Suppose that your objective is to find good investments. You start by looking at the most popular sources, and what do you find?
Most of the comments have a strong viewpoint -- either political or ideological. This has an effect on the writers, since stimulating page views drives advertising, measures of popularity (which are confused with quality, even by experts), and face time on TV. If you want to be a writer for any big-time site they expect you to have a viewpoint and to be provocative.
Am I alone in seeing the irony here? If you just take a list of the biggest "investment blogs" the ideological bias is apparent. There are only a couple of exceptions.
This week provided an excellent example of how the savvy investor can profit by putting aside his/her political views. I have in mind the ongoing Washington farce, this week emphasizing the extension of the payroll tax cuts and unemployment benefits (along with a few other elements of contention).
- As public policy, you could question whether it was appropriate to extend benefits. Was this sending the right message to the unemployed? Should public policy be nudging the long-term unemployed into more aggressive job searches?
- You could also question the payroll tax cut extension. Should we be digging a deeper hole on the entitlement balance sheet, deferring the costs until later?
- You could emphasize the political horse race -- the main theme of most stories. This is what everyone wants to read. Did the Democrats gain from this showdown? Did Boehner really 'cave'? What does this mean for the election. It is all a game to most people.
The Trading and Investment Edge
It is easy to take advantage of this political, partisan, and ideological bias. Just ask the following question about what is happening:
Is it market-friendly?
The tax-cut/unemployment decision meets the market-friendly test because it helps to stimulate the current economy. I understand that many people believe it is wrong to spend now and pay later, but that is not the market test. Those who wear this ideology on their sleeves and invest accordingly are losers.
Every macro-economic model used on The Street takes a different view. Whether Keynesian policies will work in the long run is a matter for debate. Whether Wall Street forecasts, mainstream viewpoints, and the actions of big pension funds follow this approach is not debatable. This is what they do, and today's (Friday) market underscores the point, as you will see from tomorrow's (Saturday) news headlines.
How to Profit
There was actually plenty of time to profit from this. The news came out on Thursday afternoon, and there was little movement in futures. Here is what I commented at the new Wall Street All Stars Site:
December 22, 2011 - 4:24 pm
There are reports from various sources that the House GOP will accede to the two-month payroll tax cut extension. Since the House already acted on the Senate bill, calling for a conference committee (SOP) this is going to take some fancy footwork.
December 22, 2011 - 4:26 pm
Whatever one thinks of the merits of this issue, I regard this as market-friendly news.
There was plenty of time to act. This (Friday) afternoon I noted the reaction from one major firm. I expect more to follow:
As I said [Thursday] afternoon, the payroll tax cut extension is market friendly. JP Morgan raised their Q1 GDP forecast from 1% to 2.5% partly on this basis. The assumption in their report is that it will be extended for the rest of the year as well. I think that is a near certainty. Here is a link to a story describing the report.
A Guideline that will Pay Off
Here is the rule that is working: Anything that provides current stimulus, even if it has a later cost, is market friendly. Expect a rally. This goes double in Europe. Any measure that delays a day of reckoning and buys time for a solution will be viewed as market friendly.
Are you trying to win a debate, or would you rather get returns on your investments?