There is constantly news happening, at least CNBC, CNN, FOX and a few others would like us to think so. But how much news is really newsworthy? And if it isn’t newsworthy, are we at risk of over trading based on some random comment from someone that knows no more than we do, but can say it authoritatively? Of course we are! The news we should care about is what is NOT already priced into the market, not what everyone knows or is already worried about.
So, China growth slowing? Europe showing fiscal and monetary ineptitude? Politicians from all the states meeting in Washington unable to agree on which direction the sun rises in? Petrobras over spending at the demand of the government? Japan demographics driving fear in the fixed income markets? That is not news. That is all well known, understood, and priced. So, anything about these issues to be news has to change what we know, otherwise it is as impactful to our portfolio as 13 year old girls passing secrets in the bathroom. No one outside of their clique cares. Hmm, comparing 13 year old girls to the news networks, guess that isn’t fair to the girls…
Once something is priced in, then we watch to see if something major changes. In Europe, a rumor of a plan that might address part of the problem is not news. A talking point document in a second tier newspaper released as a test of reactions is not news. But a significant change in a debt auction from what was expected and priced is news. The difference might seem slight. But for investors, understanding news vs. noise is critical.
So, how do we avoid getting whipsawed by the news cycle and still stay informed? Turning off the source doesn’t help, because sometime there really is something newsworthy. Wisely picking sources helps avoid the worst purveyors, but we find that it is better to have a list of things to pay attention to, and to use the list to create triggers to help us trade on the news instead of trying, in the heat of the news cycle, to filter the news from the opinions of all the talking heads.
At Beating the Benchmark we set our posture like most people; we divide the world by geography and also by Industry. Then we create a posture for each, and underweight where the combination is bearish, and overweight where things are bullish. This year that has meant shorting European financials, and over weighting gold and US Utilities. A boring process, but one that helps identify the news we need to pay attention to more closely.
When we are looking at making changes that affect our trading posture, we look for things that affect our over weights first, then our underweights, then the normal weights. This provides some balance to the hype. So, if there is bad news about European Financials, we can ignore it. We simply don’t care. If there is great news about Europe, then we have to read it to see if there is real news, but that is a lot easier than reacting to everything. Same with geographies. With the horrific disaster in Japan we could read as caring people, but didn’t have to worry about our trades since we were underweight. That provided time to think through which companies would be most affected and place some trades in a very controlled and still timely way.
In Japan, for example, we didn’t leap into CAT, the Japanese were a long way from affecting the CAT purchase pipeline. We did look at the autos, though, and created a short on TM as their supply chain is the most heavily dominated by production in Japan, and they were already under tremendous pressure due to the yen for the same reason.
We are watching other parts of the world for real news; things not priced into the market yet. This doesn’t eliminate mistakes, no matter how hard we try. One of us over reacted to problems in Yemen and Bahrain thinking this was a precursor to problems in Saudi Arabia this past spring. Saudi Arabia is on our list of places to watch. Saudi Aramco is about 3 times the size of XOM, and problems there would cause a huge spike in oil prices immediately. The $149 a barrel of WTI of mid 2008 would have been a minor pausing point on the way to $250 oil. But the King returned, threw Billions at the masses and everything calmed down. And I took some losses.
Generally, though, being prepared for what might occur makes reacting easier, more thoughtful, and a lot more profitable. For now, the things we watch for, and hope do not occur include mostly bad news. Russia re-invading some past satellite country, with special fear with respect to the Ukraine, though even Georgia would be a minor problem. Russia shutting down gas shipments to the EU countries. Anything in Saudi Arabia. China creating a border dispute with India. India taking advantage of the problems in Pakistan to escalate their border disputes. Israel attacking Iran. A major oil spill in a less developed area that causes a major disruption in shipments instead of drilling. (Nigeria, Indonesia, Brazil are easy example of this).
In the US, the politicians deciding the sequestration already agreed to for 2013 and beyond is too onerous and backing away would be a problem. Anywhere in the world a natural disaster can cause problems. We are seeing the impacts of flooding in Thailand right now. How many of us knew the disk drive industry had almost completely migrated there? With any natural disaster looking at the import and exports of that part of the world makes sense. That is why problems in the Philippines would be hugely problematic in other parts of the high tech markets.
There is always potential for Good News as well. We just have found that it is a lot less likely, and when it happens is much less likely to have quick impacts. The Q3 earnings season is just ended with huge surprises to the upside, and next year we could easily have SPX earning in the $103-110 range. But the market is happily ignoring that. We could be surprised by the politicians sent to Washington deciding to act like adults prior to the election, but we aren’t holding our breath. The Europeans could decide to plan ahead and either kick the weak out or build a reserve to keep the union and the Euro together, but that is as unlikely as Bachman and Pelosi sharing cookie recipes or agreeing on how to move the country forward.
So, what to do? Audit your portfolio to see where you are at risk and then make some plans for news in those areas. Look at what news you might be able to profit on and create triggers in advance. And ignore any “news” where three people are asking teaser questions of 2 or more people trying to create news.
And with your free time, enjoy your spouse, kids, your hobbies, and your charities.