Illogical Exuberance
I talk a lot about the tendency for traders to engage in illogical exuberance. Traders will push the price of stock up for any number of reasons that often have little to do with fundamentals and logic. Prices go up based on speculation, but then when the speculators are proven wrong, prices don't go down. Last year we saw the Dow climb over and over again on poor data out of the U.S. Why? Poor data increases the chances that the Fed will reduce interest rates. Has the Fed reduced interest rates? No. Have the markets come back down to the levels we saw before the poor data led traders to believe the Fed would reduce interest rates?
Of course not.
Yesterday's rally in the Dow is a perfect case in point. The dow gained over 75 points hitting a new record high. Here is a clip from my daily report courtesy of Briefing.com.
For the 17th time this year the Dow closed in record territory. However, for the first time in weeks, the blue-chip index's gains weren't the direct result of solid earnings reports from some of its components but rather anticipation of an earnings surprise from General Motors (GM 32.49 +1.19) tomorrow morning. The latter paced the way among the 28 Dow stocks posting gains and was just one of many components that helped Consumer Discretionary (+0.9%) provide some notable leadership to the upside.
Oh, there was a surprse. You bet there was. It just wasn't the one that was anticipated.
Much worse than anyone expected.:
The Detroit giant handed in a profit of $62 million, or 11 cents a share, down from $602 million, or $1.06 a share, a year earlier. The latest results include charges that totaled $32 million, or 6 cents a share, largely related to restructuring actions in Europe and Asia Pacific.
Adjusted to exclude those items, the Dow component posted earnings of $94 million, or 17 cents a share, in the latest quarter.
Revenue slid to $43.91 billion from $52.38 billion in the same period a year earlier.
Analysts polled by Thomson Financial had called for a profit of 87 cents a share in the March period on revenue of $40.88 billion.
General Motors is down just over 3% despite their pathetic performance. The Dow is up about 10 points.
Of course not.
Yesterday's rally in the Dow is a perfect case in point. The dow gained over 75 points hitting a new record high. Here is a clip from my daily report courtesy of Briefing.com.
For the 17th time this year the Dow closed in record territory. However, for the first time in weeks, the blue-chip index's gains weren't the direct result of solid earnings reports from some of its components but rather anticipation of an earnings surprise from General Motors (GM 32.49 +1.19) tomorrow morning. The latter paced the way among the 28 Dow stocks posting gains and was just one of many components that helped Consumer Discretionary (+0.9%) provide some notable leadership to the upside.
Oh, there was a surprse. You bet there was. It just wasn't the one that was anticipated.
Much worse than anyone expected.:
The Detroit giant handed in a profit of $62 million, or 11 cents a share, down from $602 million, or $1.06 a share, a year earlier. The latest results include charges that totaled $32 million, or 6 cents a share, largely related to restructuring actions in Europe and Asia Pacific.
Adjusted to exclude those items, the Dow component posted earnings of $94 million, or 17 cents a share, in the latest quarter.
Revenue slid to $43.91 billion from $52.38 billion in the same period a year earlier.
Analysts polled by Thomson Financial had called for a profit of 87 cents a share in the March period on revenue of $40.88 billion.
General Motors is down just over 3% despite their pathetic performance. The Dow is up about 10 points.
posted by Praguetwin at
6:13 PM
10 Comments:
praguetwin,
If the stock market is anything, it's a forward looking body of opinion.
But second to that, it's the focus of millions of windbags, prognosticators, seers, charlatans, bullshitters, pundits and wild-eyed analysts, all ready to share their explanations of market action.
Why do you think your claim that the market climbed last year on expectations of lower rates was the ONLY reason market averages rose?
Obviously there were other reasons. Like huge sums flowing into the hands of private-equity firms looking for buyout targets.
Meanwhile, the comment about how the latest market close wasn't driven by earnings is just plain silly. Earnings season is over. Thus, no matter what happened at yesterday, it would have been true that earnings played no role.
Comments like that from Briefing.com do nothing but fill space that needs filling, which means that a lot of market commentary is like sports writing -- interesting, perhaps, but useless.
General Motors is involved in some legal action relative to the UAW. That has a lot more impact than earnings at this point, even though the trading over the last two days reflects earnings expectations.
It's almost funny that GM was heavily criticized for selling off half of GMAC last year. Too bad GM didn't get the whole damn business off its books in time for this annoucement. As it is, things are only half as bad as they might have been. That's a plus.
Nevertheless, the GMAC loan problem is unrelated to the business of building cars. Did anyone predict this problem? Probably. Someone will soon pat himself on the back for making a broken-watch-is-right-twice-a-day call.
GM has shown that diversification can sometimes work against you. Painfully. The car business is shrinking and borrowers are defaulting. Meanwhile, Congress is toying with the idea of increasing fleet mileage requirements enough to inflict more damage on GM.
Will Congress do it?
By
no_slappz, at 7:31 PM
That illogical exuberance also drove up the prices of homes beyond reasonable levels in many areas of the country.
By
Kathy, at 9:10 PM
N_S,
You should try some of that writing for briefing.com. You seem to have a talent for filling space.
I'm not even going to comment on what you said, but I will pick out the most grievous contradiction in your incoherent rant which I think speaks for itself.
Meanwhile, the comment about how the latest market close wasn't driven by earnings is just plain silly. Earnings season is over. Thus, no matter what happened at yesterday, it would have been true that earnings played no role.
Why I bother to engage you, I don't know. I must not like myself.
By
Praguetwin, at 10:50 PM
Kathy,
Indeed it has. There may be more than one more chicken coming home to roost.
By
Praguetwin, at 10:51 PM
praguetwin,
Think what you want, but you should consider your own statements first when looking for contradictions.
You wrote:
"Oh, there was a surprse. You bet there was. It just wasn't the one that was anticipated."
News item: An event is not a surprise if it is anticipated. For some reason I'm not aware of, there were people in the market yesterday who bought the stock because they expected earnings to match Wall Street estimates.
Instead, results were bad. Let me add that last year I was trading GM. It was obvious the stock price was way way way down because lots of investors were speculating on a GM bankruptcy filing.
They were wrong. GM is not bankruptcy-proof, but it has far more ways to avoid bankruptcy than other smaller companies. Though there were good reasons for GM to file for Chapter 11, a filing would bring headaches too.
Obviously, the unions were not going to push hard enough to drive the company to a Chapter 11 filing. Despite their noise, they know if there is a bankruptcy filing, the union contracts are voided. That is the absolute last thing the union leaderships wants. If GM filed chapter 11 because the UAW wouldn't renegotiate contract terms, the union leadership would become known as the clowns who got the entire union fired. They don't want that.
Anyway, after trading the stock during the year I moved on and have not watched the developments with the same interest. But I think anyone who was on top of GM would have considered the impact of subprime loans on GMAC and how that might hit GM stock.
Unless somebody lied to the public about the extent of GMAC's exposure to subprime loans, the red flag should have been raised. Maybe it was. I wasn't looking.
By
no_slappz, at 1:21 AM
N_S,
Quite simply, my "contradiction" is based on the report which states...
....anticipation of an earnings surprise from General Motors (GM 32.49 +1.19) tomorrow morning.
I read that as saying there was broad speculation amongst traders that GM would beat earnings estimates. I.E. they were anticipating a surprise (a positive one).
I merely stated that there was, in fact, a surprise, but a down side one in that earnings fell well short of the consensus analyst view.
Get it?
By
Praguetwin, at 7:27 AM
PT, I agree with the comment to N_S "You seem to have a talent for filling space."
Logic and critical analysis doesn't feature in this behaviour.
I'm watching the market here in Australia, in North America and Europe and logic does not seem to be part of the game.
Playing big boy's games appears to override everything.
I am starting to believe true economic thinking is a thing of the past!
By
Cartledge, at 1:36 PM
praguetwin, you wrote:
"I read that as saying there was broad speculation amongst traders that GM would beat earnings estimates. I.E. they were anticipating a surprise (a positive one)."
Try this. Assume today is your birthday. You have reasons for believing someone has planned a surprise birthday party for you. Because you believe a surprise party awaits, you will not experience any surprise when you walk in the door and people yell "surprise." You will only note that reality matched your expectations.
However, if you walk in the door and you are arrested in a sting operation related to your unaccounted sales of music CDs, you will experience "surprise."
Did this happen with GM? I can assure you people labor and sweat to spread rumors that influence stock prices. Over-riding and offsetting the truth is the goal. But after the trap is sprung, truth becomes the counterweight that returns the pricing mechanism to reality. Traders know this.
You can be sure the price of GM stock was bid up at the same time put options were purchased, call options were sold and stock was shorted. Every angle was covered. Nevertheless, some participants lost money.
Meanwhile, I remain certain that followers of GM understood GMAC was exposed to subprime mortgage risks. "Traders" were among them.
By
no_slappz, at 4:54 PM
cartledge, you wrote:
"I'm watching the market here in Australia, in North America and Europe and logic does not seem to be part of the game."
In other words, the game does not conform to your expectations. I'd say you should re-evaluate your expectations of the game.
It is not a secret that "fear and greed" have been identified as the chief motivating factors in markets.
You wrote:
"Playing big boy's games appears to override everything."
How so?
You wrote:
"I am starting to believe true economic thinking is a thing of the past!"
What's changed? If you are interested in markets and markiet psychology, perhaps you should read "Popular Delusions and the Madness of Crowds".
When it comes to human behavior and money, nothing has changed.
Meanwhile, stating that "true economic thinking is a thing of the past" is an extraordinary statement given the absurd economic experiments that define the past and much of the present.
Is Marxism an example of true economic thinking? How about fascism? Are there any words to defend the economic thinking of monarchies, theocracies or tyrannies?
By
no_slappz, at 5:11 PM
Quick follow-up on GM:
Standard & Poors had a SELL rating on GM stock as of May 3, 2007, citing bad prospects in every department.
On 3/29/07 Goldman Sachs published a note about the exposure of GMAC's portfolio to subprime loans.
By
no_slappz, at 7:36 PM
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