Media Competition: The Erin Burnett Effect

Successful investing — or trading — requires a method and discipline.  This often means knowing how to interpret information and reacting to changing prices.

For many months the key issue has been the prospect for a recession.  Many individual investors and hedge fund managers expect the worst and look at estimates of forward earnings with skepticism.   Friday’s market decline, which will be extended tomorrow at the opening according to overnight futures trading, is mainly a reflection of this concern.

Two Approaches to Forecasting Recession

The bearish camp points mostly to problems in housing.  These  pundits argue that housing problems will affect employment directly, other businesses indirectly, and consumers as well since they view consumer spending as fueled by borrowing.  These observers predict with certainty.  They profess to know what will happen.

The consensus of economists continues to see recession chances as about 35%.  This is somewhat above the normal odds of 20% — since an economic shock can create a recession at any time.  In a time when the Fed has intentionally attempted to create below trend economic growth, fighting inflation expectations, the recession odds will be somewhat higher.

Consumers of Recession Forecasts

At "A Dash" we are a consumer of recession forecasting since we do not have  our own model.  With the exception of a few professional economists, our readers are also consumers of forecasts.  Most consumers make a serious mistake.

The bearish argument is easy to understand in plain English.  It has a logical appeal, since all of the pieces are stories that the media highlights on a daily basis.

The economic argument cannot be understood by an observer without economic training.

This disparity is exacerbated by a general tendency among pundits and bloggers to disparage the results from economic forecasting.  We have tried to explain the error of this — certainty versus edge — but it is a difficult concept to grasp.

The Media Background

Some months ago, CNBC lost Liz Claman.  She had to wait out a non-compete agreement, but her plan was pretty clear.  Liz Claman has good ties to Warren Buffett.  She earned that relationship through respect ("Mr. Buffett"), charm, and an engaging style.  She wrote a book based upon her work.

When the Fox Business Network was announced there was aggressive competition for interviews during the launch week.  Buffett was a prime target, and CNBC lost, seething at the result, according to one report.

Friday’s Trading

The market opened down about 0.65% on Friday, and Caterpillar opened down less than three points before rebounding.  CAT revenues were in line.  Earnings were about 2% light since they (once again) did not push to raise prices and the forecast for 2008 was reduced about ten cents — something that was already widely expected.  [Full disclosure:  We are long-term holders of CAT and big winners.  If they are growing revenues and earnings at a 10%+ pace in negative times, we see big things and a higher multiple.]

The Erin Burnett Effect

CNBC viewers were treated to an in-person interview with Elaine Garzarelli.  She was on the program because of her prescient forecast of a market crash twenty years ago, before Black Monday.  Over the next few years, she seemed to lose prestige, although her quantitative method is quite strong.  She explained why she was very bullish on the market based upon fundamentals, with sentiment as the only "neutral" factor.

At this point  Erin revealed that she had some bad news.  That was the introduction to the first segment of her interview with the CNBC response to Buffett, Julian Robertson.  The key point of her interview seemed to be that "Julian" was expecting a "doozy of a recession."  CNBC viewers got to see this story in repeated segments all day, with reminders of the crash of 1987.  Burnett also interspersed her own reading of the Caterpillar report, emphasizing weakness in non-residential construction.  Others noted that this was an unusual foray for her, so that probably explains the lack of context — a company that has been conservative in forecasts and aggressive in calling for Fed action.

Does This Matter?

For the "buy and hold" investor, this is all meaningless noise.  Those who watched the Warren Buffett interviews caught his quip that he hopes to live through a couple of more recessions.  He buys good businesses (as do we) and does not worry about economic fluctuation.

Unfortunately, many investors take the wrong cues from information.

Who Knows What?

The average investor (and many rookie hedge-fund mangers) think that someone with the title of "legendary investor" knows everything.  Do you know Julian Robertson’s record at recession forecasting?  We do not, so we are not impressed.

The doom-sayers on the economy and the market have a multi-year record going:  all wrong.  One of our best sources of wisdom, Scott Rothbort, compared Garzarelli and Robertson on TheStreet.com’s RealMoney Silver site (the really good stuff for those who pay the most.  Worth it for active traders).

CNBC is pitting the bullish Elaine Garzarelli against Julian
Robertson. Garzarelli is a bull. Robertson is a bear. While you have to
respect both, Robertson peaked in the early 1990s, missed the entire
tech boom and made some poor investments in currencies and airlines.
Garzarelli’s track record since her prediction of calling the crash has
been excellent.

When I made my first "Kudlow & Cramer" appearance several years
ago, to my surprise and delight, Garzarelli was the other guest. To
borrow a phrase from Oprah, "You go, girl!"

Conclusion

This article is not intended as a criticism of Erin Burnett.  She is doing her job, and doing it well.  The question for investors is how to interpret the media imperative.  CNBC seemed to be on a mission:  Their "legendary investor" interview had to be as important as Claman’s Buffett interview. 

This is a trap for investors–and an opportunity.  The bearish story is more exciting, more newsworthy, and more understandable.  There is a chance that the Fox Business Network launch will be a race to the most dramatic interviews.  Discussing the fundamentals of interest rates and forward earnings is boring but profitable.