measuring emotive meaning dr. michael k. green suny-oneonta oneonta, ny, usa

Measuring Emotive Meaning

Dr. Michael K. Green

SUNY-Oneonta

Oneonta, NY, USA

Historical Precedents

Several prominent economic thinkers have recognized the importance of emotional factors to economic processes.


• Pareto identified two basic emotions– The sentiment of combination, which is the

tendency to invent and undertake adventures.

– The sentiment of preservation, which is the tendency to consolidate, preserve, and make secure.

• Economic change arises from the oscillation between these two sentiments.


• According to Knight, the fundamental uncertainty that underlies production gives rise to a system in which production depends upon the willingness of an entrepreneur to act, which in turn depends upon his confidence in his own judgment and his conative attitude toward uncertainty.


Knight states:

The abundance or scarcity of mere ability to manage business successfully exerts relatively little influence on profit; the main thing is the rashness or timidity of entrepreneurs (actual and potential) as a class in bidding up the prices of productive services.


According to Keynes, economic fluctuations can be partly explained by endogenous or spontaneous shifts from optimism to pessimism or from pessimism to optimism.


• Keynes states: Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.


According to Keynes,

human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist ... it is our innate urge to activity that makes the wheel go around


• According to Keynes,

the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exist for reasonable calculation.

Theory

• Can theoretical grounds be found for these insights?

Theory

• Social institutions are created through social interaction.

• When entering an interaction with others, individuals attempt to create situations that confirm appropriate shared sentiments and thereby maintain their identities.

Theory

• Through interaction, elements essential to the self arise.– shared sentiments– identities

• Non-self objects are given collective recognition and become “facts” accepted as true within the context of the interaction.

• The interactive relationship itself is differentiated out of the interaction, and a set of norms governing these interactions is consolidated.

Theory

• Two methodological principles develop out of this perspective. – Social change arises from within the social

system itself and not from the impact of external causes on it

– Social change is cyclical as sentiment runs back and forth from one extreme to another

Measurement

• Osgood et al. (1975) identified three dimensions of emotional meaning– positive/negative– active/passive– strong/weak.

Positive/Negative Dimension

The stock markets can serve to operationalize these sentiments because they represent the choices of millions of different individuals and their willingness to place monetary bets on particular productive activities. Thus, they represent good measures of changes in a society’s construction of uncertainty, of the efficacy of action, and of fear and confidence.

Osgood’s Optimism\Pessimism

Optimism

Pessimism

Optimism


• From 1982 to 2000 optimism increased substantially as the stock market soared to a new historical high.

• Only 16 percent of Americans owned stock directly or indirectly, and stocks as a percentage of household assets were at a low of approximately 12 percent.

• Historically, less than one-third of American households held stocks.

• In 2000, over 50 percent of households participated one way or another in the equity markets, and stocks as a percentage of household assets was near 44 percent.


• The price/earnings ratio was less than 9, and dividends were over 6 percent.

• Cash and cash equivalents as a percentage of the market value of stocks and bonds were over 60 percent.


• The price/earning ratio increased to over 40, and dividends fell to 1.5 percent.

• Cash and cash equivalents as a percentage of the market value of stocks and bonds hit an all-time low.


• Another measure of the positive/negative dimension is the University of Michigan consumer sentiment index.

• In the early 1980s the University of Michigan’s consumer sentiment index was at a 13-year low.

• In 2000, the University of Michigan’s consumer sentiment index was at an extreme.


• From the early 1980s, the savings rate began a large decline, indicating a propensity to take risks, which Americans did by increasing their debt levels.


Outstanding debt was nearly three times annual GDP, and the consumer loan became more important for the economy than the borrowing that business did for capital investment.

Osgood’s Optimism/Pessimism


• Insider buying and selling indicates optimism or pessimism of those in the know.


• In 1982, pension funds invested only 24 percent of the new money that they received into stocks.

• In 2000, sock mutual funds held less than 5 percent cash.


• This extreme optimism will in turn reverse and be replaced by extreme pessimism.

• Several indicators indicate that this change is beginning to occur.

Changing Risk Perspectives

• When the market and the ratio are both rising, then the higher-beta NASDAQ is outperforming the blue-chip S&P, indicating an investor preference for riskier assets.

• When the S&P is rising but the ratio is not, then investors are becoming less risk tolerant.


The 30-year Treasury Bond yield divided by Moody's BAA Corporate Bond yield has started a decline, indicating again that a premium is being demanded by investors who are becoming more risk adverse.


Also, the Junk-to-Treasury Spread (not shown) has started a strong upward move, also indicating that investors are becoming more risk adverse by demanding a higher premium for riskier investments.

Osgood’s Active/Passive

Osgood’s Active\Passive

Cash flows into stock mutual funds were in the upper part of the range from 1996 to 1998, indicating heavy buying. During the crisis of 1998, cash flow decreased, but quickly rebounded to an extreme.


• After 2000, cash flow declined until October 2002.

• The decline was not indicative of heavy selling.• The gently sloping decline in buying was

punctuated by sharp buying sprees. • The strong rebounds indicate that investors were

attempting to pick the bottom. • Flows were negative for only a short time.• Investors were taking a wait-and-see attitude.

There was no major capitulation among mutual fund investors.

ICI Stock Mutual Fund Cash Flows

Figure 2-B ICI Stock Funds New New Cash Flow

Osgood's Active/Passive Dimension

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• Once it became clear that the bottom was in place, investors actively bought the market so that cash flows rebounded to levels that were as high as the 2000 top.

• Extreme cash flows into stock mutual funds, though, indicate market tops.


Figure 2-C ICI Stock Funds New New Cash Flow


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Cash flows have begun to decline.


Figure 2-D ICI Stock Funds New New Cash Flow


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• Hedge funds sold the market after 2000. • The decline was punctuated by sharp buying

rallies, and the hedge funds were buying the market a year before the decline ended, providing support for the decline.

• After March 2003, they were active buyers, contributing to the strong rebound of the market.

• Indeed, they were more actively buying the market than they were at the market top in 2000 after 18 years of a rising market.

Osgood Active/Passive


• Experienced investors tend to buy at the end of the day.

• These experienced investors sold the market before the 2000 decline and were buyers from the end of 2000, providing support to the market.

• However, they were also quick to sell rallies from the end of 2000 to near the bottom in October 2002.

• Afterwards, they were actively buying, contributing to the strong rally.


• Buying has been pushing more and more stocks to new highs except for quick thrusts into the oversold level that are quickly reversed.

• The bear market will be over when the multi-year highs are replaced by a multi-year period in which more and more new lows are being made.


• There has been a strong upward bias to the rebound.

Osgood’s Active/Passive Put/Call Ratio


ISE data focuses only on calls and puts bought by retail customers excludes professional traders who take positions as a hedge and without a directional bias.

ISE IndexISE Index

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• The CONSENSUS sentiment indicator, which is based on a broad mix of brokerage analysts and independent market advisory services. Sentiment started to rebound at the beginning of 2002. From 1998 to the beginning of 2002, sentiment was slightly, but not extremely, bearish. From the beginning of 2002, sentiment quickly returned to extreme levels. It has remained in the bullish range for several years now.

Osgood’s Strong/Weak


• The Investor’s Intelligence survey is based on a survey of 130 investment newsletters that employ a wide range of investment approaches.

• The survey results are expressed as the percentage of newsletters that are bullish, bearish, or neutral.


• A bearish plurality of 46 weeks preceded the bull market that culminated in 2000.

• Even during the decline from 2000-2002, sentiment was still bullish, remaining above zero.

• After October 2002, sentiment rebounded sharply and was higher than it was at the top in 2000.

• Indeed, sentiment has remained extreme on a multi-year basis.

• Sentiment has continued to remain bullish through 2005.

• 181 weeks

• Investors Intelligence was above 70 percent for 3 weeks and has had a bullish plurality for a record 180 weeks as of March 31, 2006.

• In the mid-Nineties, a bearish plurality of 46 weeks preceded the bull market that culminated in 2000.


• The Daily Sentiment Index was created by Jake Bernstein of MBH Commodity Advisors.

• He surveys nonprofessional traders in the futures markets at the end of each trading day to determine their level of bullish sentiment.


• The DSI has remained at extreme levels from 2005 until today.

• During this rebound, the 10-day DSI hit a record high.

• By February 25, 2004, it was 74 percent, significantly higher than it was even at the top in 2000.

• In the week of March 26, 2006, it was 86.6 percent


• Market Vane's Bullish Consensus sentiment indicator uses a weighted formula applied to an assortment of market newsletters to determine the degree of bullishness or bearishness among futures professionals.

• More weight is given to market letters with a larger following and less weight to those with fewer readers.

• Since the first quarter of 2003, sentiment rebounded sharply and has remained at extreme levels.

Osgood Strong/Weak

Osgood Strong/Weak

• The sentiment of independent investors as measured by the American Association of Independent Investors is based on a daily poll of its 170,000 members concerning their view of how the market will perform in the next six months

• It has remained in the extreme range.

www.trendmacro.com/a/goodman/200404/20040416goodman.asp

Osgood Strong/Weak(AAII)

Future

• By the principles of endogenous change and limits, the current situation is not stable in the long-term.

• Before the decline is over extreme optimism will be replaced by extreme pessimism.

• It took years to build the extreme optimism, so it will take years to reverse it.

measuring emotive meaning dr. michael k. green suny-oneonta oneonta, ny, usa

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