Is there ever a time when there isn’t any news that moves market? Nope, its always buzzing with what’s happening now. Often, the market movement are the news maker – typically, the media covers “after-the-fact” news with interviews and citing any slightest cause that would be deemed reasonable and digestible by the readers as the truth.
Sounds like plenty of opportunities to apply everything you learnt and make your smart prediction followed with a speculation that should rightfully reward you for your hard work and time burned – with someone in the market losing and you as the winner.
Did you kept winning? Maybe what happened was that you kept following the news, hearing and treating them as priceless information to base your next speculation and ended being fooled by the market, coming to a point where you think the market is against you. This simply means your opponent engaged in the asset you are dealing is ahead of you and has much more experience and understanding of its underlying drivers. He has more empathy of how others typically trade this asset.
These news aren’t the ones that require our focus. Focus is better diverted to an anticipation of how news would turn out, given how things are now. If news turn out as such, what would the market reaction be? Is there one clear reaction or there could be more than one ways market would react? Paul Tudor Jones affirms that it is less important to understand news than to anticipate the market’s reaction to it. If you are still understanding news as they appear and making a bet on what should follow the news, chances are that you are not making anything. The point is that, everyone would know of the same news but may or may not think and react the same way as you did. So it’s not always right to assume that everyone who read the same news would believe the same as you did. Know that reported news won’t be a guessing game that explores all the possibilities on might happen as the media has a credibility to protect.
To appreciate how the market would react, a sense of empathy, intuition and self-awareness to oneself and others play a crucial role. If the asset you are holding has fewer active participants, good news is you only need to be emphatic with those few who care as much as you do, bad news is they could be as emphatic of your actions as you are of theirs.
Awareness of Self
- Have you took the easy way out, ignoring or suppressing intuitions with “facts that everyone knows” which, rightfully, ought to be explained?
- When is the most common mistake you usually make? Being emotional? Being impatient as a result of fear of losing a great opportunity, and going too fast into a full sized position before a binary event without considering what others have already positioned?
- Introspection instilled as a habit? Would a lack of perspective of history, economics and politics result in nearsightedness, unable to see what’s next? Can reading widely from multiple authorities fill in the gap of understanding the policies and environment we are in?
- How prepared are you before putting on a position? Have you worked out the possibilities of how the trade would go wrong? Is the focus too narrow requiring a more macro view of things?
Awareness of Other Participants
- Being emphatic of an overtly one sided market going down a path of mistake, recognising it and taking advantage of the mistakes of others?
- Who cares? Why would they care? What are the different group of players views prior to the event? Does their views reconcile with market pricing?
- Price, flow/position trackers allows empathy of existing owners of assets, recognising what their allocation strategies and when they are in euphoria or pain?
How to Build Intuition
- Continuously reviewing prior decisions objectively. Give closely recurring episodes of history or storytelling of “future possibilities” of how things had or would unfold to keep simulation of concepts concrete.
- If intuition is grounded on historical resemblance, what’s kept the same and what’s not? Would the cause-effect relationship remain intact like before?
- If it’s a probable possibility, is it apparent to everyone and hence already priced in? Is there a wide margin of safety to take advantage of what is less apparent to most?
How to Use Intuition Safely
- Ask yourself whether your intuition concerns something in which you have ample experience. If yes, think of a previous situation that is similar to the fact set at hand. Otherwise, you should be very hesitant to rely on your emotions.
Examples of being empathetic.
Note how possible actions are tied to relevant actors supportive of those actions. Actors need not be restricted to competitors in the same speculation game, short or long term. Here, finance concepts is less important than the interest of the actors – not all actions from actors are speculative, more is at stake than just that.
- Crude oil is useless and worthless without demand from upstream refineries or consumption of refined oil products. Consumption for them fell when large consumers like China face a economic slowdown while reducing industrial overcapacity and transiting from an industrial to a service sector. Coal mining, construction and transportation is demanding less diesel. China’s refiners post declines in sales. Priced at 30 below the breakeven of 50, refiners are forced to cut back expenditure on O&G exploration. U.S. and Canada intents to reduce trade deficit by extracting oil from shale in North Dakota and Alberta using fracking, thereby cutting heavily on oil imports. Saudi Arabia refuse to gave up market share by cutting production, instead, wage a price war by flooding oil supply, given their competitive advantage of owning the largest oil reserve and hence able to withstand low oil prices longer than its fellow OPEC members who have a similar undiversified economy reliant on oil.
- EUR is second to USD as the international currency. EU is large economy with a large equity market capital open to international investors via UCITS and the notional value of goods and services traded across EU members and the world is large. EUR supply is controlled by a central bank and its members, and is widely used in a developed market with facilities that allow cross-border financing. Some commodities and debts are denominated in EUR, thereby forcing repayment and settlement in EUR.
- Supply side is determined by central bank reserve requirements for its members, as well as the deposit rate, deposit-marginal lending rate spread, rate on Main Refinancing Operations set by the central bank. Central bank holding the responsibility and role of a lender of last resort to the domestic banking sector, a regulator of domestic economy inflation and unemployment against some pre-determined target measurements and a protector for domestic exporters against external headwinds and tailwinds, meant that domestic stability and political goals underpins all its concerns. Remember that despite USD being used as the international currency, Fed Chair Powell do not care if stronger USD would cause a sovereign debt in emerging markets. That statement carries a weight on how EM would run their economy in the future.
- Demand side is determined by those who need EUR – borrowers, foreign investors and importers. Borrowers desire the lowest financing cost with the least foreign exchange and illiquidity risk. Inflation literally kills the purchasing power of long-term bonds, and if its a serious concern among lenders, especially for rapidly growing economies or those with a weak foreign reserve and a currency inclined to weaken, a more developed currency with a stable inflation is favored. This results in issuance of offshore non-EUR denominated debt swapped back to EUR. Such financing means could be favored over domestic currency if, for various reasons, domestic economy is deemed more risky and require a higher premium for compensation such that cost of financing is higher and less attractive to companies in need of fundings. Foreign investors could hedge their EUR exposure with a long tenored FX forward with an exchange of FX implied financing cost via a basis swap. If not hedged, they could be speculating on currency movements. Importers desire to maximise their profit while curbing any volatility in receivables or payables. This means hedging against foreign exchange risk is one of their concerns as well.
That said, being emphatic of those who care and why they even care would provide a less empahsised perspective on why they are behaving as such, as well as a ultimate truth to fallback and question the true intent of their words and actions. However, if concerns are prevalent as seen in Italy’s debt clouding ECB decisions, faced with the choice of the lesser of two evil, ambiguous decisions might be made to delay any future intentions or promises at all.
However in reality, decisions are not so clear cut that one can believe in face value. They are often made alongside with their history, their past actions, their current circumstances, their future goal. The past shapes the present to an extent, so does the present shapes the future.
Compromise, cooperation, coordination, mistrust, distraction, false optimism, warnings, threats, ignorance, assertiveness, provocation, arrogance, secrets, and more, are theatrical plays between actors who care. Thomas Sowell said, “Facts do not speak for themselves. They speak for or against competing theories. Facts divorced from theory or visions are mere isolated curiosities“. This leads to my future posts on how games are played strategically among those who care.