Thermometers

With yet another bank bailout being undertaken, I am reminded of an old joke:

Do you know the difference between an anal thermometer and an oral thermometer?

The Taste.

As this economic and banking debacle enters year 6, we continue to see highly experimental and precedent setting options being tested around the world. This has been apparent throughout this period as central bankers first test a creative solution in one jurisdiction, followed by either abandonment if unsuccessful, or adoption elsewhere if it is well taken.

The Cyprus announcement comes over the weekend allowing policy makers to present a plan and accept criticism. It provides the opportunity for wide dissemination and criticism while business is essentially closed. By Monday morning, they have an idea of some unexpected issues and those aspects that are palatable, as well as the market reaction to often unforeseen developments.

If you listened exclusively to the financial press over the weekend, their prognostications rife with consternation, you might be expecting the Dow to be down 300-500 points. It was almost laughable to see futures down all of 78 after such a performance. In here is a great trading lesson: the reaction to the news is important particularly when the response is either far more tepid than anticipated, or completely the opposite.
Years ago I knew a trader who collected the morning paper but did not read it on the way to the office. He saved the paper until the end of the day to ascertain how the market behaved in relation to the news as it was revealed in the morning. This 20/20 hindsight offered some perspective on market reaction to be used for future reference.

In today’s rapid fire hft driven environment you need to take such news results one step further. Many news headlines are optimised by computer algorithms for trading algorithms. The result of this mechanism is that announcements made throughout the day are reacted to before adequately read and interpreted; and also before widely disseminated. Computers are fast but imperfect. In this case the first reaction is therefore swift and sometimes completely erroneous because it is based on keywords rather than discernment.
In other words, waiting for a response, evaluating the news and watching for act two gives you a better picture of events and their interpretation or relevance.

Remember that on Fridays and over the weekend is when the worst news is often disseminated. The assumption being that Friday evening company news is missed as participants are tired, drunk or heading home for the weekend and they probably won’t care. Weekend news releases of this nature provides a cooling off period to allow some rationality to prevail; although witnessing yet another creative bailout has to make one wonder about the implied rationality behind the decisions of the global banking system…..and its regulators.

As of now, the matter in Cyprus remains unresolved. The Fed chairman has spoken and the markets are stable and rather boring particularly for a quarter/year end. (up and down 70 points is mundane to anyone who remembers real turmoil) Time will tell of course.

One must therefore conclude that when it comes to bailouts and the creativity of their solutions, ultimately all one is left with, is the taste.