Archive for March, 2007

Mountaineering and the Currency…

Hemingway said, “There are only three sports - bullfighting, motor racing, and mountaineering”. Mountaineering we feel is also an inspiration for financial news. The only time an asset catches attention is when it is at the top of a mountain. Like for example the 7 year top the Rupee crossed recently.

“The Indian rupee climbed to its highest in more than seven years on Wednesday, coming close to 43 against the dollar before suspected central bank intervention halted the rise”, traders said. The rupee ended at 43.04/06 per dollar, off an intraday high of 43.01 — its strongest level since November 1999, according to Reuters data. It had closed at 43.29/30 on Monday. The Reserve Bank of India (RBI) has regularly sold rupees since November to rein in the Indian unit. However, an acute cash shortage in the banking system forced banks to sell dollars to raise rupee funds. The rupee has gained more than 9 percent from a three-year low of 47.04 hit last July. “It’s unclear what the central bank would do now to check the rupee’s gains,” a private bank trader said. “The RBI’s very focused about inflation and liquidity. It would correct the exchange rate, once liquidity is comfortable,” said another chief economist. According to central bank data, the RBI had bought $7.8 billion between November and January. Traders see foreign investment as a key factor in determining the rupee’s movement in 2007.

[bold]THE ECONOMIC TIMES, 28 MAR 07 [/bold]

But as they say, nobody believes in the mountaineer till he climbs it. His motivation, determination, his dreams or his inner waves are not important till the time he proves it. This is what happened to the Rupee, making it a star makes sense now. But it did not make sense betting on the national currency as it moved sideways started July 2003 or when it started the final ascent in Jun 2006. Dear newsreader, the news is late yet again, this time it took the news 9 months to arrive and tell you that the asset crossed the 7 year summit.

[bold]WAVES.FOREX, 01 DEC 06, WE SAID [/bold]

“The currency is headed down to 43 and lower, despite what the RBI does, despite macro economic conditions, despite the seasoned trader. This is our multi month forecast. At this stage INR should be spurting up in a C wave back to plus 45 levels, before it continues the move down. Strange isn’t it, one side we have the professors, the economists, the politicians, the Bank of England, RBI and on the other side a pattern, Fibonacci sequence, and some statistical indicators”.

[bold]WAVES.FOREX.290307[/bold] latest updates on INR (Indian Rupee), YEN, EURO, DOLLAR and LEU (Romanian Lei) carries the perspectives with PREFERRED and ALTERNATE counts before the mountaineer starts climbing.

Breaking NEWS

The markets have consistently proved that profiting from news breaks is not an easy task.

Even in 1850 people needed faster stock news. And Reuters used carrier pigeons to do that. The birds were faster than the post train. This was the missing link to connect Berlin and Paris.

The stock news from the Paris stock exchange could reach market players in time to profit from it. That was then, now things are different. Now we have 24 hours markets, so even if London bombing news reaches you early, by the time the spot starts trading, you have futures that are moving up from extreme discount as spot moves down. The discounting mechanism works in a totally different way.

Now, not only market players know how to use leverage but also markets discount news differently each time. The relevance of the news is seen post facto. If the prices went up, the news might be good and vice versa.

Reuters did create a successful model by delivering the news on time. But he never really wanted to teach us how to interpret news. The market was left to do its interpretation.

How people saw news in 1850s is not very different from the way we see news today. We care about the news till the time we anticipate a reaction. We give the markets reaction time and then we have another news item to digest.

Cause and effect is a multi-billion dollar industry. We have the cause and we study the effect, writing tomes of news or research around it. For example we have the Budget effect in India or the US Federal Reserve meeting effect.

The events are watched and written about carefully to gauge an effect on the market. Why does a good budget take markets by surprise? We are too busy in the inertia of changing market prices that we really never bother about challenging the news effect. It does not work.

Markets lead economies. The S&P 500 is the best known forecasting indicator for the US recession. And in the same way, the Sensex or the Nikkei can tell more about local economies then macroeconomic indicators.

Markets digest and discount news much before they appear in the newspaper. And this is why the stock market news is always late. It is never in time to profit. Rather good news is used by smart investors to sell and bad news is used to buy in. One always gets a better entry or exit price.

And what about the bad news which pushes markets up? JFK’s assassination pushed the market up the next day. September 11 was not the end of the world, but a good time to buy. Wars happen at market bottoms not at tops. The Kargil war was a good time to dig in to be a contrarian. Why is it a known fact for an investment psychologist that one should sell on news or buy on rumour? Why is contrarianism so logical, so rational and still so tough to practice? How do market technicians give price targets without knowing the future or news? How do technicians have a better chance to tell you what is going to happen in the next minute than an impact analyst?

Investigative research cannot beat the accuracy of market timing. The truth is that price forecasting has nothing to do with news. Though the link works upside down, if you are using good news to exit and bad news to buy in. If timing the markets had something to do with news, why has the dollar not been dumped yet, despite all the calls from reputed media and academicians that the dollar story is over? Dear Professor, the point is that you cannot forecast the dollar’s strength and price targets from macroeconomic news.

Although the news media looks detached, it’s a part of the market events. Stock markets are news churners. We have an interest, an appeal and an audience, the right mix for a business model. The stock market also has star quality after all, the markets are the real fortune tellers, rich today, richer tomorrow.

Robert Shiller mentions in his book ‘Irrational Exuberance’ about this aspect. And he even goes ahead and mentions that it’s no accident that financial news and sports news together account for roughly half of the editorial content of many newspapers today.

He even mentions about our fancy with new highs. We made a new historical high today, on volumes or on price or the constant records that are being consistently bombarded by exchanges around the world. This only adds to the confusion people have about the economy. It makes it hard for people to recognise when something truly and importantly new really is happening.

Then we have Victor Niederhoffer, the legendary hedge fund manager who published an article that sought to establish whether days with news of significant world events corresponded to days that saw big price movements. He tabulated all very large headlines in The New York Times from 1950-1966. Out of the 432 significant world event days, 78 (18 per cent) showed big price increases and 56 (13 per cent) showed big decreases.

He concluded that many of the world events reported did not seem likely to have much impact on the fundamental value represented by the stock market. Perhaps what the media thought was big national news was not what was really important to the stock markets. And there are also statistics about absence of news on big price change days. The ‘breaking’ news is just not there.