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Streetwise for Friday, June 5, 2020









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Streetwise for Friday, June 5, 2020

The speed and intensity of the COVID pandemic has made the use of traditional economic indicators difficult at best. Nonetheless, there are some signs of economic improvement, while others remained bogged down.

One sector where recovery will likely be slow is crude oil extraction. A recent statistic showed that the number of active oil rigs has declined approximately 67% year to date. While this has lowered the price of gasoline, a positive for consumers, for the industry it is a nightmare.

Manufacturing rose in May for the first time in four months, suggesting a degree of economic stabilization. Unfortunately, we also saw gun manufacturers rally in the aftermath of the protests, similar to the start of the pandemic. 

Airline passenger traffic increased but is still only about 12% of the 2.4 million passengers of a year ago. And yet, despite further tension with China, lackluster virus drug-test results and the threat of further civil unrest in America, Wall Street remains focused on the idea that the economy has started down the path to recovery.

A corollary might be that quality is quality and the length of time a companies shares are on sale is always temporary. Remember that investment success is always the result of acquiring the shares of companies whose returns your research indicates will, over time, outperform, while still meeting your risk requirements.

Notice I did not say anything about investing in companies that some parasitic investment letter, TV performer or commission-based stockbroker says you must buy right now. Believe me if they really knew what stocks to buy and when, they would be buying and not living off subscriptions, advertisers, and commissions.

There is nothing wrong with reading about or listening to investment ideas. It is when you act on those ideas without doing your own due diligence that losses occur. Act imprudently and the market will take its toll with no remorse.

Market timing is as tempting to investors as the Sirens of Greek mythology whose enchanting voices lured sailors to their doom. Short-term moves on Wall Street do not hold a news conference in advance. Moreover, deciding to sell means you double the probability of an error, i.e., the sell decision and a follow-up buying decision.

William Sharpe, the winner of the 1990 Nobel Memorial Prize in Economic Sciences, calculated that in trying to time the market, you would have to be correct 74 percent of the time on both a market decline and recovery, to outperform the S&P 500 index long-term. 

Investment time gone awry can leave you feeling powerless, fearful and in a panic. Panic is never productive and is generally expensive. Nonetheless, for some reason Wall Street appeals to the gambling instinct in all of us. It hinges on the notion that maybe you can, ìBeat the House.î Lotteries count on this. 

Those planning on timing the market would have been more productive with the late Madam Marie of Asbury Park, N.J., and her crystal ball. Yes, there really was a Madam Marie, whose real name was Marie Castello, both a psychic and an inspiration to Bruce Springsteen.

When Springsteen was a teenager hanging around the boardwalk, Marie foretold that he would become famous. He did, and he returned the favor by making her famous in his song, “The Stone Pony.”

A more quantitative approach is the efficient market hypothesis (EMH). Developed by Eugene Fama, the hypothesis states that stocks always trade at their fair value.

There are three variants to the hypothesis: “weak”, “semi-strong”, and “strong.î. The weak form claims prices reflect all past publicly available information. Perhaps.

The semi-strong form claims that prices reflect all publicly available information and that prices instantly change to reflect new public information. No, probably not.

The strong form says that prices instantly mirror even hidden “insider” information. A degree of illegality here.

The only information that is not priced in is tomorrow’s news.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.
 

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