Global Agenda: Sell the fact

"Buy the rumor, sell the fact": Most people don't apply this maxim and act by it is because it requires exceptional courage and determination to do it.

'Buy the rumor, sell the fact" is one of thebest-known market adages. Act on the expectation, the assumption, thepossibility. Then, when whatever it is you expected to happen actuallymaterializes and the thundering herd of investors jumps on thebandwagon - that's the time to get off. This is impeccable marketlogic, it works in both directions - i.e. for both positive andnegative expectations, rumors and facts, and if followed consistently,it generates good results.

Thereason most people don't apply this maxim and act by it is because,despite all the advantages, it requires exceptional courage anddetermination to actually do it. That is somewhat true for stage one,which is buying on the rumor, but there at least you can be buoyed byyour conviction that you are doing the right thing and, hey, you'resmarter than the rest of the pack. But selling on the fact - that'svery difficult. The share, or the market, or whatever it is you boughtis now delivering the goods. It's steaming ahead, and you are raking inprofits. Everyone else - the dummies who were not smart like you - ispiling in. To sell out now, to go against the crowd, that's reallydifficult.

Given these general remarks, what is one to make of theactivity across the financial markets over the last several days,especially Wednesday and Thursday of this week, when they sold offheavily? In the US, the news has been mixed, but leaning in thepositive direction: many of the big companies announcing their 2009results in recent days have 'exceeded analysts' expectations' (this ismeaningless drivel, but that's what the headlines blare, so people areinfluenced by it). Yet the US equity markets have suffered theirheaviest two-day sell-off in months and are looking ripe for furtherdeclines.

Over in China, data published this week show the economy backon the path of rapid growth, with the slump of late 2008-early 2009fading into memory. Yet the Chinese stock market has dropped, whilstthe market in Hong Kong - most people's entry point into Chineseequities - has fallen by some eight percent over the last week or so.

The most obvious explanation would be that peopleare selling the fact - of positive results at either the corporate ormacro levels - and taking profits, after having earlier bought theexpectations and predictions of these items of good news. But even ifthis explains the sudden reversal from strength to weakness in equitymarkets, it does not explain the much more dramatic falls in the pricesof precious and base metals, nor the rapid rise of the dollar againstmost other major currencies - except, significantly, the yen.

It may well be, therefore, that people are selling a differentfact - not good news, but bad news. The official bad news came fromChina, in the form of indications and then actions that showed that theChinese government is now alarmed by the success of its ownexpansionary policies and stimulus programs. It was these thatgenerated the rapid return to rapid growth during 2009 - but the gameof throwing money at banks and ordering them to lend it to whomeverthey could find has gotten out of hand. In the first two weeks ofJanuary, Chinese banks lent out 1-1.5 trillion yuan (about $150-200billion worth) and this seems to have triggered a clampdown.

InChina, clampdown means clampdown. They don't use nods and winks, likethe British, nor do they rely on open market operations like theAmericans. The regulator called in some top bankers and told them tostop lending, period. That is a fact worth selling, because it was themassive Chinese stimulus last year - by far the biggest, relative tothe size of the economy - that fuelled the building boom and houseprice inflation in China. That money, together with the huge funds madeavailable by the central banks of developed countries, has causedequity prices to soar around the world and has driven the prices ofmost commodities to huge gains during 2009.

The Chinese central bank is now reversing course.Others are likely to follow - the Federal Reserve is already windingdown its emergency liquidity programs. The removal of liquidity mayhave as great an impact as its introduction, or even worse. Smartpeople are not waiting around to find out.