Jan

11

Briefly Speaking, by Victor Niederhoffer

January 11, 2007 |

As usual for the beginning of the year, the weak and rigid made a contribution to the strong and flexible. In markets the best of recent years performed the worst, and the worst performed the best. The NASDAQ was up a mere 7% last year, versus the S&P 500 's 15%, but now is up 4 % this year already, whilst the S&P is struggling along unchanged. Oil, the best performing market over the previous two years, is down 10%, and the dollar which was, at the worst of last year relative to its normal variability, down 10%, is now up 3%.

It is a similar story for the ten best individual stocks in the S&P 500 last year — ati, nvda, cmx, cbs.v, big, merq, bls, pd, hpc, nue — they are down 2% so far this year. The ten worst stocks last year — donaq, apol, adct, amd, jbl, ebay, bsx, novl, kbh, stj — are now up about 2%. Good old blue.

In Japan when a big stock sets a milestone there is singing on the exchange. There should have been an opera for IBM yesterday as it broke through 100 for the first time since April 2002. What a show of resilience — a milestone for the market, similar to the Dow breaking 12,000. This show of strength had a gravitational pull enough to outweigh the pseudo event of Gov. Moskow in Iowa stating that the Fed. would have to remain vigilant on inflation and raise rates again if economic growth quickens in 2007. When will someone explain to Fed. Governors that the stronger the economy, the less likelihood there is of inflation, as there is expansion to absorb the money supply.

pt (price times trade) = a constant to a first approx., and if t is up then p is down.

But of course the Iowa speech was a staged classic pseudo event of the kind that Boorstin would have used as a cardinal example, if his interests were not so aligned with the collective and it would not have offended his sponsors. Nevertheless, it was picture perfect. At precisely 12:30 e.s.t., the market swooned to 1415, down a nice 1% on the year, when the word "vigilant " came across the tape, and within 4 hours, the market had recovered the full 1% so it could play footsie with unchanged levels again, and get the boys who anticipated the pseudo Jan. barometer to reverse.

The major mistake that they make in fundamental statistical research, in my opinion, even above and beyond the use of retrospective files and out of date data, is to assume that the number of independent observations is somehow related to the company years in the study. If you are considering 1000 stocks say, value versus growth, over ten years, then you have ten independent observations, not 10,000. That is because in any given year, a certain style does well or badly, and the rising tide lifts all boats designed in such a way, and therefore the results in that year are completely predictable from five of six of the company years, and the rest of the 995 are redundant and non-informative.

I always get a kick from the key level boys who say "1398 is the key level." They do not tell you whether it's bullish or bearish, when you should act on it, or which index they're talking about. But if five days later the index or the futures is well above 1398, why then they say "we were on record with that 1398 was the key level to buy." If 5 days later it's 1350 then they tell you that the big boys got you again.

Now someone is going to tell me that 1398 was not a key level but the problem is that the key levels that I have heard talk of never got near for the futures, and were broken below for the index by three, so my goodness, what fools they must think we mortals are. What a terrible Upas tree of self destruction is wrought by such key level analysis.

When will someone explain to Fed Governors that the stronger the economy, the less likely there is for inflation as there's expansion to absorb the money supply pt( price times trade) = a constant to a first approx and if t is up then p is down.

This concept that real economic growth reduces the likelihood of inflation is something that is rarely explicitly mentioned. In fact, even on this list, this is the first I've heard it put this way, and it makes sense. The only other place I've seen it is in Wanniski's works and essays.

Growth is a result of "demand for liquidity," which is defined as demand for liquid funds (money) to be invested directly into the economy. Lower taxes increase demand for liquidity, since it lowers the cost of capital (and rewards to capital).

The result is an "expansion to absorb the money supply." Now, if the money supply increases, but the desire to invest decreases or goes away (say, because of new regulations or suddenly sharp, higher marginal tax rates), there is a) less expansion (investment) and b) higher inflation (less supply of goods and services).

In the case of this higher inflation, the money bids up the prices of goods and services, and/or is stashed away in "inflation hedges" (or perceived inflation hedges), as people observe increases in nominal prices.