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Kass: Emotion Begets More Volatility

There is rarely market news that says, "Things aren't so bad, but they're not great either."

The media are too often positively biased (though there are occasionally some exceptions), and their objectivity is sometimes lost in their cheerleading and chorus of "Everything's Coming Up Roses."

Who can blame them for the use of their bully pulpit? The media have a vested interest in stocks rising; their audience (and ratings) contract in times of market downturns, and advertising suffers. If things turn really bad, their salaries and employment status may be adversely impacted. The market's theatre (sometimes of the absurd) is far more exciting when stocks are in the green rather than in the red. As a result (and almost regardless of market environment), bullish talking heads who appear in the media routinely outnumber bearish talking heads.

One should not be surprised that despite the reality of the moment and quality of future analysis, downbeat forecasts and outlooks are not what investors normally want to hear.

A little-discussed secret is that representatives (the talking heads) of significant media advertisers (print, radio and television) often appear with greater regularity than other guests. This helps to explain, in part, the media's sometimes limited criticism of glib, formerly wrong-footed bulls (names are excluded to protect the guilty!), many of whom failed to see the drop into the debt and equity abyss in 2008-2009. Compared that to the relative quickness in criticizing recently wrong-footed bears such as David Rosenberg, Nouriel Roubini, Meredith Whitney and, of course, yours truly.

Back in 1973, the first health warning appeared on cigarette packaging: "Warning -- Smoking is a Health Hazard." Perhaps in 2011 it should be legally mandated that guests/talking heads in the business media disclose that their employers are important advertisers on the platform on which they are appearing. After all, when I or anyone else mentions a stock in the media, a disclosure of ownership in my hedge fund must be made.

Hedge Fund Managers

"Wild swings in share prices have more to do with the 'lemming- like' behavior of institutional investors than with the aggregate returns of the company they own."

-- Warren Buffett

The hedge fund community has become the dominant investor over the past two decades. The rewards of differentiated performance, especially in a successful hedge fund, are huge. As a result, the performance pressures are intense. The fear of missing meaningful moves (especially to the upside) make for hedge fund catch-up buying (sometimes oblivious to overall macroeconomic strategy or individual company analysis) similar to what we might have seen over the past few months.

History shows that hedge fund managers can get even more emotional than retail investors (though there is less emotion, it seems, when markets drop).

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