More Market Worries: 'The Only Three Questions That Count'

There is an important observation from a great source, Daily Speculations by Victor Niederhoffer, Laurel Kenner, and their team. This is on our list of regular reads, with a bombardment of stimulating ideas, but thanks to Charles Kirk for highlighting a very interesting post we had not yet seen (as he does so often).

Review of Ken Fisher's Book

Victor has a number of criticisms of the much-publicized Fisher book, The Only Three Questions That Count. Readers should check out his review. This is on our (growing) list of books to review, so we have no comment at this point, beyond our general respect for Fisher's results.

Here is Victor's nomination for the single best point in the book:

As a final positive note, one thing that Ken Fisher claims in his book that sounds true to me, is that any fear that is widely broadcasted in advance will have no impact on the market. Or perhaps in more predictive terms, to the extent it's influencing the market, it creates a bullish situation because it's already encapped by the price, then price will increase when the fear subsides. Fisher gives many examples to carry his point, and if it weren't so hard to quantify this, and there weren't so many highways and byways to tie down, this would be a very good thing to study.

I feel that this point is highly relevant to sub-prime, and also to the asset seizure on the brokerage house that is famous for seizing the assets of its own customers (how ironic).

How Timely

This observation is extremely timely. In a few words, Victor made the point we were reaching for yesterday. It is difficult to quantify what worries are already reflected in the market. A good starting point is for investors to ask, when reading the umpteenth article on sub-prime lending or hedge fund problems or spent-up consumers, or housing market problems, whether this seems like new information.

Here is a clue: If the writer calls it "sub-slime" or a "meltdown" or "parabolic," one must evaluate the rhetorical flourish. Those invoking symbolism instead of writing objectively frequently have an agenda that the reader should understand.

Comments

[cayman:]

so if we start to get worried about that meteor coming towards earth and the market takes a a dive. Is it a buying opportunity because it's already been discounted. ????

2007 Jun 28 10:30 AM

[benesposito:]

Look at the rate of change of opinion. Six months ago talk of subprime would have been ridiculed. The predictions of a fed cut went from 98% to 0% in two months this spring. Three months ago talk of subprime affecting the financing of M&As, or bond yields would have been laughed at. Now, granted, in the sort term a person would have lost out on potential gain in their portfolio through the same period of time. However, how much of a commitment to these things is warranted giving this swiftly tilting view? Given the rate at which information is distributed in society, and the 24 news channels need for rating grabbing headlines (like meltdown and crisis) these things can be over-hyped and talked to death without instantaneous gratification, but it doesn't make them merit-less. Anyone who's not a short seller should be disturbed by the trends...

So yes, they may be fully discounted. IF everything turns for the positive. And no, they aren't fully discounted if these particular problems lead to new problems. WHICH THEY HAVE BEEN. i.e. Subprime -> Hedge Fund -> who knows?

So the meaningful point is, do the problems continue to spread. The current trend indicates yes, but who knows? Maybe a month from now your telling us how everyone keeps talking about the Alt-A meltdown, so therefore, we're at a bottom.

2007 Jun 28 01:28 PM

[wixeywaxy:]

My observations would indicate that every bad news story has it's own effect. I don't think there is a one size fits all way to determine if all the bad news is priced into the market for any given negative. With regard to the present R.E. slow down and losses in the sub prime lending market my own feeling is that it is not as bad as the media portrays it. House building was at an unsustainable rate probably so a slow down was inevitable and healthy. The sub prime mortgage loan losses are, for the most part, diffused and only in a few cases concentrated enough to bring a lender down unless there were other problems. That could be the case with some hedge funds is my guess. Vic

2007 Jun 28 03:20 PM