Seeking Balance from Bloggers and Media
The courtroom oath, "The truth, the whole truth, and nothing but the truth," is a good test for articles in the blogosphere and in mainstream media.
We have suggested that investors have a difficult task in sorting through the available information. Today’s trader commentary was a good example. Bernanke highlighted actions already taken, expressed confidence in the results, and showed awareness of the likely need for more interest rate reductions. Journalists drew conclusions like "Fed’s remarks cause stocks to slide." One is left to wonder what he might have said, or what policy critics actually recommend.
When looking for a critical analysis of important market events, many investors turn to The Big Picture, one of our featured sites. We do as well, since we think that Barry Ritholtz is a smart guy who has increasing power in the blogosphere, his frequent media appearances, and many citations by major news outlets.
This power carries a special responsibility, so let us check on his current take. Our question is whether Barry’s approach provides an informative and balanced view of events. In one of his articles today, Quote of the Day: Liquidity Trap, he offers his viewpoint on monetary policy.
The article begins by asking if the Fed is out of bullets. Barry quotes a guy selling a book and a system on real estate timing about "forcing people to borrow." We are not going to link, but feel free to check it out in the original article.
The article next says "Even more proof ? Consider this article…" We did not see the first article as "proof" but we wonder how many readers clicked through to check the credentials and possible bias of the author. It is compelling to sling around a term like "liquidity trap" and it probably scares the daylights out of many readers, but there is not much explanation and even less "proof."
The article cited is from Bloomberg, one of the most respected sources.
Analyzing the Bloomberg Article
We believe that the article is biased — written with a strong viewpoint. It is typical of many current mainstream media articles which emphasize opinion. All of the facts are there, but the overall impression is misleading. The article title is "Fed Interest-Rate Cuts Fail to Lower Borrowing Costs."
The article provides plenty of facts and quotes, so it is the truth and maybe nothing but the truth. It is not "the whole truth." Writers with an agenda leave out important facts. This writer took one brief period of interest rate changes and selectively chose rates that did not respond. The writer did not mention the dramatic reduction in LIBOR, the success of the Fed’s TAF facility, or the immediate impact of rate reductions on the prime rate. These are all meaningful rates for many homeowners, banks, and businesses. The article was misleading by being selective in the time period and the rates chosen.
The article also buried any positive comments in the last paragraphs, often neglected by impatient readers. The story could have been written as a "good news, bad news" piece, and it would have been more accurate.
Ritholtz Makes it Worse
Here is the quotation that Barry chose from the article:
The Federal Reserve’s interest-rate
cuts last month have failed to lower borrowing costs for many
companies and households, increasing the chance of further
reductions from the central bank.
Companies are paying more to borrow now than before the Fed
reduced its benchmark rate by 1.25 percentage point over nine
days in January, based on data compiled by Merrill Lynch & Co.
Rates on so-called jumbo mortgages, those above $417,000, have
increased in the past month, making it tougher to sell
properties and risking further price declines.
Carefully read, it says that some have not benefited from the most recent cuts — yet. It does not discuss past cuts, the TAF, or the stimulus package provision to help those needing jumbo rates. Why not provide readers some balance?
More importantly, the Big Picture article leaves out some other information, including the following:
The lack of improvement may make a fiscal-stimulus plan
passed by Congress last week more critical. The $168 billion
package, to be approved by President George W. Bush today, would
send tax rebate checks to more than 111 million households,
probably beginning in May.
“It’s a necessary thing given the uncertainties about both
the economy and the power of monetary policy at this point,”
said Harvard’s Feldstein. It will probably add 1 percentage
point to economic growth, he said.
The Feldstein analysis of the stimulus package and the other quotes predicting more rate cuts do not fit with the bearish Ritholtz message to his readers. The result is not "the whole truth."
The final paragraphs, not cited by Ritholtz and downplayed in the article, were as follows:
The bill will allow Fannie Mae and Freddie Mac to raise the
limit on purchasing “jumbo” loans to $729,750 from $417,000.
The idea is to help struggling homeowners finance larger
mortgages at lower interest rates, especially in expensive
metropolitan areas such as New York, Washington and Southern
California, where median home prices now exceed the $417,000
Yesterday, at a closed-door luncheon with Republican
senators in Washington, Bernanke was “very upbeat” that the
economy would avoid a recession, Iowa Senator Charles Grassley
said in an interview.
Kentucky Senator Jim Bunning said in an interview that
while Bernanke didn’t comment on interest rates, the Fed chief
said that “they have their eye on inflation and price
stability, and if the credit crunch didn’t ease, obviously they
are going to have to do something about it.”
Any reasonable person might well draw a different conclusion from these paragraphs.
Finally, Barry offers his own take, something that some might find to be patronizing:
Can you say "The Fed is pushing on a string?"
(Very good children. I knew you could)
Graphic phrases like "pushing on a string" have important symbolic power. They are favored by proud non-economists. It is much harder work to find and analyze many sources checking out what real economists think about the issues. We recommend the following:
James Hamilton, consistently explains the commentary from all of the leading sources. He is far from bullish, but he looks at all perspectives. Here is his analysis of how monetary policy is likely to play out. Readers willing to do a little homework can consider his analysis and links and compare to the "pushing on a string" slogan.
The Wall Street Journal provides a nice summary of economic commentary on Bernanke’s testimony. One can readily see the range of opinion. Mostly, it is a question not of "whether" but when and how much.
Turbulence in the financial sectors, mostly influenced by questions involving the bond insurers, has spilled over into many other stocks. The model gave up on the dividend payers, reacting to technical factors. This analysis questions the selling in the sector. Nevertheless, we follow the rules.
We are still in the area recommended by our Gong Model. As we explained when citing the signal, this is not an exact bottom-caller, but a reflection of risk and reward over several months. A free analysis is available upon request. There is plenty of time for a good investment.
While the TCA-ETF model shows only eight out of 44 sector buys, it still represents opportunity. We also have a report on this model. The table below shows the update.