{"id":39537,"date":"2013-07-02T11:24:40","date_gmt":"2013-07-02T15:24:40","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=39537"},"modified":"2013-07-02T11:24:40","modified_gmt":"2013-07-02T15:24:40","slug":"review-intermarket-analysis-and-investing","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/07\/02\/review-intermarket-analysis-and-investing\/","title":{"rendered":"Review: Intermarket Analysis and Investing"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

\"\"<\/a>\"\"
\n\u201cRecognizing that the stock market is a difficult game to play and admitting that investing in securities is an art, we can only preface this book by saying, \u2018Good luck.\u2019\u201d<\/i><\/p>\n

So writes Michael E.S. Gayed in the forward to Intermarket Analysis and Investing<\/a><\/strong>, <\/i>originally published in 1990 and republished in 2013.<\/p>\n

Outside of politics, few areas of life are in greater need of fresh thinking than the investment profession.\u00a0\u00a0\u00a0 Like students of political ideologies or religious cults, investors often fall into dogmatic camps.\u00a0 There are chartists, who view stock patterns as if they are prophetic views of the future.\u00a0 There are value investors who view the utterances of Warren Buffett<\/a> and Benjamin graham like divine revelations.\u00a0 There are trend followers\u2026and contrarians who actively bet against the prevailing trend.<\/p>\n

There is a dedicated core of followers for virtually any investing style you can imagine (and plenty that you can\u2019t).\u00a0 But the problem with rigid schools of thought is that what works in one market does not necessarily work in another.<\/p>\n

This is the basis of Gayed\u2019s book.\u00a0 Rather than lean too heavily on one particular method, with all of its inherent flaws, Gayed attempted to meld the various schools of thought into a unified process.\u00a0 He\u2019s not the first analyst to do so, and he certainly wasn\u2019t the last.\u00a0 But his attempt is one of the most comprehensive I\u2019ve seen, and it was made over 20 years ago.<\/p>\n

Investment books tend to have a somewhat finite shelf life.\u00a0 \u00a0Stories and anecdotes can look somewhat dated with the passing of time.\u00a0 But as with Graham and Dodd\u2019s Security Analysis<\/i>, first published during the pits of the Great Depression, there is value in studying historical anecdotes and in reading a contemporary account of the times.\u00a0 History tends to get \u201cscrubbed\u201d with the passing of time, which makes learning its lessons more abstract and difficult.\u00a0 Gayed\u2019s book fits a particular time period\u2014the late 1980s and very early 1990s\u2014making it an effective time capsule of the era immediately preceding the Internet Revolution.<\/p>\n

One of the aspects I most respect about Gayed\u2019s work is that he is intellectually honest. \u00a0Investing isn\u2019t easy, and no \u201chow to\u201d book is a guarantee of success.\u00a0 \u00a0You will make mistakes along the way, but those mistakes make you a better investor if you make analyzing them part of your process.<\/p>\n

And this is really the key word: process.\u00a0 All 484 pages of the book can essentially be boiled down to one critical point: you must have a rigorous investment process in place.\u00a0<\/strong> The process can take different forms, but a regular assessment of the results should be a key part of it.\u00a0 Process brings order from the chaos and prevents your investment decisions from being \u201ca random walk of trial and error.\u201d<\/em>\u00a0 And if it is failing to deliver results, \u201cperhaps the whole process should be examined to uncover where things went wrong.\u201d<\/em><\/p>\n

Well said, Mr. Gayed.<\/p>\n

Gayed addresses the strengths and weaknesses of each of the major schools of investing thought.\u00a0 For example, of fundamental analysis he writes that it is \u201cmore reliable than any other approach\u2026tangible and logical.\u201d<\/i>\u00a0 But also acknowledging its shortcomings, he notes that \u201cfundamentals tend to lag behind the price action.\u00a0 The discounting mechanism of the market often senses evolving financial problems before the company actually discloses them.\u201d<\/i><\/p>\n

Similarly, Gayed notes that quantitative market timing approaches are \u201cmost helpful in allowing investors to buy or sell a security at the most opportune price.\u201d\u00a0 <\/i>But they can also let you \u201cget carried away in a frenzy of speculation and overtrading, eventually becoming a gambler.\u201d<\/i>\u00a0 And remember, Gayed wrote this in the days before discounted internet trading and algorithmic bots!<\/p>\n

I liked Gayed\u2019s comments on contrarian investing because I see some of my own psychological shortcomings in his words.\u00a0 While betting against the crowd at key moments can by wildly profitable, \u201cThe crowd is not wrong at all market junctures\u2026 The only correct application of the contrarian approach occurs when market psychology reaches unanimity in either direction.\u00a0 Beware of being a contrarian all the time, since this attitude violates the well-established norms of trend following.\u201d<\/i><\/p>\n

Given my experience of working with Harry Dent for the better part of a decade, I found Gayed\u2019s comments on demographics to be particularly interesting.\u00a0 Dent made several bold predictions that proved to be correct and became a very successful New York Times<\/i> bestselling author in the early 1990s by using demographics as a forecasting tool.\u00a0 I still consider his first bestseller\u20141993\u2019s The Great Boom Ahead<\/i>\u2014to be his best.<\/p>\n

Dent is widely considered to be the first analyst to effectively use demographics in the investment process.\u00a0 But Gayed appears to have independently reached many of the same conclusions at around the same time:<\/p>\n

All industry groups are affected in varying degrees by demographics.\u00a0 Beginning in the 1970s, the economy has felt the impact of the baby boomers\u2014those born between 1945 and 1960\u2026 The influence of demographics is likely to continue into the first quarter of the next century as the baby boomers grow older.\u00a0 There might be increased demand for such services as health care, banking, investments, insurance, nursing homes, leisure, travel, etc\u2026 Demographics should be factored into the overall investment strategy.<\/i><\/p>\n

This could have been written today, but Gayed wrote it in 1990.\u00a0 The prescience is impressive.<\/p>\n

Gayed saves some of his best insights for last in the section on intermarket relationships.\u00a0 The capital markets are a complex organism.\u00a0 \u201cMarket links are interrelated, and they tend to feed on each other\u2026 The commodities market, for example, influences the trend of interest rates, which affect the bond market.\u00a0 This, in turn, impacts securities prices.\u201d<\/i><\/p>\n

In this era of central bank intervention, it\u2019s important to remember not to view each segment of the market in isolation.\u00a0 Intermarket analysis is complicated\u2026and messy\u2026and you won\u2019t always put the pieces together.\u00a0 But it should be part of the thought process that goes into your asset allocation.\u00a0 Gayed notes that an astute investor would have seen that the accelerating inflation of the 1970s would have been great for commodities but terrible for bonds.\u00a0 But when the Fed\u2019s high interest rates in the 1980s halted inflation, the high real interest rates in place set the stage for a long-term bull market in bonds\u2026which in turn led to a long-term bull market in stocks.<\/p>\n

I would add that more recently, investors with a deeper understanding of intermarket dynamics would have known that the Fed\u2019s explosive growth in its balance sheet would not be inflationary given the debt deflation going on in the private sector. First order thinking would tell you to expect inflation.\u00a0 Second order thinking would tell you to expect flat or even falling prices.<\/p>\n

Oh, and remember \u201cTED spreads\u201d?\u00a0 These are the spreads between Treasury bills and Eurodollar rates that become front-page news during the 2008 meltdown when the capital markets ceased to function.\u00a0 Few people had ever heard of TED spreads prior to 2008.\u00a0 Gayed was writing about them in 1990.<\/p>\n

I recommend you pick up a copy of Intermarket Analysis.<\/i>\u00a0 Gayed\u2019s magnum opus is an exhaustive collection of investment insights that he has done a remarkable job of funneling into a cohesive framework for analysis.\u00a0\u00a0 The sheer scope of material covered would put most MBA programs to shame.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

\n

Related posts:<\/p>\n