Each month, Kiplinger’s Personal Finance Senior Editor Robert Frick writes a column entitled, “Your Mind and Your Money,” in which he delves into the psychology of traders, investors, common schmucks like me, the market, etc. It is almost always an enlightening read in that it usually deals with some aspect of economic behavior that is either mildly or decidedly irrational.
Throwing the word “irrational” into most discussions of economics makes many of us trained in the dismal science begin to wring our hands, break out in cold sweats, and, perhaps, start wondering if Karl Marx could have been correct. It sort of shakes our foundations, if you know what I mean.
Frick’s column this last month begins by citing Ben Graham’s frequent and fond reference to “Mr. Market” in explaining movements of stock prices. In Graham’s example, Mr. Market is your partner who shows up every day and offers to buy your interest in your business or to sell you his. He is the guy who provides opportunity for entry or exit.
Graham, of course, was Warren Buffet’s mentor and the author of the one book that Buffet says all investors should read – “The Intelligent Investor.” In my opinion, all business people should read this book. Though first published in 1949, its original text and the additions and comments added to recent editions provide a wonderful primer on business decision making.
But Buffet has never trusted Graham’s Mr. Market, it seems, claiming that Graham’s fictitious partner has “incurable emotional problems,” with his daily offerings being heavily impacted by whether he was feeling euphoric or depressed at the time.
Frick states that “Every day, the media assign market movements to random events – and sometimes even attribute different market shifts to the same event.” I’m not sure it is the media any more than it is our emotionally unstable Mr. Market, but the impact is the same. Often, random events give rise to even more random results. It makes effective management difficult to say the least.
Checking Mr. Market’s Mood
I think the Frick/Graham/Buffet discussion is precisely what we have seen in the past week with the situation in Japan. Mr. Market (or at least Mr. Hog Market) looked at the situation early in the week and was very worried. How would we get product into Japan? How would it be moved around? How would it be stored if power became a constant problem? As the news shifted to the nuclear power plant crisis, concerns grew. From Thursday, March 10 to Tuesday, March 15, Chicago Mercantile Exchange (CME) Group Lean Hogs futures for June fell by $6.70/cwt. (Figure 1).
But then Mr. Market changed his mind. More details on Japanese ports, the apparent success of rolling blackouts’ managing the power grid, the fact that orders for U.S. pork products were not being cancelled (and were in fact being increased according to my sources) changed Mr. Market’s outlook and the market ended the week at $99.82, 32 cents/cwt. higher than one week earlier. And this in spite of news that the nuclear plant situation was getting progressively worse. Go figure.
My point in all of this is to say that minute-to-minute, hour-to-hour and day-to-day fluctuations in markets should be expected. Further, we should not expect every movement to have a fast and ready explanation. Stuff happens. Sometimes the stuff cannot be easily explained, but we should always consider the mood of Mr. Market. As Frick points out, “Listening to Mr. Market may be foolish, but knowing whether he’s euphoric or blue could be useful.”
Mr. Hog Market has been pretty euphoric for most of this year. That euphoria may turn out to be well-based or it may not. He certainly got a case of the blues early last week. In spite of a situation in Japan that is still far from good, at least some of his euphoria returned. That speaks well for the basis or Mr. Market’s happiness.
We will get another read of the potential supply situation for hogs and pork this Friday. So far, the December report has been very accurate. One implication of that accuracy is that first quarter hog demand was significantly higher than one year ago. The CME Lean Hog Index was about $6/cwt. (8%) higher than I expected, while actual slaughter was within 1% of what I expected. That kind of demand relationship – or even better – is still reflected in futures markets for the rest of the year.
I really hope the euphoria remains. It is certainly more fun than last week’s short-lived bout of depression.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.