Counter Trend Rallies

The relatively simple concept of the counter-trend rally is generating a disproportionate degree of confusion amongst nervous traders and fund managers. Allow a brief clarification of what these retracements mean to a variety of differing but interrelated asset classes: Oil, U.S. Dollar, Stocks and Bonds.

All asset classes traded in free, liquid markets tend towards eventual over-extension. Commodities, fixed income, currencies, equities, and options all must retrace their prior gains or losses after an emotional move in either direction. As traders press their bets, they eventually reach the point where the temptation for profit taking becomes overwhelming. That’s often the initial move counter to the previous trend.

Or, consider what happens when a trade becomes too crowded: the path of least resistance is the opposite direction, as everyone who could lean one way already is. The next move is the unwinding of that excess enthusiasm.

What makes the most recent activity so complex has been a series of simultaneous counter trend moves in Oil, interest rates, currencies and equities. It is no coincidence, as the chart nearby shows, that as Oil pulls back, equity markets rally. Concurrently, the U.S. dollar has bounced after ongoing weakness. Short term, a weak dollar helps multi-nationals by making their exports cheaper. Longer term, the effects are deleterious. Not only does the weak dollar pressure Crude prices higher, it discourages foreign purchases of U.S. assets, i.e., fixed income and equities.

The complexity of all these moving parts was revealed during last week’s Tuesday and Friday sell offs. This holiday-shortened, light-volume week has equities particularly sensitive to any twitch in the price of Crude. But the thinness of trading suggests that the markets can be easily pushed around, on Wednesday and especially the short session on Friday.

We continue to advise using these pullbacks as opportunities to add to long positions. Look for the Nasdaq to pull back toward 2040. I hope the S&P500 sees 1150, but since I suspect it won’t, I would start adding as the SPX approaches 1160. Perhaps the Dow pulls back to 10,350, but on the chance it doesn’t, use 10,425 to start scaling into that index.

Category: Markets

More P2P Promotion: Napster Rescues Shaggy

JACOB SLICHTER: So You Wanna Be a Rock & Roll Star: How I Machine-Gunned a Roomful of Record Executives and Other True Tales from a Drummer's Life

I just finished Jacob Slichter’s So You Wanna Be a Rock & Roll Star. Slichter is the drummer for Semisonic, which had a breakout hit single with “Closing Time.” Its an amusing look at the music industry by an insider, and was a welcome reprieve from my usual fare of economic/market related reading.

Towards the end of the book, there’s an interesting discussion: It turns out that Semisonic’s label, MCA, had a well deserved tin ear for deciding what was “single worthy” or not. The book suggests that a long series of missteps by MCA very much hindered the band. Despite critical acclaim, they never managed to really gain much traction on format radio beyond Closing Time.

Slichter offers Shaggy as an example of the pooor judgement of the execs at MCA. It seems the Jamaican born rapper handed in his new album, Hot Shot to the label, and the first two songs on the record suggested as singles were “It wasn’t me” and “Angel:

“Remember those song titles and read on: The MCA bosses listened to the album and complained “They’re no singles.” The bosses demanded that Shaggy return to the studio and record new songs, and Shaggy agreed. This was exactly the scenario that Semisonic had faced in late 1997 when Jay Boberg and other [MCA] senior executives heard no hit potential in Closing Time and suggested we return to the studio to record more songs. Jim warned us that if we recorded a new batch of songs, the label would choose the single from the new batch and forget about “Closing Time.” Fortunately, we heeded Jim’s warning.

When faced witht he same dilemma, however, Shaggy accepted MCA’s mandate to record more material, and no surprise, one of the new songs was selected as the single. The CD came out in August 2000, the single flopped, and within weeks MCA stopped working the album.

Meanwhile, a DJ in Honolulu, Pablo Sato of KIKI 93.9-FM, had downloaded Shaggy’s album off of Napster and started to play one of the other songs, “It wasn’t me.” KIKI was flooded with calls and “It wasn’t me” became a local hit. Bonnie Goldner and other Shaggy supporters at MCA seized on the success and advocated the song be pushed to other stations, and within a few weeks the song was a nationwide smash. By Christmastime, the album was on its way to number one, and after another hit, “Angel,” the album had sold 12 million copies worldwide, no thanks to the people running MCA. It was Pablo Sato, his listening audience, and Napster — the dread enemy of the music industry — who pulled Shaggy’s album from its grave at the Music Cemetery of America.”

I’m lost as to which is more amazing: the astonishing incompetence of the label at promoting their own bands, or artists actually being saved by P2P.

How many more of these stories are out there? Eminem, U2, Wilco, Radiohead and now Shaggy.
(If you have any other concrete examples of P2P functioning as a defacto promotional machine for the labels, please post them in the comments or send me an email).

UPDATE:  November 28, 2004 2:40pm
A commentor reminds me of Steve Albini’s The Problem With Music; In many ways, this book lays out that critique from the musician’s perspective . . .

So You Wanna Be a Rock & Roll Star
Jacob Slichter
Broadway Books, 2004 7131547 9942524?v=glance&s=books

MCA, August 8, 2000

Feeling Strangely Fine
MCA, March 24, 1998

The Problem With Music
by Steve Albini

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Category: Finance, Music

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The kinda-eventually-sorta-mostly-almost Efficient Market Theory

“I guess we’re all behaviorists now” -Richard Thaler   One of the most widely believed theories on Wall Street is the Efficient Market Hypothesis (EMH). Adherents of this charmingly naive thesis believe that markets are an incredibly effective distributor of information. Because of this, say EMH theorists, it is impossible, therefore, to beat the market,…Read More

Category: Philosophy, Psychology, Really, really bad calls