A Dash of Insight

Understanding Market Volatility

Investors and traders alike need to understand market volatility.  Many market observers use volatility as a euphemism for price declines.  This is completely wrong.

The astute options analyst Adam Warner (one of our featured sources), does a great job with this concept.  Writing about the Market Vectors Gold Miners (GDX), he makes this important point:

Volatility is about fear of the unknown, and so long as gold and currencies get out of range a bit, there's apparently a bit of fear around of either missing another leg up or missing an about face down. (emphasis added)

A Natural Human Trait

Accepted lore is that markets hate uncertainty.  It is a normal human trait, one that is manifested in collective behavior as well.  Here is a simple example.

Airline passengers are quite sensitive to the unusual.  I was thinking about this on my trip this week to the West Coast.  (I always expect to post an article or two on these business trips, but usually fail.  Sorry!)  My seatmates on both flights had a lot to say about the pilots who somehow missed their destination, flying 150 miles past the airport and losing contact with air traffic control for more than an hour.  Everyone I talked to was confident that the pilots dozed off, and dismissed other explanations.

I fly on United and enjoy the flight deck feed on Channel 9, the conversation with ATC and the towers.  The Wall Street Journal cited the calming effect of this feature:

Many passengers take comfort in the back and forth between pilots and air-traffic control. Mr. Ohnstad, a technology project manager in the banking industry, says he sometimes worries about noises and jolts while in flight. "But I hear the pilot's calm voice telling ATC that 'We're experiencing continuous light chop,' and I can relax more," he said. "It's fear of the unknown that causes apprehension. Pilots can't update you every 30 seconds."

Personally, I have often enjoyed specific benefits from the flight deck commentary--often warning that choppy skies are ahead.  The funniest case was when we were parked at O'Hare waiting for a gate and the pilot asked for a small move to a new parking spot.  His passengers were getting restless!  I was one of the few to know the secret.

Anyone who flies often will enjoy the excellent blog from Captain Dave, who provides inside information from the perspective of the pilot, including an insightful treatment of the recent incident.

Applying the Lesson to the Market

When following the market, an explanation of each day's trading can be a calming influence, just like communication from the pilot.

The problem?  The explanations are all different and generally lack any evidence.  Here are today's candidates.

Business Week explained as follows:

U.S. stocks closed sharply and broadly lower Friday, led by financial issues, as disappointing reports on personal spending and consumer confidence stoked investors' concerns about the economy. Treasuries jumped as stocks skidded.

MarketBeat had a similar take:

For months, investors have worried that the recovery of both the economy and the stock market had more to do with heavy government stimulus than with fundamental economic improvement. Now those fears are raising their heads again.

The concerns sent stocks down sharply back on Wednesday, but seemed to dissipate Thursday, as a stronger-than-expected government estimate of third-quarter economic growth helped stocks erase the week’s losses in a single day. Today, weak reports on consumer spending and consumer sentiment have put the bears in the driver’s seat again.

Briefing.com has a very different viewpoint:

There wasn't any immediate cause for this session's decline, though some market watchers point out that stocks have had an increasingly difficult time of climbing higher since making their strong runs in recent months. Others have pointed out that there may be some month-end portfolio rebalancing and window dressing accounting for the recent whipsaw trade.

Nonetheless, the concerted selling effort brought about a spike in volatility. That sent the Volatility Index, often dubbed the Fear Gauge, up 24%, which marks its sharpest single-session spike by percent this year. Moreover, the VIX now stands at its highest level since July. Complementing the spike in the VIX is an elevated put-to-call ratio of 1.2, which is indicative of positioning for downside protection.

Art Cashin, a great reporter of floor sentiment, emphasizes the relationship between stocks and the dollar.  He notes that there is a high correlation -- weak dollar, stronger stocks.  He believes there is great risk in a dollar spike.  The CNBC interviewer pushes him hard on the nature of this relationship, suggesting that both the dollar and stocks are reacting to a change in appetite for risk.  Watch the video, beginning at 3:21.

Our Take

The question to Cashin was a good one.  It is what is called a "spurious" relationship.  Two variables are highly correlated.  Observers, in this case the NYSE floor traders, infer causation.

Here is an example I used in class.  You have a person in the middle of a traffic intersection with a stoplight.  When the light turns green in a given direction, he waves the traffic to go through.  The actions of the guy doing the waving are perfectly correlated with the traffic movement, but there is no causation.

Now let us suppose that the traffic light is out, and the person in the middle is wearing a police uniform.  The inference of causation is quite different.

Proving causation requires more than showing a correlation.  It requires solid evidence of timing, one variable leading another, and also a strong hypothesis about the logic of causation.  It is also useful to have statistical controls.  Art Cashin is on target when it comes to the floor trader attitudes, but they might all be fooled by a spurious relationship.

Meanwhile, there is plenty of evidence that the market is currently trading on perceptions of economic strength.  It is quite possible that we could see a stronger economy, a stronger dollar, and stronger stocks.  Or the opposite.

This explanation may not be comforting to investors, but at least it suggests what to watch.  That remains our focus.

Politicizing the Olympic Decision

Those of us who live in the Chicago area have paid special attention to the Olympic decision.  There are a number of theories about what happened.  There was an especially strong analysis from Dick Ebersol, NBC sports & Olympic Chairman.

Watch the video to confirm, but his key point is that the IOC has a European focus and is unhappy with the financial relationships with the USOC.  There are issues about how much of revenues come off the top, and what other countries get.  Ebersol suggests that without some changes in these fundamentals, also affecting the last bid from New York, it will be many years before we see an Olympics in the US.

His message is that this is an uphill battle -- 18 votes for the US this time, and 19 for NY the last time.  It is a problem -- and one not related to partisan politics.

The Kudlow Spin

Regular readers of "A Dash" know that we view the Kudlow show as a useful source of debate about the economy and the market.  They also know that we are disturbed by the increased injection of partisan politics, often extending to his assignments as a CNBC anchor, perhaps somewhat better since he is no longer a rumored candidate for office.

In tonight's program Kudlow portrayed the President's decision to go to Copenhagen as a big mistake, undermining US credibility.

What if the President not made the trip?  Kudlow might well have blamed the outcome on his failure to participate.  It has become routine for national leaders to make a pitch, but Obama had to trade this off with the health program debate.  Those present at the US presentation uniformly report that the involvement of the President and the First Lady were the best parts.  No one knows what would have happened if Obama had not made the trip, but the critics would have been loud.

Investment Implications?

We understand that Kudlow is competing for ratings, and working in a very conservative time-slot demographic where many are eager to criticize the President.

Briefly put, there are no investment implications from this event.  This piling on by Kudlow and his selected guests is more about partisan politics than the investment purpose of his popular program.

Our own viewpoint is that we should be focused on investments, agnostic about politics, and trying to find the best opportunities.  Our objective is to make great returns regardless of which party is in power.  We seek information that helps in this quest.  Overtly partisan messages do not fit.

Revisiting the Stress Test

Early this summer we raised a number of questions in our Summer Quiz.  The objective was both to enlighten and to help investors make wise investment decisions over the summer.  As we hoped, anyone who took the quiz seriously has had a profitable summer.  (We'll try to wrap up the answers and award the prize, since we are now beyond Labor Day).

In Question #7 we asked:

The government stress tests for financial institutions have something called an "adverse scenario."  The conditions from that scenario have already been met, or nearly so.  (True or False)

At the time we posed the question, there was a universal fixation on the unemployment rate.  This was the only readily measurable input, and it seemed artificially low.  It was pretty clear that unemployment was going to lag the rest of the economic recovery.  Meanwhile, the other stress test inputs were not very visible.  On a symbolic basis, it was bad politics from the Obama Administration.

This fact was widely known to anyone paying attention.  A month before our quiz, Tom Brown wrote as follows:

But as unhappy as I am about the stress test, I’m even more shocked by all the commentators who dismiss the test results because they believe it wasn’t stressful enough. Some of these people simply believe the U.S. economy is headed into a death spiral; no how matter how bearish a given forecast is, they’ll tell you it’s not bearish enough. Others have lately built a nice business for themselves by being relentlessly, flamboyantly negative. Still others simply don’t know what they’re talking about.  Let’s look at a few of these people have had to say lately:

Brown went on to analyze several bank critics.  These were the people celebrated as "getting it right."  Brown pointed out that the loss reserves in the test were very aggressive.  His prediction of the result?

The likely result of all this? Just as in the last recession, the big banks will emerge overcapitalized, over-reserved, while their shareholders have been unnecessarily diluted.  It’s a disgrace.

Other source fixated on the employment number in the stress test, ignoring the (more important) loss reserve inputs.  Despite their analysis, several of the big banks are paying back TARP funds.

What Happened?

Since our quiz on June 15th, the big banks are up about 30-35%.  Anyone who did the homework could have participated.  Meanwhile, there has been fresh news about bank failures and additional capital requirements for regional banks.  As part of our series about what to watch, we noted that bank failures are not an important economic indicator.  Many blogs enjoy reporting a few more failures each week, adding to the impression that this is significant.  There has also been news that regional banks may need to add capital.  Maybe so, but it is not the crucial point.

As Tom Brown wrote:

In particular, in the latest quarter, the banks’ NCOs came to 3.16% of loans, far short of the 4.16% laid out in the stress case. And as you can further see, chargeoffs under the stress scenario won’t peak for another three quarters, at which point they’ll top 5%.

He produced the following chart.

We remain very interested in when banks will be willing to do more lending!

A Crucial Question for Investors

A common theme among many pundits is to say something like "X was wrong on subject A, so why listen to any future predictions?"  Some of the more aggressive pundits extrapolate.  If an expert was wrong on "A" you should ignore him/her on "B".

That was the dubious logic for missing one of the biggest rallies in history.

A Dose of Reality

The subject really requires a more extensive article (forthcoming), but the stress test issue highlights the main theme.  Every time we cite Tom Brown we get critical comments, since he "missed it," while Meredith Whitney and others "got it right."

Predictions are not so simple.

Those who "called the crash" are not all geniuses.  The others are not all dummies.  Experts use widely varying methods.

The biggest investor mistake is chasing performance, thinking that someone has a hot hand.

We are about to see this play out in many sectors.  The stress test is a good example.

[Full disclosure -- Our accounts hold GS, BAC, and held at various times, regional bank ETF's.]

Misunderstanding the Fed Balance Sheet -- A Costly Mistake

At "A Dash" our principal mission is identifying the real experts on various topics.

There are so many sources of information and analysis.  The business models for financial media depend upon ratings, so popularity rules.  The easiest way to connect with readers or viewers is via the anecdote, the dramatic chart, and analysis that can be explained in "pop economics" terms.

The Fed balance sheet provides a good example.  The bearish element of the punditry has highlighted the dramatic increase in the monetary base and the various Fed programs as a sign of incipient disaster.  At first, many suggested that we were about to have another Great Depression.  Some still maintain this position despite the improving economic indicators.  Arguing in the alternative, these same people argue that we have merely delayed the real consequences.  In particular, we have already sowed the seeds for a new inflationary bubble

We have recommended a more compelling viewpoint.  It is not popularly accepted, partly because it is difficult to understand.  It is not Pop Economics.

Our Take

We highlighted the monetary stimulus in our Summer Quiz.  We followed up with an analysis using a better long-term take on the Fed balance sheet.

Briefly put, the Fed has stepped in to provide lending in markets where the private market has dried up.  This was necessary to limit the impact of the recession.  Fed Chair Bernanke has explained the plan for an exit strategy, to be implemented when normal and sensible lending resumes.

We see this as wise and sensible public policy.  We understand that many disagree, and that is what makes a market.  In particular, we have highlighted the thoughtful and market-oriented analysis of Bob McTeer, former Dallas Fed President and analyst at a free market think tank.  His credentials and expertise are impeccable.  We strongly urge readers to consider his analysis of Fed policy.  Here are some highlights.

McTeer criticizes those who use a compressed time horizon to show the increase in the monetary base.  He thinks this is deceptive, and points out that the analysts have no clear causal reasoning for the prediction of an inflationary explosion.  He is modest in his analysis, accepting that there is room for some inflation protection.

His key point is that the Fed is filling in for a failure of private markets to do normal lending.  This is a process that started with the failure of Lehman and the temporary cessation in commercial paper.  There will be an end and an exit strategy.  He notes that the monetary base expansion occurred eight months ago and has leveled off.  He writes as follows:

Meanwhile, the time to shrink is not close. The velocity of money obviously declined dramatically as money growth accelerated months ago. Under those conditions, rapid money growth is needed to prevent deflation. Anticipating velocity changes may be hard, but seeing them after the fact is rather easy. Just divide GDP (P x Q in the equation of exchange) by M (whichever definition of money you fancy) and you get the income velocity of that measure of money. Having GDP growing slower (negative lately) than M is growing tells you that V is declining.

Put another way: Money doesn't cause inflation; spending money may cause inflation. Money is not being spent at a sufficient rate lately to cause inflation.

and further..

The decline of nonbank credit leaves a large hole to be filled by bank credit until things return to normal. That's what Chairman Bernanke is doing as he purchases debt (assets) other than treasury debt-commercial paper, mortgage-backed securities, packaged student loans, auto credit, etc. Focusing on these purchases and not realizing the hole he is trying to fill would lead you to believe, falsely in my opinion, that seeds of future inflation are being sowed.

and finally...

...(T)he inflationary impact of fiscal deficits depend almost entirely on how they are financed, i.e., whether new money is created in the process. Growing deficits without comparable monetary expansion will push interest rates up sufficiently to get the debt purchased. Higher interest rates are likely to crowd out private investment as the government commands more and more of the financial resources. This is not a good outcome, but it's not inflation.

Conclusion

There is a time and place for various policies.  An ideological perspective that nothing will work is a losing investment strategy, as we have seen in the last several months.  Readers would be well advised to read the entire McTeer analysis.

There is a lot of buzz about what will be the "New Normal."  We expect this to be a return to sensible lending practices, relying on private markets.  The Fed will withdraw as this takes place.

And That's the Way it Was

This weekend everyone is hearing a lot about a giant of journalism, Walter Cronkite.  For a generation of Americans, we could not imagine that a space launch could succeed without Walter helping it along.  We were all crying with him on the day of the Kennedy Assassination.  We loved him even more because he was human.

His career spanned a turning point in journalism.  His approach was to provide factual coverage, reflecting every viewpoint.  This extended to an interview with Mayor Daley at the scene of the Democratic Convention in Chicago in 1968, an event that independent parties later determined to be a "police riot."  Cronkite reported the story, and then offered a platform to Mayor Daley.  They shook hands, because it was possible to have differing viewpoints and still have mutual respect, or "be friends" as they called it.

There was a tipping point during the Vietnam War.  As the war progressed, the overall sentiment in the country shifted.  Walter Cronkite saw all of the data and all of the news.  He was better informed than anyone, since he had to take complex stories and turn the result into something that the average viewer could understand in a few minutes.

When Cronkite came out against the war, it was a sharp break from his past approach and a change in the practice of journalism.  Here is a good summary:

After the Tet offensive of 1968, it was Cronkite who dropped his trusty mask of objectivity, risking everything with one line: “It is increasingly clear that the only rational way out will be to negotiate not as victors but as an honorable people who lived up to the pledge to defend democracy.”  This brisk summing-up of disaster prompted President Lyndon Johnson to despair with perfect accuracy, “If I’ve lost Cronkite, I’ve lost Middle America.”

A few years later, he took a similar approach on Watergate, raising the issue in the consciousness of the people.  It spelled the end of the Nixon Administration.

Here is the key.  This was not a man starting with an opinion.  It was someone watching the drumbeat of facts on an issue of national importance.

Cronkite was the most trusted man in America because people accepted his objectivity.  He was like them -- examining the facts, but better informed.

And Now.....?

There no longer seems to be a market for objective, non-partisan analysts.  Those invited on TV are encouraged to have a controversial viewpoint.  That is what the viewers want -- at least the remaining few who are still watching.  The TV hosts and anchors often have a viewpoint, aggressively stated.  They have an audience with an appetite for their position.

The Internet and the blogosphere have democratized commentary.  Nearly everyone participating in this free-for-all thinks it is great.  Few weep for the demise of the newspaper.  The traditional media sources are all imitating the blogs:  fast reaction, instant analysis, emphasis on conflict.

There has been a major shift from what is factual and important to what is popular and will garner a big audience.

We are all the losers as a result.  We miss you Uncle Walter....

Popular and Critical Acclaim

Over at The Big Picture Barry Ritholtz has some great suggestions about improving financial television.  We agree with the entire list, but especially like the following:

1. Stop Yelling. Stop interrupting. Stop Talking Over Each Other:  This is not Jerry Springer, its serious business. People’s retirement and investments are at stake. Please treat it that way.

5.  Lose the Octobox. Fire whoever came up with the Decabox.   ‘Nuff said.

6. Separate the Signal from the Noise.  Understand that most of the day-to-day action is simply noise. Look at a long term chart, you can barely see 9187 or 9/11. If those major events get lost in the long term trend, what does the intraday jags, kinks and reversals mean? Very little. Recognize that not every data release, slice of news, or rumor is at all significant. Stop treating them as if they were.

7.  Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.

9. Bring Back Louis Rukeyser: Not the man, but rather, his style. Wall $treet Week — Rukeyser hosted it from 1970 to 2005 — was plain-spoken, thoughtful and accessible. Quiet, contemplative, discussions, with intelligent market participants, revealing helpful information. The investing public would appreciate something of that sort — again.

Improvements Unlikely?

There is a reason for the current TV programming:  Ratings!

The experts know what sells.  Everyone on TV is asked to state an aggressive and controversial opinion.  It is entertainment.

Would the current investing world give a high rating to Uncle Lou, no matter what the quality of the program?

Popular versus Critical Acclaim

We recently watched an old film for which a reviewer had noted that it achieved both popular and critical acclaim.

That is certainly great news for a movie, and one can easily see the distinction.  At nearly any time one can find a very popular movie (the "date movie" from back in the day) that has little artistic merit.  At the same time, there is something playing at the local Art Theater that scores high on artistic merit, but does not attract many teenagers.

It is a delight when a film can satisfy both criteria.  It is also a great challenge.

The Investment Audience

Here are a couple of key facts about the audience for investment news:

• Individual investors have dropped out.  (We'll get them back after another 25% or so in the major averages).
• Most readers are obsessed with the negative.  That is how to seem smart at a cocktail party.
• One can measure this with objective indicators, like our Seeking Alpha sentiment indicator.

The reader will note that we are moving beyond financial television, and considering all sorts of information.

The Conclusion?

With newspaper ad revenues disappearing, MSM are all turning to blogs.  Blog revenue is all about hit count.

If times were more prosperous, business managers could afford to think about the actual merits of analysis.  In times of stress, they look for the most popular.

So what happens?  We all know from behavioral finance that investors chase what worked most recently.   Today, that means that all of the doom-and-gloom predictors are geniuses.  Many of those writing and appearing on TV search relentlessly to find the most negative spin on any piece of information.

It is those people who are now featured.  It is not because of editorial bias on the merits.  It is financially driven.  These are the writers who are "popular."

This is what happens editors become pollsters.

Does Blogging Enable Market Manipulation?

The greatest strength of financial blogs is also a potential weakness.  There is so much information that readers frequently rely upon the interpretation of the writer.  Most people do not click through to the supporting links.  They go to their favorite sources for information, and generally rely upon the interpretation of the writer.

We know this is true from our own stats, even when we strongly encourage readers to check out an entire article.  Readers rely upon us to make accurate representations of source material.  We are expected to provide a fair summary and accurate illustrative quotations.

Fair enough.  No one has time to check out all of the sources, no matter how carefully we try to document.

This is in sharp contrast with mainstream print sources, where editorial procedures review material before it is published.  Not so in the blogosphere.

The issue can be simply stated:

Blogs with a wide following have a special responsibility to check and re-check accuracy before posting.  If the authors do not do so, there is an easy means of manipulation.

Step one:  Get a dubious story out there somewhere -- anywhere.

Step two:  Get a noted blogger or pundit to mention the story.

Step three:  Mainstream media sources race each other to be first with this news.

Trust in link sources is vital.

Strong Sources

We feature several blogs where the authors provide plenty of links and summaries.  Some of the sources are anonymous bloggers.  We believe this conveys a special responsibility, since the reader does not know the background or skill of the writer.  It takes more evidence to be convinced of these sources, but the proof is evident in the work.  If one checks out the links, the accuracy proves out.

Here are examples of sources where the links are fairly interpreted with very high reliability:

• Abnormal Returns.  The summary tells you what you will see.  You can choose whether to read it.
• Charles Kirk.  Always interesting, always accurate.  Many interesting links.
• Alea.  Anonymous, but with special insight on credit markets.
• Calculated Risk.  Respected by everyone -- earned through accuracy.
• Paul Kedrosky.  Especially useful in finding interesting academic papers.
• The Big Picture.  Barry has a viewpoint, but his sources are always carefully documented and accurate.
• Muckdog.  We like the "everyman" viewpoint, which often captures the spirit of the market.  The links support his statements.
• Dr. Brett.  Unchallenged authenticity, with widely varying interests.
• David Merkel.  What you see is what you get in links at The Aleph Blog.
• Adam Warner.  The quotes are always representative.

We are leaving out many, of course, but this is designed to illustrate.  The WSJ blogs, for example, are carefully sourced.

The Jury is Out for Some

Like many others we follow the work of the anonymous blogger "Tyler Durden."  Seeking Alpha assures us that this person is an authority. He has rocketed to a high level in the new Seeking Alpha rankings -- a position of influence and responsibility.   Many of the articles display interesting and informative insight concerning the inner workings of big firms and hedge funds.

Since there does seem to be a viewpoint in the Durden work, we have great interest in the sourcing and evidence.  Let us look at an example of links from the prolific Durden.

Must read on CNBC propaganda: "Immelt and NBC Uni CEO Jeff Zucker supposedly told top CNBC executives and talent to be less critical of President Obama and his policies" This explains why nobody with half a brain watches CNBC anymore (THR hat tip Guest)

Since we have opined on CNBC politics, this was of great interest.  Our viewpoint is that opinion shows like Kudlow's in the evening are interesting and informative.  Viewers know what they are getting, and it is a lively debate.  We do not like the intermingling of politics and journalism during the business day, when CNBC anchors get to interview authoritative guests.  We are not very interested in the opinions of the journalists, and viewers should not be either.

If one reads the link, one can readily see that the quoted section does not accurately represent the article.

First up was a woman asking about a reported meeting in which Immelt and NBC Uni CEO Jeff Zucker supposedly told top CNBC executives and talent to be less critical of President Obama and his policies.

Immelt acknowledged a meeting took place but said no one at CNBC was told what to say or not say about politics.

During the woman's follow-up question, her microphone was cut off.

The key point is that Immelt denied the charge in the Durden quote.  Perhaps he suggested that journalists should be journalists in non-opinion shows.  We do not know, of course, but that would be a good thing.  Helping investors to separate political decisions from their finances is good advice, as we have frequently suggested.

Even more telling is this section from the rest of the article:

Later, during the umpteenth question about MSNBC, another shareholder's microphone was cut, according to multiple attendees.

"The crowd was very upset with MSNBC because of its leftward tilt," one attendee said. "Some former employees said they were embarrassed by it."

One specific complaint about MSNBC concerned Keith Olbermann's interview of actress Janeane Garofalo, who likened conservatives to racists and spoke of "the limbic brain inside a right-winger."

We spend very little time on MSNBC, but from what we have seen, we can understand the criticism.  Once again, the key is whether the program purports to be journalism or opinion.  This part of the article is exactly the opposite of the theme of the Durden quote.

Briefly put, we do not think that the Durden summary of the link is a fair and accurate representation of the article.

Another recent  example is the unsourced claim that SPY is hard to borrow.  This was challenged by Doug Kass (full disclosure -- Kass is a valued colleague at TheStreet.com).  Kass checked this out and found no problem with a borrow.  Here is the Durden response:

Update 4: Doug Kass disagrees:

I have received emails from several trading sources, stating that the market is rising because the SPDRs (SPY) are hard to borrow now and arbs are being squeezed.

This story is hogwash, as I just tried to borrow 500,000 SPDRs and had no problem doing so!

Position: Long SPY; short SPY puts and short SPY calls

Maybe Doug can disclose at what term and rate he got the borrow. Doug - I am dead serious - can I borrow 5 million SPY right now at 0% from you? Hell, will give you 1%

We expect to hear more about this dispute.  Meanwhile, anyone wanting to short the market can do so through a futures account.  There is no problem in "borrowing" e-mini's to go short, the method favored by those of us in Chicago.  There is an arbitrage opportunity with SPY.  The claim of a problem in shorting does not have face validity, so we look forward to some evidence.

Our Take

It is easy for investment readers to be swept up by apparent authenticity, especially from a source that everyone seems to follow.

We hope that "Tyler Durden" will balance frequency of posting with accuracy in representing links.

We have a continuing concern about the "leaked stress test" story, where he is a supporter of a dubious source.  That is a question for another day.

The Wide-Ranging Thoughts of Dan Niles

We always turn up the sound and back up the TIVO when we see  Dan Niles on financial television.   He has a well-deserved reputation for great knowledge of what is happening in technology, especially semiconductors. He combines this information with superior analytical skills.

We were treated to several of these conclusions in his CNBC interview today with Maria Bartiromo.  Niles continues his bullish stance on technology for the remainder of 2009, while allowing for some pullbacks.  In particular, he suggests that we look for companies that have already guided down significantly on revenues -- 50% or so -- since these are the firms that will now be guiding higher.  Watch out for those that did not reduce earnings forecasts enough.

The interview then continued with a list of his biggest concerns. He offered opinions about how much further home prices would decline, the amount of "toxic assets" remaining to written down and long-term debt issues.

Everyone is  familiar with these issues, but there was nothing special in the analysis.  It is a story that one can read anywhere.  Does it make a difference that Dan Niles believes this everyday story?

Perhaps.  To the average listener he sounded just as much an expert on housing as he did on technology.

Six months ago we had an article featuring the famous picture of Ted Williams and a strike zone filled with baseballs. It showed his batting average when he stayed in what he called his "happy zone" and what happened when he did not.

(Full disclosure -- we are long INTC in personal and client accounts).

With the start of the baseball season, fans might enjoy a look at this, but the article is more about how to parse information. Everyone is entitled to an opinion, but why listen if the expert is reaching for a pitch in the dirt?

A Problem: Business Journalists and Political Opinions

At "A Dash" we take the investor perspective.  Put very simply ---

We seek credible news sources where astute journalists draw out the expert opinions from leading experts.

We frequently express dismay when business journalists substitute their opinions for a presentation of facts, when columns have a clear slant, when bloggers start with a conclusion, and when anchors intermingle opinion with questions.

A New Voice

It is important to identify these errors.  They are not obvious to the average listener.  This intersection of political comment and business news has stimulated a reaction.  There is now a new fact-checking source, Financial Media Matters.  Readers following politics may already be familiar with Media Matters, which describes its mission as follows:

Media Matters for America is a Web-based, not-for-profit, 501(c)(3) progressive research and information center dedicated to comprehensively monitoring, analyzing, and correcting conservative misinformation in the U.S. media.

We should all understand the approach and possible bias.  Having said this, the reports are factual and worthy of evaluation.

We do not engage in political advocacy, but the intersection of political discussion and the economy is crucial right now.  Investors need to understand what is factual and be willing to consider fact-checking in an open-minded fashion.  This is a new source, and a valuable one.

The First Impact

Media Matters challenged CNBC, suggestion that Larry Kudlow was using his platform as the basis for a possible Senate race.  CNBC responded with a clear denial of a Kudlow Senate run.  This is positive and important.

We have been long-time fans of the Kudlow show, which brings together many experts and draws out opinions.  We have also been concerned about political commentary in Kudlow's anchor segments on CNBC.

The clarification of this point is a good positive step.  We followed these developments via the excellent blog from the University of North Carolina, Talking Biz News, now added to our featured sources.  We commend the work of Chris Roush, the distinguished journalism prof at North Carolina.  This is a good time for investors to monitor his work, and that of his team.

Conclusion

Successful investing means putting aside personal political viewpoints.  The election is over.  It is time to consider the investment implications of the policies in place.  This is not a discussion over cocktails -- it is about your money and your investments.

The overwhelming trend in market commentary is that no government program will work.  The criticism of each announcement is immediate and pervasive.

The critics often disagree based upon personal values or politics.  They are not engaging in a dispassionate analysis of the programs.  Government efforts are not perfect, but they will have an impact.  Mainstream economic forecasts recognize this, and diverge widely from those of the punditry, mostly non-economists.  Check out this disparity in a  nice pickup of some key observations by SF Fed President Janet Yellen at Calculated Risk, another of our featured sources.

Getting this right is the most important challenge for investors.

Politics and Markets Update

CNBC news anchors have reached a new high in politicizing daily market reporting.

Regular readers of "A Dash" are well aware of the danger of inferring causation when two events occur simultaneously.  In a market environment where we have intra-day moves of five percent, often with no apparent reason, it is silly to speculate about a gain or loss of 1%.

Today's Example

It is dangerous to confuse your political views with your investment decisions.  Most financial journalists do not distinguish between analyzing events and offering opinions.  Let us turn to today's example.

President Obama was making a speech to the graduating class at a police academy in Columbus, Ohio.  While discussing today's terrible employment numbers, and the total job loss during the recession, he observed that the stimulus package had saved the jobs of this class.  Avoiding impending budget cuts in state and local government was part of the package for a simple reason: Most states have balanced budget requirements, constitutional or otherwise, and the federal government does not.  State policy is pro-cyclical, with increased spending in good times and lower spending (and perhaps higher taxes) in bad times.  This aspect of inter-governmental fiscal policy was addressed as far back as the JFK Administration.

The Obama speech was exactly what most investment pundits were asking for just a few weeks ago.  The chorus was that he was too negative, a note struck to get the stimulus package passed.  Now he is trying to restore public confidence and get people to look ahead.  Whether you like Obama or not, and regardless of one's opinion about the stimulus bill, this is what we are going to see.  It is a textbook example of Presidential leadership.

If this is the reality, what does it mean for the economy and the markets?

The CNBC Reaction

Starting their daily program on CNBC, Melissa Francis and Larry Kudlow began as follows:

Francis:   ...Stocks had been higher, and then as President Obama was speaking, not surprisingly the market fell.  It's down 30 points now.  It had been positive before he came on and started speaking....

Kudlow:  I didn't hear the word "capital formation" in his talk, Melissa.

Francis:  No, or tax cuts, I would think.

Kudlow:  Tax cuts.  I didn't hear that.  Stocks are off more than 20% since he took office.  Is he to blame for the weakening economy and the stock sell-off?

Our Take

We highlighted the excellent Jon Stewart segment on this topic as part of our series on why the market cannot find a bottom.  The financial punditry is setting up an unrealistic expectation about the content of every Obama speech.  Would Larry Kudlow really speak to the graduating police officers on the topic of "Tax Cuts and Capital Formation"?

Well.....maybe he would!