Saturday, July 12, 2008

Perceptions

Suppose you were watching the TV news last week and learned:

- Personal income jumped 1.9% last month
- Disposable income was up 5.7%, the sharpest gain in 33 years
- In the last 20 years, the average lifespan has increased by 3 full years
- As a nation we have never been healthier
- Real pre-tax income per worker hit an all-time record and was up 11% since the current president took office
- Americans net worth is $15.3 trillion more than it was seven years ago
- Since 2000 nonfarm business productivity has expanded 21%
- 9.2 million jobs have been created since 2001
- 80% of poor households have air conditioning and 97% own color TV sets

Those facts certainly would paint a pretty rosy picture, certainly nothing like the economy we have really been hearing about on the news. No wonder the markets have made it to official bear territory and no wonder the indexes saw one of the very worst June's. What a different world it would be if those were the facts. While this setting may be a far cry from today's reality, it would be interesting to see how those factors might influence market direction.

Oh wait, according to two articles on the front page of Investors Business Daily on Monday, June 30, 2008, respectively entitled "Do Foreboding Headlines Reflect Real Trends or Media Mind-Set?" by Terry Jones and "Rebates Fuel Spending, But Consumer Outlook Tough" by Scott Stoddard, those are the true facts. The list above represents selected facts that help describe current conditions, but though quite positive, are having little apparent effect on market conditions and movement.

The answer, at least in part, is people's perception as opposed to actuality. In listening to the news on network TV and in reading various publications, the perception seems to be that the sky is falling. Clearly, oil prices are heading out of sight and many of the financial institutions are in trouble as a result of their relationship to the sub-prime mortgage crisis, and many people may lose homes for the same reasons. As far as most of the network news I watch goes, that's the whole story. The perception is that things are in terrible shape.

As is often the case, the markets at least in the shorter term react or overreact with emotion to perceptions. Here, I would suggest, the perception is that the economy is in the tank, almost doomed; the outlook is bleak. The reality, I would suggest, is not quite so bad as the perception. Just look at the positive facts listed above, and things seem a little more balanced at least. I don't mean that high oil prices are good for our economy nor do I think that the sub-prime crisis shouldn't have a significant affect, I only mean to say that on the whole things are better than they are portrayed day to day. If the perception (whether right or wrong) is that things are bad then market action is not only likely to be bearish, it is likely to be more bearish than the facts actually warrant.

All this is to say that if we can gauge the perception of traders, their current psychological bent, we are more likely to be able to give ourselves an edge in our trading. In general, and in the short to mid-term, it is the psychological, not necessarily the logical, that moves markets. The psychological reactions in the market are, in many cases, driven by perception rather than reality.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved


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To comment on Bill's article click on the "comments" link below.

31 comments:

GreekEagle said...

Either you are smoking crack or you are one of the rich elitists that hang with the likes of George the BUSH & THE DICK Cheney because I can tell you this for a fact you are not buying because if you are i will see you in the homeless shelters within 9 months

Mike said...

Hello Bill
And excellent article - thanks - increasingly I think the recent downturn has been aided and abetted by the media in all its forms.

Going back to when Bush senior was running things, in the last few months running up to the Clinton Bush election there was a huge increase in the number of stories about 'homeless families' sleeping on the streets. (This can be verified on Lexis-Nexis.) Within days of Clinton winning the election these stories dried up almost completely.

So back to the present: even keen Democrats will surely agree that most of the press is looking for an Obama win. So talking down the economy now serves their interest.

I am not saying that this is some kind of conspiracy, but rather an unconscious perception of how the 90% of the media (even financial journalists) who vote Democrat simply see the world.

Back to trading. I am pretty sure the economy will pick up dramatically after a (likely) Obama win. Suddenly the world will seem more positive - good people are running the country (not those nasty right wingers) and the media will echo this in their stories.

Incidentally it may explain why the economy does better under a Democrat administration.

To your point Bill, the media paints is a key factor in creating main street and even Wall street sentiment. When sentiment is positive sentiment indicators, companies ..... and even stocks follow on.

nissanle said...

Hello Bill,

About the perception concept I coudn't agree more since the most successful trader buys at weak and sells at strength. However, it is, in my opinion one of the most difficult actions for the trader and only a few succeed.

Regarding the hold of long and short positions at the same time I would appreciate your answering again this question, having in mind that I trade only stocks and not options.

Thank you again for your assisstance and interesting articles.

Nissanle

Anonymous said...

With the political leanings and objectives of the media in general, and the time of year (period prior to a significant election), how can you expect anything but a blown up negative image of the economy (and everything else)being projected?

Bob

Bob said...

I noticed completely the opposite from the "talking heads" on TV. They were trying to paint a rosy picture of the economy and drive the stock market up until recent events have made it impossible for them to stick to the "economy improving" retoric. With the beginning of many banks collapsing, and these other sobering facts. Household net worth contracted at a rate of 2.9% the second consecutive quarterly decline. And since peaking in the third quarter of 2007, Americans' net worth has plunged by $2.23 trillion. Homeowner's equity has plunged to a record low. to a recored low of 46.2% of home value, it's now nearly half the level is was at its peak of 81.5% in 1950. Household debt is at record levels when compared to household assets. The average American household now has $19.70 of debt for every $100 in total assets. The U.S. Federal Government Is Flat Broke! The total federal debt stands at $9,479,447,411,795 Put another way, every man, woman and child in the U.S. owes $31,151. Look around you and be realistic. The average consumer cannot afford to fill their gas tank, pay for food and necessities, and many are losing, or struggling to stay in their homes. This is not "perception", this is the worst economic crisis since the great depression, and may become worse, due to all commodoty, food, and fuel hyperinflation, which we did not have in the 1930's. The frivolous examples of people having air conditioners and TV's, income jumping for for one month by 1.9% (by the way, entirely because of the "stimulus package" handout from the government),and income up because of inflation, are not relavant examples to show that a nations economy is improving. Also, your economic examples go back several years before the recent mortgage, housing, energy, and commodoty melt down. This is a very serious situation we are in, and in my opinion the beginning of the end of the US being the top economic power in the world, and the start of very hard time for US middleclass consumers.

Anonymous said...

Bill,
Well, as I see it, some one is "smoking crack". Unfortunately, it is the liberal/socialist element that believes an Obama victory will usher in a Socialist utopia in the United Socialist States of America. You are hearing it First here: If (God Forbid) Obama wins, it will mark the start of the worst 4 years in American history, the exact OPPOSITE of FDR's reign.
And I can't help that I think so.

Anonymous said...

Much financial planning has been done in investments relating to the perception of Global Warming. Facts point to just the opposite as on July 1, John Casey, Director of the Space and Science Research Center held a news conference and presented shocking evidence that global cooling is the concern of scientist rather than global warming. A related press release supporting the same can be found at; http://www.spaceandscience.net/id16.html This has implications for all solar stock-negative and positive-for food related stocks.

Bob said...

Global warming now instantly changed to global cooling by an unheard of man, who is not even a PHD climatiologist. (He has a BS degree in Physics and Mathematics and an MA degree in Management.) Wow, a degree in Management. I think I'll rush out and by some heating stocks! What the heck is wrong with you? What a joke!!

GEEZER said...

It sounds like the typical IBD nonsense. Their reporting makes Fox News look really "fair and balanced". After reading IBD editorials, do you get the feeling that your head is screwed on backwards? If you don't, it is.

BillF said...

I've been reading your excellent column for a while now. You assertions are true. You just missed a few things:

The higher price of oil will cause even more foreclosures. The best prices for new homes the past 10 years is in the boonies. People moved to the distant suburbs to get affordable housing. The cost of commuting has more than doubled in a very short time.

And there are the rising food costs -milk, meat substantially higher.

And like a lot of other people who follow the market, I am expecting the next big bank failure shortly.

Anonymous said...

Wow, it did not take long for such a strong attack, with religious ferver, on the global cooling blog and the Director of the Space and Science Reseasrch Center,John Casey. He speaks for many of the highest in regards PHD's in asto physics who make a living on getting things right when it comes to long term accurate weather forcasting.The SSRC represents NASA. Unlike all of the well known Celbs and Al Gore,, who have a name, are pushing the global warming scare with an agenda. I do not think that I will invest in a nudist camp in Anartica anytime soon. When someone like John Casey speaks I will listen.

Jed said...

Since you don't post your first name, I don't know who to respond to...Maybe a GW Bush fan? Anyway, You seem to believe one obscure group, over hundreds of scientists, from litterally every country in the world, with reams of proof, of man's definate causation global warming from fossile fuel usage over the last 100 years. How can you just say "when John Casey speaks,I will listen?" What does that mean? Just because you can find one obscure person to back your hopefull beliefs, you think everything is okay? try to be realistic and realize we are in big trouble with our environment and global warming. Why would you even bring up the subject on this forum? It has nothing to do with the subject at hand...

Bill Kraft, MarketFN.com said...

Greek Eagle, I simply quoted facts from IBD. I really don't think it was deserving of your incivility. Are you aware that there are ETFs that play the downside of the market as well? Or are you too busy name calling?
Bill Kraft

Bill Kraft, MarketFN.com said...

Mike, thanks for the thoughtful comments.
Bill Kraft

Bill Kraft, MarketFN.com said...

Nissanle, thanks for writing. You had asked again about holding long and short positions at the same time. It is quite common in option trading where, for example, the trader might have a spread where he sells one leg to bring in income and buys another leg to offer protection against an adverse move. In trading stocks without trading options that would be much less likely since most of the time the trader is probably trading with the market direction. Even then, there could be times when a trader might be overall bullish but may see a candidate in a sector that is tanking and short the stock. It is a strategy that also is sometimes employed by pairs traders.
Bill Kraft

Bill Kraft, MarketFN.com said...

Like I wrote, Bob, it is all about perception. There are both positive facts out there as noted in the Investors Business Daily article I referenced and there are negatives such as the ones you noted. As each of us reaches our conclusions we must weigh the manner in which we perceive the positives and the negatives. Thanks for writing and, believe me, I don't discount the seriousness.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks for your comments, Anonymous. They definitely point out the vast gulf in our political system. Undoubtedly the fellow who accused me of "smokin' crack" has his own opinions and perceptions. It sounds like the opinions of no one else matter. One of the problems with attacks like his are that they are extremely divisive. No effort is made to understand anyone else's point of view and no effort is made to support his own. There is just an angry "off-putting" blast that accomplishes nothing and takes no steps to achieve any understanding. I think we could all do better by trying to reason together rather than trying to jam our personal biases down other folks throats with vituperation.
Bill Kraft

Bill Kraft, MarketFN.com said...

Very interesting comment on the global warming/global cooling controversy, Anonymous. Again, so much of the argument (not from you) is on the emotional level and is based on people's perception from what they hear and maybe what they want to believe. You have produced some evidence and I'd almost bet that there will be emotional comments screaming out against John Casey's evidence. I agree we need to work with the facts and just as with the economy, there are facts to be martialed on each side of the argument.
Bill Kraft

Bill Kraft, MarketFN.com said...

Bob, whether you like it or not, there are people who do have PhD's who disagree with your conclusion about global warming. In fact, Al Gore's professor who started him on the global warming trail changed his own position. When you ask what's wrong with me, I can only answer -- plenty. However, I don't know one way or the other about global warming. I do know there is evidence on both sides and, clearly, the debate is not over. Since you have taken an apparently unalterable position, how do you explain the evidence that refutes your arguments? By the way, I agree that pollution is a bad thing and we should do what we can to reduce or eliminate it where possible consistent with preserving the human race. Remember, people are part of the environment, too.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Geezer. Now I know I should never read IBD or watch Fox News. I did not quote from editorials, but rather a factual article. Which of the facts they set out was not a fact? Should I turn to the Wall Street Journal and Katie Couric for their unbiased approaches?
Bill Kraft

Bill Kraft, MarketFN.com said...

Hi BillF. Thanks for writing. I intentionally did just set out some positive and factual statements about the economy; ones I had not generally heard in media accounts. Of course you are right, there are also serious negatives. What I don't get is why so many folks seem to get mad (and you don't seem to be one of them) when someone presents a fact that isn't in keeping with their opinion. Wouldn't we all be better off to have as many facts as possible in forming intelligent opinions. By the way, I am very curious to know what big bank you are expecting to fail shortly and what time frame is encompassed by "shortly." Again, thanks for your comments.
Bill Kraft

Bill Kraft, MarketFN.com said...

I agree, Anonymous. I would certainly give greater weight to a scientist on global warming than I would to a politician or a movie actress trying to get or stay in the limelight. Of course, unfortunately, even with the scientists, we need to be aware of any agendas or biases they may have. It's just my opinion, but where science is concerned, I would more likely listen to John Casey than Julia Roberts on a scientific issue. It isn't about how many well-known names someone can line up; it is about scientific truth.
Bill Kraft

Bill Kraft, MarketFN.com said...

Jed, you are evidently addressing one of the bloggers, not me, but John Casey is anything but obscure. There are many scientists who do disagree with your conclusion. Saying it is so doesn't necessarily make it so on either side. Did you take the time to review the evidence John Casey presented, or is your mind so made up that you will not accept any fact or facts that might change your beliefs? The world population was almost unanimous at one time in believing the world was flat, but as we now know, that didn't make it so. What specifically did John Casey present as evidence that has been disproven?
Bill Kraft

Anonymous said...

Why do so many sane people turn into raving partisans when the subject of global warming/stasis/cooling is raised?

Can it be that this is not a political issue at all but a pseudo-religious one?

A man converted against his will is not converted at all - so almost all of the blogs are not only misleading but are useless.


Incidently I agree with you - the spin is pervasive.gdubrlx
Stolidman99

William said...

It would be appreciated, Anonymous, if you would muster the courage to pen your name to your reactive comments. I'm surprised Bill even bothered to respond.

None of our opinions matter, do you all understand that? When the markets open, we lose our opinions.
"The truth is true, inconquerable life prevails....and all is well."

It has been interesting to watch the VIX hang around the mid-20's during all this malarky. The media screams and howls but traders and buyers don't appear to so reactive. Maybe we've internalized our angst.

I am way more interested in considering the markets together than the vitrolic non-sensibles your commentary induced. I stand stable with you, Bill.

William

Bill Kraft, MarketFN.com said...

Thanks Stolidman99. I think it's time to remove the global warming controversy from this blog. It is so emotional and doesn't advance our trading knowledge particularly and that is the subject of the Newsletter. Thanks, again, for your contribution.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, William. It really is about the markets, isn't it?
Bill Kraft

artiegold said...

Here's what troubles me: The statistics that are often quoted are aggregates and means -- which are perhaps valuable from a pure market perspective, but not nearly so valuable from the perspective of the lives of majority of people. [After all, if you put Bill Gates and Warren Buffet in a room with 100 homeless guys, the average guy in the room is a billionaire.]

My fear in the longer run is simple. What happens in the longer run in an environment that is certainly inflationary in terms of the things that most people spend a significant plurality of their money on (i.e. food and energy) absent the "wage floor" that would exist in an economy that had a viable labor movement? At some point, the consumer becomes history. Then what?

Bill Kraft, MarketFN.com said...

I don't know, artiegold. I guess when that day comes to pass we may be learning a new language.
Bill Kraft

Carroll Kennemer said...

Bill, Read "Perceptions" and totally agree. We are at the mercy of the print media and the television media. I was told once that it is impossible to win an agrument using the written work when your opponent buys its in by the barrels. Same is true with the TV "News?" media when they have the all powerful tool of "Editing". As to oil prices, in my opinion is is also misplaced perception powered by speculators. Think of the mother asking her young son why he had hit his sister and made her cry. His response was, "I thought she was going to hit me first".

Bill Kraft, MarketFN.com said...

Thanks, Carroll. You express some important thoughts.
Bill Kraft