Monday, May 9, 2011

Eyes Wide Open

As a geologist, I can appreciate the fundamental underpinnings that make up the energy and metal components of the CRB Index. The arc of exploration, field-development and resource quality. 

For the most part, there is a neat set of equations and analytics that can elegantly distill where the resources can likely be found, how much they will roughly cost to get out of the ground and what quality they will be once they are exploited.

The variable has always been how much the market will yield for these assets - and there is absolutely no mathematical formula that can explain the market's rationale for valuing a commodity one week at X and the next week at X(.70) (yes - that is last weeks formula for silver). The efficient market theorists can keep their tin foil hats on as a fashion statement, but once you fold human emotion into the formula - all bets are off. 

It is why causation is typically such a fools game when painting the fundamental picture of an asset class (broadly speaking, i.e equity, bonds and commodities). A white paper's methodology of explaining the fundamental virtues of a certain market (not relevant to individual stocks) is often times overly verbose and irrelevant to price. Certainly there are times in the cycle where fundamental analysis is more than helpful with establishing ones position in the market. But for the vast part of the price continuum, its a diminishing angle of relevance.

As a trader and investor - you absolutely need to throw another axis down and establish the technical picture. Without it, your viewpoint is basically a monoscopic reference, rather than a three-dimensional perspective. You are essentially limited to one eye open without peripheral vision. 

I honestly mean no disrespect by this - but what is interesting about many of the money managers today is that they started their careers in the benevolent boom times of the late 1980's and 1990's. The fundamental story worked for their respective investing thesis' more out of luck in the cycle (i.e Malcom Gladwell's Outliers) than prescience. 

The fundamental perspective just became the easiest pill to swallow and present to investors.

I just joined Twitter. All my trades and occasional market musings are disclosed in real-time here

(Position in AGQ, UUP)

Disclaimer: This is not investment advice. Always do your own due diligence. Erik Swarts is not a registered investment advisor. Under no circumstances should any content from this website be used or interpreted as a recommendation for any investment or trading approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor.