'Breaking' news

GUEST COLUMN

The markets have consistently proved that profiting from news breaks is not an easy task.

Even in 1850 people needed faster stock news. And Reuters used carrier pigeons to do that. The birds were faster than the post train. This was the missing link to connect Berlin and Paris.

The stock news from the Paris stock exchange could reach market players in time to profit from it. That was then, now things are different. Now we have 24 hours markets, so even if London bombing news reaches you early, by the time the spot starts trading, you have futures that are moving up from extreme discount as spot moves down. The discounting mechanism works in a totally different way.

Now, not only market players know how to use leverage but also markets discount news differently each time. The relevance of the news is seen post facto. If the prices went up, the news might be good and vice versa.

Reuters did create a successful model by delivering the news on time. But he never really wanted to teach us how to interpret news. The market was left to do its interpretation.

How people saw news in 1850s is not very different from the way we see news today. We care about the news till the time we anticipate a reaction. We give the markets reaction time and then we have another news item to digest.

Cause and effect is a multi-billion dollar industry. We have the cause and we study the effect, writing tomes of news or research around it. For example we have the Budget effect in India or the US Federal Reserve meeting effect.

The events are watched and written about carefully to gauge an effect on the market. Why does a good budget take markets by surprise? We are too busy in the inertia of changing market prices that we really never bother about challenging the news effect. It does not work.

Markets lead economies. The S&P 500 is the best known forecasting indicator for the US recession. And in the same way, the Sensex or the Nikkei can tell more about local economies then macroeconomic indicators.

Markets digest and discount news much before they appear in the newspaper. And this is why the stock market news is always late. It is never in time to profit. Rather good news is used by smart investors to sell and bad news is used to buy in. One always gets a better entry or exit price.

And what about the bad news which pushes markets up? JFK's assassination pushed the market up the next day. September 11 was not the end of the world, but a good time to buy. Wars happen at market bottoms not at tops. The Kargil war was a good time to dig in to be a contrarian.

Why is it a known fact for an investment psychologist that one should sell on news or buy on rumour? Why is contrarianism so logical, so rational and still so tough to practice? How do market technicians give price targets without knowing the future or news? How do technicians have a better chance to tell you what is going to happen in the next minute than an impact analyst?

Investigative research cannot beat the accuracy of market timing. The truth is that price forecasting has nothing to do with news. Though the link works upside down, if you are using good news to exit and bad news to buy in.

If timing the markets had something to do with news, why has the dollar not been dumped yet, despite all the calls from reputed media and academicians that the dollar story is over? Dear Professor, the point is that you cannot forecast the dollar's strength and price targets from macroeconomic news.

Although the news media looks detached, it's a part of the market events. Stock markets are news churners. We have an interest, an appeal and an audience, the right mix for a business model. The stock market also has star quality after all, the markets are the real fortune tellers, rich today, richer tomorrow.

Robert Shiller mentions in his book 'Irrational Exuberance' about this aspect. And he even goes ahead and mentions that it's no accident that financial news and sports news together account for roughly half of the editorial content of many newspapers today.

He even mentions about our fancy with new highs. We made a new historical high today, on volumes or on price or the constant records that are being consistently bombarded by exchanges around the world. This only adds to the confusion people have about the economy. It makes it hard for people to recognise when something truly and importantly new really is happening.

Then we have Victor Niederhoffer, the legendary hedge fund manager who published an article that sought to establish whether days with news of significant world events corresponded to days that saw big price movements.

He tabulated all very large headlines in The New York Times from 1950-1966. Out of the 432 significant world event days, 78 (18 per cent) showed big price increases and 56 (13 per cent) showed big decreases.

He concluded that many of the world events reported did not seem likely to have much impact on the fundamental value represented by the stock market.

Perhaps what the media thought was big national news was not what was really important to the stock markets. And there are also statistics about absence of news on big price change days. The 'breaking' news is just not there.

The writer is CEO, Orpheus Capitals, and can be reached at mukul@or-phe-us.com