February 5, 2013

DJIA:13,880 NASDAQ:3,131 10-YR TRS: 13/32, yield 1.973% Oil:$96.17 EURO:$1.3514 YEN:92.38

Behavioral Contagions in the Market Place 

It only takes one person to yell, “Fire!” in a movie theatre to create a chaotic scene. One sick traveler passing through a village to spread a virus. One hedge fund manager to accuse a company of a pyramid scheme to ignite a dumping trend. In each of these scenarios, the weakness of a single long tie connecting the social network caused a disruption in equilibrium. It seems to me that behavioral contagions are just as contagious as the spread of infectious diseases. Understanding the psychology of the business cycle is vital to avoid behavioral contagium in the financial markets. John Paulson identified the infectious shift toward buying into the subprime mortgage trend. He understood not only the housing market’s boom-bust cycle, but also the emotions that were leading the herd. Paulson bet against the behavioral contagion and made $3.7B in one year. The weakness in long ties in social networks allow information to be spread quickly, and, as such, has a bigger impact on market behavior than most investors care to realize. 

Domestic News

• Market Update. In the green as the markets are recovering from yesterday’s rapid sell off. 
• The price of houses are soaring as buyers are facing the reality of increasing demand. The US housing market has tipped so far in favor of sellers that almost a third of all listing are under contract in two weeks of less. Many are selling for almost twice the asking price. 
• Gas prices up $0.18 in the past week to an average of $3.54 a gallon, the biggest week jump in almost two years! Rising crude oil prices are driving the rally. 

International Updates

Asia

• Market Update. Majority of markets suffered losses, Hong Kong and Tokyo were hit the hardest. 
• Bank of Japan Governor Masaaki Shirakawa has offered to resign three weeks early on March 19, which is also when two BoJ deputy governors are expected to leave. 

Europe

• Market Update. Recuperating from Monday’s rapid sell off as investors absorbed earnings reports from heavyweights. 
• Eurozone composite PMI rose to 10-month highs of 48.6 in January, compared to December’s 47.2.
• German composite PMI soared to 54.4 in January, compared to December’s 50.3. 
• French composite PMI fell to a 46-month low of 42.7 in January, compared to December’s 44.6.

Corporate

• Rio Tinto (RIO) has come to a deal with Aboriginal landowners in the Pilbara region of Western Australia over the company’s plans to grow its iron-ore operations. Rio is planning on raising capacity at its Pilbara mines to 360M tons by mid-2015 from 290M at the end of 2013. 
• Berkshire Hathaway (BRK.A) has agreed to reinsure Cigna Corp. (CI) death benefits and retirement products in a deal that will provide Berkshire with $1.8B in investment assets but only accompanied with $4B in liabilities. Cigna will fund the deal with $100M in cash,  a $300M tax benefit, and will incur a a Q1 after-tax charge of $500M.