Media Headlines vs Fundamentalsvalueplays
Reopening stocks suddenly take center stage vs COVID-lockdown issues in the middle of record cases. To understand what is occurring between the volatile push/pull of the COVID-lockdown vs reopening theme since April 2020 one needs to have monitored the media headlines vs the fundamentals. The mismatch of the narrative vs the reality has been stark if one tracks fundamentals. It is what is behind the scenes driving market psychology that matters. What we see we see priced in markets is momentary, the stuff of consensus headlines, not the stuff of fundamentals. With short-term investors mostly seeking trading signals using price trends, fundamentals have little influence on prices till they are obvious enough to impact prices. Even then, unless there is a new price-trend, trend-followers continue investing with previous trends till the new trend passes whatever thresholds each has determined is relevant enough for them to adjust. Sometimes one can see this and sometimes not. In contrast, the fundamentals are there for all to see. If fundamentals continue to trend, it is fundamentals that eventually becomes the basis of media headlines. When a breakthrough occurs from a prior trend to a new trend, it always comes as a shock. For price-trend followers, it is typically a break above or below a specific price. A price trigger! An event such as this, is ascribed to major shifts in market psychology but it is far more complex than that.
It is a change in market psychology which is a sum of multiple inputs unpredictably weighed which has no visible trigger that is readily obvious till it becomes so. Those who are monitoring fundamentals know from experience that transitions based on fundamentals while expected never provide one with sufficient timing. Investors making decisions on fundamental trends must not only have confidence in their analysis but also must have a decent allocation of patience. Fundamental-based investing makes one aware of wide pricing gaps between business returns and market pricing. The more stark this gap, the greater the investment opportunity once the headlines reflect it.
The current headlines are awash with COVID warnings and shutdowns nestled in a background of Global Warming themes. Both are counter-productive to economic expansion. Those investing with shutdown themes see a deflationary future with fossil fuels being rapidly replaced by electricity from solar, wind and perhaps a mix of liquid fuels including hydrogen and agriculturally derived oils. None of these can reliably supply society’s needs and have already failed during severe weather when demand is highest. A few charts help to define the current environment and the transition which appears to be occurring.
With multiple themes roiling investor perceptions it is difficult to prioritize importance especially when the day-to-day media focus is inconsistent. Of significant magnitude and longer lasting has been the response by policy makers to Global Warming themes. The first clear indication that alternative energy sources are unable to meet society’s needs was in the US when Texas experienced a cold wave Jan 2020. Currently, Europe is experiencing a similar disparity between demand and expectations of Green Energy to supply. This second severe test in 12mos of policies seeking immediate change-over to meet Global Warming demands has been a wake-up call to all involved when the ‘Texas Freeze’ was mostly ignored as a signal. A headline from Jan 5th 2022 is apt. The weekly price chart of natural gas in the US should be multiplied 3x to reflect the panic pricing Europeans are experiencing from reliance on Russia using natural gas as a political tool after shutting in their own gas fields, shutting down coal, shutting down nuclear and global transport and infrastructure not prepared for demand during periods of high demand. Fossil fuels continue to represent ~80% of global energy needs with alternatives not able to supplant this dominance unless some technological innovation emerges that dramatically changes the balance. Global Warming is a misperception which has built into a political crescendo the past 20yrs without evidence of the many claims made of its impact.(There is simple and ample scientific evidence to disprove Global Warming risk assessment. Ask if interested.) Most have accepted the media pronouncements as have policy makers and the consequences are moving to center stage.
Gas prices surge again in Europe, leaving some business owners ‘terrified' for the future
The other prominent theme today is COVID. The data is gradually emerging to provide perspective. What is currently of media/political importance is the soaring level of infection. Reported minimally is that the Omicron variant has little health risk compared to the original variant or the Delta variant. Two charts show the current cases identified vs the death rate for these cases. The data spans March 2020-Present and is a 7-day moving average. The case load is the highest ever while the death rate is the lowest ever during an outbreak. The risk is low. Unfortunately, this data counts every death with a positive COVID test as a death from COVID even when the cause of death was not COVID. The misreporting has been in place since March 2020. The truth will eventually emerge but all have experienced the media’s hyperactive reporting and it is part of the current theme. Some are just now beginning to report on these discrepancies. As they do this, the investor stance shifts towards reopening. This perception is also moving center stage.
Investor perceptions are not uniform simply because no two investors are identical. At some point when the weight of investor thinking moves to a tipping point, it appears that something acted as a trigger. The fact is, there is no trigger. It is more that those using price trends become suddenly aware when a price trend ‘breaks’. Such a break is seen the highly popular ARKK ETF when it broke below $89/shr. ARKK was a media darling with its reporting its daily trading activity. Its founder was interviewed endlessly promoting the benefits of the issues favored till recently. $89/shr was not something one could have identified as a breakdown price 6mos ago. One could have perhaps identified $100/shr as significant which one can see on the chart has some peaks and low points associated. In my perspective, a fundamental perspective, the current COVID fears are overdone and the errors in the policies surrounding Global Warming are suddenly apparent in the headlines. The headlines now favor those issues that form the reopening theme. The spike in $WTI and 10yr Treasury rates reflect the market turn to the reopening theme and a significant transition from the recent spate of threats from lockdowns or Russia.
How one knew to be invested in specific issues comes from knowing the overall economic trend. Only two charts are shown of a number of economic indicators which have proven to provide decent guidance are the Bureau of Labor weekly Claims and the monthly Intermodal Rail series. The direction of employment and pace of goods transport are key indicators of economic demand and trends. April 2020 was the month these indicators marked that we exited recession. The media continues to report as if economic recession continues. In July 2021 the National Bureau of Economic Research reported April 2020 as the month the COVID Recession ended. It was clear from multiple data series at the time this was so. Fundamentals provide insight to investors not available elsewhere.
Market Psychology can change very quickly. When this will occur is impossible to predict. If one is investing with headlines, the volatility is enormous. More so if on margin! One makes better investment decisions seeking guidance in the factors which eventually percolate into the headlines i.e., the fundamentals. This provides many months to position capital before markets discover them as opportunities. The Illustration Market Psychology & Pricing Information Hierarchy is useful as a guide. Economic and policy themes enter the process multiple levels below when market psychology translates what it sees into prices. While economic trends are reported monthly, how policies may impact economics, which is what in the end everyone cares about, may not emerge for several years. Even then, it may take several years of outcomes to recognize policy implications. One truism holds: headlines report what occurred not what is about to occur. This is despite the many claims by media selling products they indicate we will need to fend off future risks. The fact remains that most investors rely on media reporting for guidance when fundamental trends are the better guide. The goal of investing, since it is market psychology driving prices, is to sort through those ideas with fundamental support as a sufficiently discounted opportunity.
It was clear with fundamental analysis that we would recover from COVID. It has remained clear that economic expansion was rapidly progressing April 2020 and continues to progress closer to a more normal pace today. It is also clear from fundamentals that we still have a period of economic growth ahead of us despite the many headlines to the contrary. That ARKK has broken below $89/shr is a trigger for some. Fundamental investors anticipated something like this would occur at some point. The combination of the sharp rise in $WTI and 10yr Treasury rates coupled with ARKK’s pricing unable to hold a certain level reflects a transition with a long tail. It is not a trigger. It is simply part of the processes that comprise the investment cycle based on fundamentals.