Financial Headlines

In my article A Noob’s Introduction to Investing, I mentioned that it’s very dangerous to pay attention to broad market headlines. While reading Nassim Nicholas Taleb’s The Black Swan, (a sprawling, thought-provoking, messy book which I recommend) I encountered the following anecdote:

One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: “U.S. TREASURIES RISE; HUSSEIN CAPTURE MAY NOT CURB TERRORISM.”

Whenever there is a market move, the news media feel obligated to give the “reason.” Half an hour later, they had to issue a new headline. As these U.S. Treasury bonds fell in price(they fluctuate all day long, so there was nothing special about that), Bloomberg News had a new reason for the fall: Saddam’s capture (the same Saddam). At 13:31 they issued the next bulletin: “U.S. TREASURIES FALL; HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS.”

So it was the same capture (the cause) explaining one event and its exact opposite. Clearly, this can’t be; these two facts cannot be linked.

It’s a funny anecdote. One of the things you notice when you follow the markets is that there are a lot of Official Numbers. This is usually things like manufacturing data, employment data, GDP data, etc. Major financial companies will try to estimate these numbers in advance, and the average of the estimates is called the “consensus.” So let’s say the consensus estimate is 9.1% unemployment, and the actual employment numbers come in at just 9% unemployment. What should happen?

If you said the market should go up, because the numbers were better than expected, you’d be right – half the time. In reality, the numbers can go any which way, even on days when nothing else is happening. The headlines on days when Official Numbers are released are informative. If the market goes the same way as the news (if the unemployment numbers were better than expected and the market goes up), then they have their explanation. But if the market goes the wrong way (unemployment numbers better than expected, market still goes down), they will single out some element of the data and that becomes the explanation.

The simplest explanation for wrong way moves is simply that “the market” had a different consensus than the experts, and that it was only revealed after the fact.

All this means is – ignore speculation in headlines (Market falls on weak employment data is *not* a factual headline). It won’t help you think clearly about your positions, and will usually cause you to do exactly the wrong thing.

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2 Comments

  1. Ha this really strikes a cord with me as I recently had an uncle who trades in futures explain how he follows hundreds of updates through the day to stay ahead of the volatility.

    I remember thinking how it was all bull and that his day must be really boring. I check my porfolio once, at the end off the day….if I’m bored

    Reply
    • m741

       /  December 31, 2011

      If you really know what you’re doing, then you have to follow all the updates – and you’ll know which updates are important, and which to disregard. But that’s a fraction of a percent of the general public.

      Reply

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