The Speculator's
Corner
We Thought We'd Heard It All
By Laurel Kenner and Victor Niederhoffer
Special to TheStreet.com
2/24/00 6:03 PM ET
URL: http://www.thestreet.com/comment/thespeculatorscorner/889553.html
A
round number never holds. With the Dow Jones Industrial Average pushing
below 10,000 today, the round number of 10,000 set in March 1999 was broken.
Such moments remind us of the principles of classical composition, where dissonance is unstable. Yet each classical piece lets the opposing key dominate for a time, so the tonic can be brought back and prevail, satisfying the listener that all is right with the world. Gioacchino Rossini, the 19th-century composer of operas including The Barber of Seville, couldn't get up to work unless the dominant was resolved to the tonic.
The same is true of the market. Until the Dow fell through 10,000, there could be no resolution. Once it did break through 10,000 and then tried to scare the longs by pretending to test it once more, the bulls were ready to take over and bring it up quickly back up again.
The market's decline is a direct result of Dr. Alan Greenspan's new and improved thermometer of market values. Greenspan, it is said, has encyclopedic knowledge of economic indicators, and it is widely believed that he strives hard to present a new one in his twice-yearly Humphrey-Hawkins testimony to Congress, to spice up the dry nature of the proceedings. In past testimony, he has trotted out employment costs, gold and the high level of stock prices.
Greenspan's latest attempt to dazzle honest politicians and their minions was the unveiling of the "excessive productivity" indicator, one of the most fanciful we have heard in our combined 100 years of market study.
The gist of it was that increased productivity is a problem because it leads analysts to raise their forecasts for corporate earnings, thus spurring business investment and increasing stock prices. This, in turn, creates additional purchasing power that nobody can work fast enough to satisfy with goods and services. For the economic expansion to slow to a sustainable pace, he said, the wealth effect must be contained. (Polite language for "Down, stocks!")
There are more gaps and untested assertions in this one than all the snow in Alaska. Could this be the same Dr. Greenspan who suggested in previous Humphrey-Hawkins speeches that rising productivity is good because it helps prevent inflation? We note in this connection that the vagueness of the speech did not strike us as the usual Delphic ambiguity that Dr. Greenspan is so famous for.
One example stands out. Asked by Rep. Judy Biggert (R-Ill.) whether he was concerned about the recent spate of high-tech IPOs, Greenspan referred to an offering by a company that said, "We don't produce anything, we don't do anything."
We tracked down the issue that Greenspan seems to be referring to, and it isn't a recent one -- it occurred in 1720 during the South Sea bubble in England. The telescoping and lapse in memory prompted us to begin a complete search of all Dr. Greenspan's remarks about stocks. We shall have more to say about their accuracy and validity in a coming column.
However, we always pay attention to expansive utterances, particularly when they come from folks with their index fingers on the buttons of the U.S. money supply -- small though it may be next to the gigantic pool of euros sloshing around the world. Truth be told, we have our own peculiar "tells" that we use to manage our own, smaller sources of funds.
As just one example, Vic has compared the number of books published on sex each year from 1886 to 1995 to those dealing with speculation and those about Shakespeare. When he compared the sex-to-Shakespeare ratio in any given year with the market's subsequent performance three years later, he found an amazingly high correlation: 0.5 (meaning 25% of the behavior of the latter was explained by the former). The odds against a coincidence that size is 1,000 to 1 against.
The correlation of the sex-to-speculation ratio with the subsequent market change was 30%. (We should note that the Dow predicted both of the sex ratios equally as well as the ratios predict the Dow, and our statistician friend, Steve Stigler, complimented us on a perfect example of bogus correlation.)
While these methods may seem offbeat, we are inspired by the crack East Tennessee weather forecaster Helen Lane, who died this month at 79. Using techniques learned from her farmer father, she based her predictions on the color of woolly worms, the thickness of corn shucks and whether spiders were spinning webs on the ground.
So in honor of the Fed chairman, we are inaugurating a Greenspan Tell Contest. Readers are invited to send us their favorite market indicators -- the ones that actually work, of course -- by Tuesday, Feb. 29. Because canes are proving to be quite useful in these times of market panics (particularly those engendered by Dr. Greenspan's forecasts) we will award a cane from the shop of our correspondent Stan Novak to the winner.
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Laurel Kenner is a former markets editor of Bloomberg, and a trader. Victor Niederhoffer is currently a private investor and author of Education of a Speculator. At time of publication, Kenner was not long any of the issues in this column, while Neiderhoffer held a net short position in S&P 500 futures and options, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While they cannot provide investment advice or recommendations, they invite you to comment on this column at mailto:%20lkenner@thestreet.com.
