The Media Indicator and Reaping What You Sow

``What defines sucker money is not the horse selected, but the acceptance of odds on that horse that are substantially out of line with its chances of winning… even a horse with a very high likelihood of winning can be either a very good or a very bad bet, and the difference between the two is determined by only one thing; the odds. A horse player cannot remind himself of this simple truth too often, and it can be reduced to the following equation: Value = Probability x Price.” Steven Crist, veteran horse bettor and publisher of the Daily Racing Forum

Nonetheless, financial markets usually reflect a social phenomenon, where people tend to assimilate the action of the others based on the perception of success.

The concatenation of advances (fourth straight weekly advance up 16%) in the Phisix has set tone anew for media to conjure up articles on how perceptibly easy investing in Phisix has been, so much so that professionals and neophytes can coolly squeeze out gains from the market without the adequate assessment of risks.

While it has been a crusade for us to help inform readers and the public of the merits of financial markets investing, never have we suggested that the markets function as some sort of milking cow. Success from investing comes with rigorous discipline, enduring patience, the ability to assess risks relative returns and developing and practicing Emotional Intelligence, hence, our predilection for Behavioral Finance/Economics. To paraphrase Galatians 6:7 ``You reap what you sow.”

However, portrayals like this, which illuminates on fast riches, gives out false hopes and encourages wanton risk taking appetite, eventually delivers a lethal blow to the emotionally driven media inspired gullible speculator or punter. When the markets become object of arrant speculation, the usual outcome reflects on the manner of which the markets have been treated. Just ask those who got burned in 1997. People get what they deserve. It is just fortunate enough that the cycle still works in favor for the punters.

Further, as we have previously written, this usually serves as precursor of a nearing peak in the cycle. In the US it is called the “Magazine Cover Indicator”, where a climaxing deeply entrenched trend is showcased by media as front page treatment or as major feature (hence the cover) which eventually turns out to be an inflection point. The reason for this is about economic incentives and overconfidence, wrote author Nicholas Vardy (emphasis mine),

``Journalists aren't writing cover stories to make investors money. They are writing cover stories to sell magazines. And "hot topics" sell. But it also means that when a company or financial trend is featured on a magazine cover, the chances are that the trend is already widely known, and universally accepted.”

Selling what the public wants to hear is also about OVERCONFIDENCE, or (wikipedia.org) ``the human tendency to be more confident in one's behaviours, attributes and physical characteristics than one ought to be”, or when applied to the markets the ingrained fallacious notion that the prevailing trend is a permanent feature. Since it is easier to sell what people want to hear or illustratively the confirmation bias, then the tendency is to go and assume greater risk taking activities in the assumption of the continuity of such trend.

The last time we saw this related phenomenon, where a TV news documentary profiled the “basura queen” was in June of this year, following the Phisix breakout from the 3,400 to reach a high at 3,800, which we discussed last June 11 to 15^th edition [the Philippine Stock Exchange: The PUBLIC’s MILKING Cow???!!!].

ONE month after, the Phisix joined world markets into a month long carnage emanating from the dislocation in the global credit markets, an event which has somewhat eased but remains a looming threat to the present revelry as shown in Figure 5.

Figure 5: St. Louis Federal Reserve: Three Month Treasuries Remain Under Pressure

While, according to the St. Louis Fed, the 10 year treasury yields have risen, and where market has priced in the Fed Fund Rates at present levels or for a potential pause, 3 month treasuries remain under pressure, with marginal signs of recovery. In short, while equity markets have priced in a recovery, the credit markets have not normalized.

This is NOT to suggest that the depiction of our Magazine/Media Cover Indicator signifies a TOP, although they as well could.

Our point is to take on a broader perspective and weigh the developments in the context of a global dimension.

Remember, as discussed earlier our markets have been significantly correlated with global markets, where variables of influences such as the Phisix-Philippine Peso relative to the US dollar, inflationary activities of global central banks, surging commodities and activities of the equity benchmarks in Asia and emerging markets appear to convey the same message: Resurgent Inflation.