Let’s Get Negative!
On occasion our business takes us out of the world of investments and face-to-face with management. It is a good reality check. So many of those in the punditry are convinced that they would do better than those in Congress, better than those managing auto companies, and better than those teaching at major universities.
Readers would be well advised to examine the credentials of those making such claims!
Our Experience
Here is what we have learned.
A highly-respected colleague — an economist — thinks that our profligate spending has caught up with us and forecasts a GDP loss of as much as 10%.
A highly-esteemed business associate, engaged in top-level sales in a cyclical business, sees a prolonged period of economic distress.
A respected colleague with broad experience in financial markets and connections to many corporate boards thinks this is the worst economic situation in his lifetime (back to WWII era). He notes that many of his companies are cutting back on spending.
Fortune collects the views of some mostly bearish pundits, designed to scare the daylights out of readers. After all, that is the story!
Many observers focus on any corporate announcement that discusses bad times. FedEx (FDX) reduced estimates and the stock got trashed. Jamie Dimon said that November was bad and December had not improved.
What Does it Mean?
A few years ago we challenged a young colleague to bring me a piece of information that I could not read in tomorrow's Wall Street Journal. The point is clear enough. If it is in the WSJ, it is in the market.
The biggest challenge is to figure out which pieces of evidence are concurrent economic indicators and which (if any) provide a glimpse of the future.
Hint: FedEx is completely concurrent and always wrongly interpreted by the market. The company has frequently stated that they have no great future insight. Jamie Dimon also denied any ability to see into the future, and even complained a bit about the question. Hat's off to him for observing that he was asked to step out of his "happy zone."
It is pretty clear that the negative sentiment about the economy has become even more pervasive. At some point it becomes a self-fulfilling prophecy. If businesses choose not to invest in new technology, the economy will get even worse.
If an investor thinks this is fresh information, it is time to sell. If it is a time when all others are fearful, maybe it is time to buy.
Historically, I have generally agreed with your point that things that show up in the Journal have been discounted already (or at least that only the tiniest items on the back pages may not have been discounted fully). However, it seems like there are too many exceptions that pile up, and that maybe the markets are less efficient than I thought. (I’m of the markets-are-mostly-efficient-most-of-the-time camp.)
For example, there was much information about the excesses of the housing and securitization markets in the Journal and elsewhere in advance of the current crisis, yet it was not widely acted upon.
And a self-fulfilling recovery when the end of the world fails to materialize and investors come to realize things aren’t as black as they feared.
Tom – I do not think that markets are efficient. If they were, I should be in a different business.
Finding an edge means moving beyond the obvious. As to how well this was done in dealing with housing and securitization, that is a complex question. Some of the key facts were not really known until they happened, because they related to market behavior. Anyone following the put prices in Bear Stearns, the CDS market, the ABX could see that some were planning to profit from the loss of confidence. We then watched the process repeated, at least in part, several times.
But this is a long story. Thanks for your thoughtful comment.
Jeff