Apr

5

All news is not equal. Some news tells you what has happened in the past, other news tells you what is coming in the future. Some news becomes important again, like knowing the Sage had bid 15% below asset value for LTCM. That's where the market cleared in 2002. For example, on 9/11 there was news about the attack that drove stocks like INVN from $8 to $50 over the next three months, because it led to the installment of baggage screens at every airport. It led to a fundamental shift in air travel demand leading to airline bankruptcies.

Other news, like the Congressional hearings and the questioning of high profile investment bankers in July 2002 signaled a market low of significance. Currently, news of the Fed pause has led to expectations of a Fed rate cut, which subprime reinforced, so if there is news that shifts that expectation it would be dramatic — much as Clinton shifted expectations at the high in 2000 with a comment on genomics. That's why I continue to watch gold closely here, because the expectation is for an easing of inflation and gold at a new high would shatter that expectation.

Gregory van Kipnis remarks:

Words betray us and never seem to mean what they intend. What is meant by news, what is meant by prices? Here are the principles that guide me:

First, There is something called analysis; analysis of news or analysis of prices.

Second, if markets are very efficient there will not be many occasions when the analysis of news or prices will yield predictive insights.

Third, "news" is generally used to refer to fundamentals, i.e., events that shift supply or demand or any of the assumptions that govern the stability of prices. Prices, on the other hand, refer to the unfolding outcome of changes in views about fundamentals.

Fourth, most fundamentals are discounted, so prices move in advance or swiftly. Therefore, I rarely get an information edge about changes in fundamentals. Nonetheless, the persistent analysis of human action yields insights, from time to time, to the prepared mind. But there are false positives. Monitoring prices in relation to quantitative tripwires can also signal a fundamental is changing, but here too there are many false positives. I may never know why views are changing, so I would have to satisfy myself that it is sufficient to figure out that others are valuing things differently and that is all I need to know.

So I pick my poison.

I would always prefer to have an independently obtained opinion about the likely causes of changes in equilibrium rather than constantly trying to figure out if others are changing their minds about what to value, and never understanding why. However, there is a caveat. Just as when driving on a busy highway, to use an analogy, fundamentals first –but also a wary eye always cocked to discern technical signs to avoid risk. I don't have to know if a bad driver was drunk or having a heart attack, I just have to pick up quickly that something is wrong and make sure he doesn't take me out on his way to his maker.

Hany Saad replies:

News does not drive prices. I would like to see empirical evidence to the contrary.

Prices predicted 9/11 and other events if you look close enough at the options markets. Now, if you suggest that 9/11 drove prices with an open gap down when the market finally opened, how would you have profited as an operator? In retrospect you were handed the same cards every other operator was and you had to make a decision based on your historical views, your system, your statistical edge — but not on news.

Even if news drives prices, it is very questionable that an operator will be able to benefit from public news from off the floor. Can one really profit from the news in real time? Yes, news might have an effect on price but this ignores the main use of news for the speculator — profitability. The correct question is whether a speculator can trade profitably using news.

I maintain that prices predict news, and trading on statistical patterns and measuring psychological biases is the only good niche in a market where there are more newswires than brokerage houses.

David Higgs adds:

It's the interpretation of when good news is bad news and bad news is good news. Changing cycles, sea changes. Those with the knack of getting these right become wizards.


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