Tune Out The Hype Machine

I don't know if it is "Wall Street," the media, someone else, or all of the above, but the market often confronts scary events that cause people to get very worried - and then these scary events end up being nothing, or close to it.

Going in, these are all different, but they never really are. In the summer of 2002 there was genuine panic because CEOs were going to have to certify their earnings. Woooo, that was going to be a bad one. It really turned out to be more of a bottom than a top.

Just recently we had the options expensing thing. This was going to wreak havoc with earnings - hmmmm, not so much. I wrote about that one in December 2004, about six months before it was due to start. That one seemed to have zero impact.

I am not sure how many people are paying attention to the commercial paper issue or the mortgage reset issue, but neither will matter anywhere near as much as some people fear.

There will be impact here and there no doubt, but my hunch is that neither will derail the markets. Invariably there will be a dissenting comment on this but we have seen this movie over and over. The terror caused by the earnings certification was so huge - and it was a non event.

We start hearing about these things months ahead of time, so the market prices it in and the surprise factor disappears; who doesn't know there are a ton of mortgage resets coming?

While I am not a 100% efficient market guy, these sorts of things tend to have far less bite than bark.

Comments

[Boycemix:]

If you are correct in your market analysis and the market will pull through with minor scratches then go ahead and take all the credit for predicting the strength of the market. If you are wrong however, and this is just the jittery beginning before the real drop, then I wonder if you will admit it later and confess in your wrong prediction with a post along the lines of "Sorry guys, I was totally wrong".

Making predictions is easy :D And at this point it is about 50-50 of where the market can go

2007 Sep 12 04:16 PM

[Roger Nusbaum:]

see the above for some context, see past articles for more context, I am just saying that these two items will not drive the bus the way people expect. a measurable chunk of the mortgages have already reset and stocks are only down 5%.

The bigger thing is access to new capital for new mortgages that is impeded by the slope of the yield curve. The Allison Trannie deal shows there will be a way around the short term funding issues.

2007 Sep 12 07:31 PM

[Still Renting:]

I agree with some of what you say with one caveat: as long as a thing like this doesn't hit what I call "critical mass" everything will be fine. If it does, well, it won't.

It is like an earthen levee. As long as the water stays below the top, we're fine. As the rains come and the water rises, it can look scary. But if the rains stop and it stays below the top, everyone can relax.

That said, I think the "hype" is those who say it will be fine. We are seeing the BEGINNING of the reset "rainstorm". It will reach full power next year. We will then see if the economic levee holds. If it doesn't, well, we know what happened to New Orleans.

One other thing: comparing so-called hype here to other past predictions on completely different events is a bit disengenuous. After all, as so many like to point out: "Past performance does not guarantee future returns".

2007 Sep 13 12:41 PM

[Still Renting:]

Oh, and I was a Y2K programmer - I managed code remediation for several companies. Many of us, as the year approached, were buying property in the sticks. This could have been REAL bad had the work not been done. It was not "guaranteed" that it would be no big deal.

We won that battle through hard work. It does not mean we will win them all.

2007 Sep 13 12:43 PM

[Boycemix:]

If you are correct in your market analysis and the market will pull through with minor scratches then go ahead and take all the credit for predicting the strength of the market. If you are wrong however, and this is just the jittery beginning before the real drop, then I wonder if you will admit it later and confess in your wrong prediction with a post along the lines of "Sorry guys, I was totally wrong".

Making predictions is easy :D And at this point it is about 50-50 of where the market can go

2007 Sep 12 04:16 PM

[Antediluvian:]

I'm sure you aren't stupid. So you must be lying. The dollar is at an all time low 79.45 NY/BOT and we have 80.00 bpd oil. When the Fed cut the rates the dollar index will be just fine.

Oh and by the way, it's the CDO's valuelessness that is probably causing the dollar dump as well the possibility of a rate cut.

Do you understand economics or are you just not paying attention?

2007 Sep 12 08:20 PM

[Roger Nusbaum:]

you can read my past articles for full context of what I expect, if you care, but I am saying the market is way more worried than the fundies dictate and you are basically saying this time will be different.

2007 Sep 13 03:57 PM

[Karl Denninger:]

Let's see..... the dollar in the tank, breaking 30 year support, Oil hit $80 (gee, I wonder why - maybe because its IMPORTED?), consumer is 70% of GDP and our net trade imbalance is ~$700 billion annually.

We're on the edge of foreign capital flight which will drive real interest rates (that would be BOND YIELDS) above 10%.

Oh, and there are signs of a recession by Christmas.

Naw, nothing to be worried about at all. Buy more stocks (thank you for the opportunity to unload into your portfolio!)

Just one final question. Historically-speaking, what percentage of value do stocks lose in a recession?

2007 Sep 12 09:06 PM

[gordon:]

Stocks go down 20% in a recession, as I remember.Bloomberg is saying earnings should only be up 3-4% now. Maybe that's sandbagged to make 6-7%. About those back-dated stock options, didn't they sweep them under the rug? How many came clean? How many companies still have'nt settled or restated? They waited for the next financial scandal so we would forget, classic Wall St.

2007 Sep 13 10:46 AM

[Roger Nusbaum:]

I did not say to buy anything. There is a fear that there will be real problems from the commercial paper roll next week. The commercial paper market is already fixing itself a little. If we are talking about the mortgage resets months before it happens the effect will be very muted.

2007 Sep 13 03:54 PM

[Tristan Yates:]

Is this charted or uncharted territory? That's the trillion dollar question. I started my career as a mortgage-backed security portfolio analyst in 1991 and I have to say that this looks familiar in many ways with falling prices, rising delinquencies, and bank failures due to derivatives. We watched the DQ3Ratio climb up, recommended our clients set aside a reserve, and then the ratios came back down and they didn't need it. A few banks had gone under but the losses weren't as bad as expected and the loan portfolios were in better shape too. The economy slowed, some regional economies were hit hard like Texas, but the sky didn't fall by any means.

2007 Sep 12 10:49 PM

[Bob K.:]

We are in uncharted waters in so many ways. Debt to GDP, House price to GDP, House price to income, debt service to income, cap rates on rental property, massive retirement of the baby boomers, etc.. As a long time investor and M & A guy there is little value out there, but plenty of risk. I quite frankly do not see the catalyst for growth. This look alot like Japan in the early nineties to me. Aging population, refusal to mark down worthless assets, they stopped spending (we will be forced to stop spending), I will be happy to miss some upside to avoid a greater risk of substantial downside

2007 Sep 14 12:59 PM

[GadflyOnThe...:]

Roger,

I enjoy the media hype because it creates opportunities to grab assets at sale prices. Having 40 years experience in the investment markets (as an investor, stockbroker, director of trading, director of international research), I have observed that when the "big" guys want to accumulate, they feed the media scary news, and when they want to sell, they feed the media good news (witness the analyst reports during the dot com era).

Valuemaster

2007 Sep 13 11:51 AM

[tlc8386:]

If you think now that all of this is "nothing" then why in the world would you a few weeks ago tell everyone to short the market? Roger you don't know what you are doing do you? You told me I could be wrong hey I am way up--my buy rec went in beginning of Aug. And the simple reasoning is this when the fed starts to cut money will be pulled out of cash into something else and this time the rotation is back into stocks. Now if we don't cut we could see a nice turn around but the feel is now .25% cut and that is what needs to happen to help this credit crunch. ( so if you are still scarried get your puts ready for the 18th)

Lenders though need to be spanked big time and deserve to go under!! some of these loans are insane --white collar crime if you ask me!! good luck---

2007 Sep 13 12:05 PM

[Roger Nusbaum:]

um yeah, I disclosed adding about 1.5% to a double short fund as a hedge. if you call that short the market you are adding 1+1 and getting eleven.

2007 Sep 13 03:52 PM

[tlc8386:]

seekingalpha.com/artic...

how soon we forget!!

2007 Sep 13 06:33 PM

[Roger Nusbaum:]

I am abut 80% long, as that article you link to says, I made a couple of tweaks. did you actually read it? Seriously, you are adding 1+1 and getting eleven.

The entire context is don't panic when the market panics and stick to whatever your exit strategy is. I am picking on you because you seem to come at me very hard without having read the entire article.

2007 Sep 13 08:02 PM

[tlc8386:]

Ditto!!!!

2007 Sep 14 04:23 PM

[tlc8386:]

Ditto!!!!

2007 Sep 14 04:23 PM