Higher Volume Does Not Imply Higher Intelligence

Posted by T.W. Hanson - Mar 2nd, 2008 at 20:03

talking heads

If you follow news coverage of the financial markets, you have undoubtedly been forced to endure the screaming, fist pounding and big hand gestures of the “experts.” Remember that these forms of communication were mostly weeded out by evolution.

If these women and men were sage enough to know where the market is going next, why are they spending their evenings yelling about it in front of TV cameras? I see three possible explanations:

  • They have positions in the securities that they are talking about and are trying to move the market in personally advantageous directions.
  • They couldn’t or can no longer make a good enough living from investing. As a result, they are reliant on making money from being a market cheerleader on TV.
  • They actually have unique insights into the market and feel it is their philanthropic duty to inform the world of their successful trading strategies.

I believe that there are people in all three camps. Some people do provide good thoughts about the market and its likely future course. Others are selfish and simply use the time to talk their own positions.

I have found that one of the best indicators of insight versus ignorant posturing is volume. Beware of the person who’s argument rests on the number of decibels her or his vocal chords can produce.

Advocating Panic

Posted by T.W. Hanson - Feb 29th, 2008 at 23:02

Panic

I am going to differ from my colleague on an important point: the benefits of panic related to the stock market. I believe emotional reactions to the stock market spur reflection and analysis, positives for the market. One of the worst things for the market is ignorant, apathetic stoicism. Evaluate what you own and why you own it.

Trying to time the market on a daily, hourly or tick by tick basis is clearly not advised.

Twice every month, money is taken out of my paycheck through a 401k program. My management of this consists of periodically evaluating the portfolio allocation between sectors, geographies and other characteristics. However, this gets to my point, I am reviewing and understanding where my assets are and what they are doing.

In my personal account, I take a more active role. On an almost daily basis, I look at what I own. If I cannot justify its place in my portfolio, I get rid of it. Past data show that equities outperform almost all other classes of securities in the long run. However, past performance is no guarantee of future success. Tell former employees of Enron who had invested in their company that stocks go up in the long run and see what reaction you get.

A healthy dose of panic and the rational reflection that follow can be a very good thing.

Suing Your Own Client?

Posted by T.W. Hanson - Feb 27th, 2008 at 20:02

lawsuit

Wachovia has filed suit against Providence Equity Partners, one if its clients. It is arguing that by Providence improving the terms of a leveraged buyout of Clear Channel Communications it no longer has an obligation to provide a portion of the financing. They are well within the legal rights to do this and may win. However, what is their motivation?

The terms of the deal improved. Providence’s renegotiation of the buyout makes the financing more palpable to lenders like Wachovia. This is analogous to stopping at a Waffle House, arguing that the bill is to high and refusing to pay after they lower the tab.

This is a PR nightmare for any future Wachovia financings with private equity firms. Providence is large, and this will not go unnoticed by other PE shops.

Appetite for risk at Wachovia has clearly contracted since they orginally agreed to the Clear Channel buyout financing. The big question is what has made them bring in their horns: a greater level of intelligence than at the original time of signing, fear or big trouble in the banking sector.

Today’s Equity Market Conundrum

Posted by T.W. Hanson - Feb 26th, 2008 at 19:02

 

What the hell is going on out here?

lombardi

Despite two bad economic numbers, the market moved higher today. We learned that home values continue to plummet and that prices are going up at the wholesale level. Apparently IBM’s announcement of a large share-buyback and positive guidance was enough for many to justify buying equities, not me.

The producer price index (PPI) was up 7.4% from last January. When prices rise at the producer/wholesale level, the increase is either passed on to you the consumer or their businesses profit margin decreases. Although not everyone reading this is a big fan of corporate America, a large contraction of company margins would have an effect on vicenarians. An unprofitable business is far more likely to fire you than hire you.

Second, only because the data came out a bit later than the PPI, is the dreadful house price data. Across the country, home prices were 9.1% lower in December than they were last December. The last three months of data indicate that house prices are falling at an annualized rate greater than 20%!!!

With all of this, the stock market went up…

As we have be writing, don’t try to time the market.

The Oscar’s and Making Money from Movies

Posted by T.W. Hanson - Feb 24th, 2008 at 12:02

Oscar

$9.7 billion is the amount people have spent on movies released in 2007. Is it possible for you to get access to that money? By owning studios, yes is it.

Time Warner, Viacom, Sony and News Corporation are four of the studios that first come to mind. Studios reap approximately 50% of the gross box office figures, approximately $4.85 billion from 2007 releases. There are many costs the studios face with blockbuster films, but $300 million in box office receipts for Harry Potter and the Order of Phoenix has a noticeable effect. The major studios are all conglomerates with other lines of business that dampen the successes and cushion the flops. Therefore they are not directly correlated to the success of their films. However, if you enjoy movies, want to be invested in them and the securities fit your investment profile, movie studios are one way of owning a piece of Hollywood.

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