good companies are doing nothing right now because of market action. You can't fight the market or the trend and win.

Apr 16 10:27 AM

[Larrysyr:]

Cetin,

I'm starting to appreciate your positive outlook, although it's a little too positive for my taste.

But please stop using Goldilocks as an ideal. She was a burglar, a thief, a vandal, and a coward. She ran away rather than face the consequences of her actions.

Apr 16 10:44 AM

[jratl:]

Hmmm, "The market is a poor substitute for doing fundamental research on stocks..." And "The market means EVERYTHING!"

I think it depends on your time horizon. Fundamentals are worthless for short term trading, and trends are great for trading while meaningless for long term investing.
Beauty is in the eye of the beholder.

Apr 16 01:20 PM

[THofler:]

I've experienced loss & gain on both sides of this issue. I bought some ETrade stock when in steep decline, because the CEO reassured that their CDO portfolio was rated AAA. Ouch!

Then I bought some Energy Transfer Partners in November at $25/sh when highly leveraged hedge funds were dumping it in a massive cascading margin call puke. This Tues. it traded near $42/sh. Aahh!

Markets can be very smart and also very dumb.

Apr 16 09:46 PM

[Glen L.:]

"The market is surging because it,s pricing in a Goldilocks recovery of years of sustained economic growth and tame inflation thanks to Obama and Geithner's stimulus efforts. "

Yeah, but two problems: (1) the market is wrong, (2) you think this is a GOOD thing.

Obama, Geithner, and the FED are destroying the dollar and pushing the country into receivership, and you think it's a GOOD thing.

I love reading your posts, Cetin. My eyes need the daily rolling exercise they provide.

Apr 17 12:01 PM