Indicators Show Conditions are Returning to Normal

Friday, September 3, 2010

There are now signs that we can look forward to normality returning in 2011. Perfect timing, with Wall Street coming back from its summer vacation and ready to examine the new year.

What are these indicators? They’re an eclectic group…

First, a high-brow conference to discuss yesterday’s problems

I just got a glossy brochure for the “Global Macro Investing & Geopolitical Risk Forum” plus “The Investor Summit.” At the conference, “The Most Influential Investors” and “Financial Market Thought Leaders” including “Geopolitical Experts” will focus on “market disruptions” and “global dislocations.”

All that means is that they going to talk about two-year old stuff plus Greece (believe me – I attended enough of these meetings in my career). This “first global meeting” likely will be the last. The tip-off? Their “marquee sponsor” is Citi – AKA, Citigroup (C). You know, the outfit that messed up on so many levels that it almost went bankrupt, then had to pay a big fine and whose stock is still more than 90% below its high of three years ago.

Second, the regulators are in high gear, backed by new powers

The SEC and FDIC are at it now – digging into the stuff they let go before. The important point is that they’re back on the job and, while they’re late attacking some of the problems, doing so will help repair what’s broken and restore trust.

Third, investors are giving up on the disproved “new” and re-adopting the proven “old”

The Wall Street Journal provided three examples:

  • Bruised Quant [computers make the decisions] Funds Seek a Human Touch” (By Eleanor Laise, September 2, page C-7), highlights the common sense notion that successful investing is more than doing screens and mathematical computations
  • A Hot Fund Design Turns Cold – So-called 130/30 funds aim to boost performance with borrowed money and bets against overpriced securities” (By Chris Gay, September 2, page C-13). The article’s first sentence explains that “financial innovation” often looks good on paper, but fails in practice: “There are good ideas that are badly implemented, and there are bad ideas that are, well, bad ideas.”
  • A Simple Recipe for Investors: Less Can Often Lead to More” (By Jonathan Burton, September 2, page C-7). More than the other two, this article identifies a true trend shift in investor thinking – one that will bring back normality and, eventually, investor enthusiasm: “Investing is complex rocket science that requires professional help—at least that’s what the professionals usually say. But a strong case can be made for investors following a design principle known as KISS, which in this case stands for: Keep it simple, saver.”

Fourth, the government is no longer viewed as the solution

All that discussion about deficits and voter frustration means the days of desperate need are gone. People may not be showing a normal confidence level yet, but the return of debate indicates we’re on the right track.

Fifth, investing humor is returning

The first level, where we are now, is shaking our heads at some of what we see and hear. For example, the financial bill’s provision that banks must verify that mortgage borrowers have a reasonable ability to repay. Now, instead of gnashing our teeth, we just groan at the silliness of needing such a regulation.

So… I hope this helps. I realize this listing is hardly the type of fact-based analysis we are accustomed to. But it is important because investors are, after all, human. As we get back to normal, so will the markets.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

September 2010