Comments on: Market reports are hurting America A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: cptcodfish Thu, 27 Oct 2011 18:42:34 +0000 @Danny_Black I appreciate your adherence to the strict definitions and I agree I mangled them. Your comments show me that I may have muddied the waters for the sake of simplicity. However, this discussion was initiated to talk about why I thought market reporting is rubbish, not to discuss how I may have muddied the waters. To go back to my original point, market reporting is garbage for two reasons. (1) We will always be limited with our our predictive capability because outside of toy-problems found in textbooks, we never know all factors and we can never measure them with enough precision. There is always one more decimal place that we cannot attain. As long as we cannot know all factors, we will have an imperfect prediction. As long as we cannot measure with infinite precision, we will always have an imperfect prediction. Just as with the butterfly effect, a small imprecision (the decimal place we cannot attain), there is the potential that our prediction will be rubbish. (2) Markets are complex adaptive systems. As mentioned, small things can feed back (or forward) into each other to result in large effects. Consumer confidence is one of the variables that influences market behavior. It has a circular relationship with market reporting. That circular relationship means that whatever coefficient you use in your regression equation will always be changing and adapting. These feed off of each other. Given that we cannot measure these with infinite precision and that they are constantly changing, we find ourselves in the situation of Point 1, that the predictions will likely be rubbish because small differences can have substantial effects.

By: roy13miller24 Sat, 15 Oct 2011 19:35:44 +0000 If salmon are obsrtucted from returning to the place of their birth with they spawn in fresh water anyway?Please reply thank you.

By: Danny_Black Fri, 14 Oct 2011 16:07:50 +0000 TFF, I think I do have a rather restricted definition of actionable. It is a bit like porno but I will try and come up with something which approximates my idea. I think actionable news is something you can use within your analytic framework to have a greater than 50/50 chance of turning a profit that you would not have without said news and without the benefit of hindsight.

FBreughel1, as may be obvious I am a bit pedantic so if I am about to proceed to rewrite what you meant in slightly different language I apologise in advance.

Deterministic means that there is no random component, ie if I put the same input in I will ALWAYS get the same output. Random is non-deterministic. Predictable means that given knowledge of the initial variables with a certain error, at any future time I can state the output with a certain error. Deterministic and predictable have nothing to do with each other. A system can be random and have predictable outputs and deterministic and non-predictable. Chaotic systems is another name for non-predictable. A Chaotic system can consist of a small number of variables and a typically rather complicated interactions – for instance the Lorenz equation or logistic equation. A complex system is one with a large number of components each with simple local behaviour but which exhibits complicated – possibly chaotic – global behaviour.

The sense in which “traditional cause and effect” is chucked out is that people assume if there is a big effect that the cause has to be large and that these jumps are not simply inherent in the system. For instance if 5 days the market tanks then it must because of X whereas it can be lots of little things feeding back on each other.

By: Th.M Wed, 12 Oct 2011 20:15:20 +0000 Market should move on news, so explanations that involve things that should already be well in the price (most sovereign rating downgrades, for instance) are pretty useless to start with.

What’s often missing, from a practitioner’s point of view, are the explanations of why the market doesn’t move when some piece of news upon which you have built a strategy happens, and yet you reap no benefit from your correct expectation.

By: FBreughel1 Wed, 12 Oct 2011 19:28:17 +0000 @ Danny_Black: No, I think cpcodfish meant it: “Because of the butterfly effect, traditional cause-and-effect must be thrown out the window, especially in the case of markets”.
In any complex deterministic system an initial infinetismal different starting variable would not grow so much for the system to become unpredictable. It would be difficult, but still predictable. A complex chaotic system would not be predicable but since its pattern is stable, money could be made. I thought his distinction between complex and complicated was a particular give-away. Too bad cpcodfish didn’t reply !

By: TFF Wed, 12 Oct 2011 14:12:55 +0000 Danny_Black, I disagree on that point (unless you are using a very restricted definition of “actionable news”).

Plenty of situations which build slowly. Understanding the growing context within which the individual stocks trade can help to anticipate risk factors — risks that often are not yet fully recognized by the market.

Might somebody reading the financial pages have recognized the risks to the financial system in the summer of 2007? Perhaps taken that as reason to stay away from the apparent bargains in LEH? Or reading about the European turmoil, decided to step away from those stocks for a few months?

The trick, naturally, is reading what “might be” rather than what has already happened.

By: Danny_Black Wed, 12 Oct 2011 14:04:34 +0000 davidgaffen, the probability that a journalist is going give actionable investment news is around 0. Financial reporters – and i don’t think i have ever read anything of yours – tend to have a very very shallow understanding of the markets and frankly by the time it is widely known public information most of the market participants will have long acted on it.

FBreughel1, if it was all noise then that would be a proof of the efficient markets hypothesis which states exactly that. Secondly, again to be pedantic, butterfly phase diagram and what the other guy said are completely different mathematical concepts.

SelenesMom, that is because fundamentals don’t drive day to day price movements, market microstructure and noise do.

By: Curmudgeon Tue, 11 Oct 2011 21:55:37 +0000 @SelenesMom, sounds like you should be writing these market reports.

By: davidgaffen Tue, 11 Oct 2011 20:36:30 +0000 The primary issue here – that is, with my colleague Felix Salmon, who is as handsome as he is misguided – is that market reports, written badly, will indeed fail to inform, and serve no more utility than an incomplete box score about a baseball game.

But the sports analogy is apt here. You don’t draw conclusions on the state of a baseball team from one game (ok, the Mets are an exception), just as you don’t do the same from the market. Which is where context comes in. Boring, repeated, restated, and then repeated context. Again and again.

But the job of a market reporter – and I haven’t written any confessionals, though I’ve been doing it 15 years – is to understand short-term events, medium-term events, and long-term events and the changes, as they happen, by reporting on it. Constantly.

Because if there’s one thing Felix can agree with me on, it’s that muscle memory means a lot. The more you write, the more you write, and so it is with reporting. Never covering a market, only to wake up and try to discern just what a big drop in stocks means at a given moment, is not an easy task. And it would rob the reader of the expertise one gleans from doing this on a daily basis.

Does that mean that every market report is one that investors should act upon? Hardly. Does that mean every market report is going to be a humdinger that we hold up as a prime example of amazing journalism? No. But there are reasons for this day-by-day understanding, the blocking and tackling, so to speak.

But Felix is English, so he doesn’t get American football analogies.

By: FBreughel1 Tue, 11 Oct 2011 19:44:09 +0000 Wow, are we trying to re-proof efficient market theory here ? Wow, please look up Brealey and Myers basic stuff. Stock charts are statistically all noise. Has been examined over and over again 50 years back.
@cpcodfish: if you find even one butterfly phase diagram in any of the thousands available sets of stock data you are one lucky guy. What do you think ?