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Posts Tagged ‘sentiment’

0 Jan 13 2011 @ 10:58am by Matt Smith in Capital Markets, Crude Oil, Economy

The Best Things In Life Aren’t Things

Flipping through a book on graffiti in the past week, I came across this phrase and image. It set me off on the tangent that the best things (= most bullish influences) in current markets at the moment are not ‘things’ (i.e. underlying fundamentals), but the unquantifiable: perception and sentiment. » read more

0 Feb 4 2010 @ 10:24am by Matt Smith in Capital Markets, Crude Oil, Economy, Natural Gas, Random

A Weapon called the Word

roger-federer again

I find it amazing that at a time when information has never been more accessible, and there has never been so much data to digest, that focus falls on the scrappiest of morsels to move markets.

For example, everyone waits with bated breath to compare and contrast the latest statement from the US Federal Reserve after their meetings, with markets hinged on the subtlest of changes to their rhetoric. Markets have rallied like Roger Federer or sank like the Titanic on single words; just this past Wednesday we saw equities and commodities rally as the statement changed from ‘economic activity is likely to remain weak’ to ‘economic recovery is likely to be moderate’ – a blunderbus of betterment by Fed standards.

As an aside, Ben Bernanke  (banana Ben, helicopter Ben, Widow Twankey, choose your weapon – I prefer to call him Sir) learnt the power of his words the hard way. In the first few months of Mr Bernanke’s tenure as Fed Chairman he spoke candidly to Maria Bartiromo (= rather pleasant CNBC pundit) at a Washington dinner.  His remarks were subsequently reported a few days later, and stock prices plunged.  Mr Bernanke learned a hard but important lesson. 

lexluthor

If the Fed’s power seems somewhat unwieldy, it is equally matched by the preposterousness (or prowess, delete as appropriate) of Opec. Like Britney Spears, Roger Federer (that man again) or Lex Luthor, just when you think Opec has lost their power and influence…poom!…they come back with a vengeance. You can gauge when an Opec meeting is on its way, as commentary starts from the various cartel comrades. Which would be fine if a) they all sang off the same Opec hymn sheet or b) if their comments didn’t move markets. But herein lies the problem. The greater the need for Opec to placate the market, the seemingly greater their efforts to be less cohesive and more misleading, as their esoteric interests pull them in different directions.

Back at the chopping block of our burrito, we know natural gas can be moved by certain analysts expressing their market opinion (or even just a soundbite) to the newswires. Unable to access the underlying research to understand their logic, we are left to extract what we can from their quotes (or – more accurately – the journalist’s intepretation of such).

britney-spears

The phenomenon of markets latching on to certain scraps and discarding others, can be explained away to a certain extent. If market sentiment is bullish prior to new information, then investors cannot help but look for the bullish angle to validate their point of view, and vice versa. If data releases are a surprise to consensus, then prices can whipsaw in the opposite direction. Or sometimes we simply see the Kansas City Shuffle.

What all this leads to explain is that markets are unpredictable. But that still doesn’t justify why they focus on certain news flows. It does highlight, however, that a few choice words from a certain sphere of influence (i.e. the Fed, Opec, an analyst, etc) can have much more force than a fact. What got me off on this tangent in the first place was the Nigerian militant group, MEND, who last weekend announced an indefinite end to their ceasefire. And this was the ironic thing: in the past their greatest impact has come from brute force and violence to prove their presence. Admittedly, while they still undertake certain acts of sabotage, they have come to realize that one of  the other advantages they have is a different weapon – a weapon called the word.

3 Jan 13 2010 @ 10:55am by Matt Smith in Capital Markets, Risk Strategy

The Kansas City Shuffle

lucky#slevinI don’t watch much tv, but when I get time, I love watching a good movie. Something I watched recently (for the third time) is Lucky Number Slevin. This film is great for a number of reasons – the cinematography, Morgan Freeman, Ben Kingsley, just watch it – but the best part is a scene with Bruce Willis, where he does what is known as the ‘Kansas City Shuffle’. As many good things tend to, the Kansas City Shuffle traces back to jazz – deriving from a song which states:

‘It’s a blindfold kick back type of a game
Called the Kansas City Shuffle
Whereas you look left and they fall right
Into the Kansas City Shuffle
It’s a they-think you-think you don’t know 
Type of Kansas City Hustle’

I know what you’re thinking;- uh oh, Burrito boy – here you go again, off on a tangent. But here’s the wrap – the key and the kicker to the Kansas City Shuffle  is one of the pillars of financial markets: sentiment and contrarian logic. If everyone is expecting a move in one direction, the exact opposite tends to happen.

This is why I think sentiment is so compelling. If everyone is bullish about a certain asset – be it gold, oil or toilet paper – it is a good time to sell it, as there is no-one left to buy. And on the flipside, if everybody hates a certain asset (like natural gas last year), surely it can only go up because all the haters (I really, really don’t mean to sound like a rapper) have already sold it? There are obviously going to be exceptions to this rule (most prominently, momentum trading), but for the most part, sentiment puts forward a credible case.

Sentiment levels are essential to watch because markets turn when they reach extreme levels (just as volatility highlights turning points). Contrarian investing is absolutely not just about going against the grain, swimming against the tide, or dissenting. It is about understanding when a trade is overcrowded, when pessimism or optimism in an asset is overdone, and when a break in trend is long overdue. 

Life is based on emotion, and markets are often driven by emotional responses rather than rational calculations. Emotion is not rational, so it is impossible to deny that markets are not oftentimes irrational; the bubble-and-bust history of financial markets is living proof of this. And that is why they are the coolest thing ever, as irrationality is impossible to predict. We can never truly win.