Yet "bad prints", which is trader terminology for a mistake, happen often and don't unglue the system. One view might be that the market was exceptionally skittish going into today. Many metrics indicated that the market had overly bullish sentiment, “overbought" conditions, expensive valuations and had largely ignored recent negative economic developments in Europe. Complacency on account of "the recovery" is rampant.One example of how investors seem to be throwing caution to the wind lately is how they have reacted to, or failed to react to, Greek woes. The situation in Europe has been known for months yet the markets have been complacent. Did investors just wake up for the first time today and notice how pathetically the EU is dealing with the situation? That is very plausible and if true, then caution had certainly been thrown to the wind and we could be in for a sizable correction. Just as a relatively small amount of subprime loans crippled the entire banking system, Greek debt along with Spain, Portugal, Ireland and Italy could also cripple the system.
Then again, this may have been a very random event; a mere matter of coincidence which we’ll all soon forget. At this junction, it is impossible to tell yet. While it may be comforting to hear pundits (yes you, CNBC!) definitively claim this or that, the reality is that we don’t know how this will play out.
---------------------
We've witnessed nearly everyone bash the US Dollar over the past few years. As I've often commented, the dollar is indeed a weak currency- except for all the rest. The Euro is not a currency; rather it is a currency experiment and we're in the lab right now. The ECB has been quiet and largely powerless, Germany and France have made promises
only to reneg, while the Greeks seem to want their cake and to eat it too. Spain, Portugal, Ireland and even Italy face huge issues. As painful financially and politically as TARP was- at least we dealt with the issues in about a month and on short notice. The EU hasn't done anything to address Greece after months and months of fair warning. Yet some continue to insist the Euro should be the stronger currency? I think not.
---------------------
Watching CNBC today, I heard discussion on the possible rogue trading include comments such as "where are the regulators?" and "where are the checks to make sure these things don't happen"? I must laugh at the hypocrisy- CNBC is a bastion of pro free-market, anti-regulation rhetoric. God forbid someone want to regulate market processes- how dare they! Let the private sector decide if program trading, high frequency trading, co-location and hedge fund algorithim flows are okay. As soon as something goes wrong however, out come the calls for adult supervision! Those pundits really ought to think about their positions a little more than superficially. Alas, they're just talking heads I suppose. Too bad people take them seriously.
---------------------
I've wanted to address high frequency trading since it surfaced as a potential abuse last summer, but didn't get to it. Perhaps now it is time. Coming soon...
To me, this just shows that it's dangerous for corporate executives to look at the day to day stock prices. They need to look at the longer term strategy and how/why it creates value. Full disclosure: I am not an investment professional, I use my finance skills to help corporations make better decisions (and I am not an M&A banker).
ReplyDeleteI had a few reasonably senior clients who told me Friday and today (Monday) that their email Thursday ran over with analysis, comments, concerns. Some of them were called out of meeting to see what was happening. These were companies whose exposure to Greece is pretty minimal, and even if there was some impact on the U.S. or other global business or consumer customer, for all of these companies it would have been pretty small. (I know that in many cases because we helped them to look at some scenarios). They all knew that there was no way that their fundamental value could move that much in 30 minutes. But they all were distracted from running their company and making real decisions by "the news". And today, it's 4%+ up.
Bottom line: As a manager of a business, focus on the longer term value creation in your business and understand the risk exposure so you know when to shrug and when it's important to do something asap.
Now for investors, the view is obviously a bit different.