Behaviour of the three animals.

Behaviour of the three animals.

The three animals all live together. They are all running in an eternal race. The race that they run in is very similar to "the running of the bulls" which is a practice that involves humans running in front of bulls that have been let loose on a course of a sectioned-off subset of a town's streets. The most famous running of the bulls is that of San Fermín in Pamplona, Spain.

As I attempted to explain in the last posting, the three animals coincide with three phases of a market cycle.

• Up = the bull market.
• Down = the pig market.
• Sideways = the bear market.

The number of pigs and bulls in any one cycle dramatically outnumber the bears. In much of life there emerges the good old 80/20 or 98/2 rule. The market place is no exception, and as such, in any given market cycle there is a relative absence of bears. As a result, the voice of the bears is drowned out by that of the herd, leading to the irrational behaviour that so often accompanies the herd.

Bulls.
Bulls are the most numerous and flamboyant of the three animals. The active time of the bull is over half of the entire cycle. The time of the bull coincides with economic growth and an overall uplift of gross market value.

When bulls run, they run with their heads down. They charge along and clean up all that stands before them. As a result they can't see very far into the future, and to be mildly successful, they don't need to see the future. A lot of the time they are just running on sentiment which is delivered to them from the bull standing next to them. The continual taking of sentimental advice from neighbouring bulls allows self prophesizing theories to become the norm and irrationality ensues. The excitement of running alone, the adrenaline rush of running with the other bulls, it is all highly addictive.

The action of the bull is very similar to the bear; and as a result, many a smart bear can be a bull. The differentiating factor between the smart bear and the average bull is that the smart bear will not succumb to the herds irrational demands that everyone morph into a raging bull.

The raging bull is a bull on steroids. The steroid that empower bulls to morph into raging bulls is that of irrational sentiment in the marketplace.

The widespread emergence of the raging bull signals caution in the market place.

Pigs.
Pigs get eaten by bears.

Pigs are polymorphs, or more simply, bulls that morph twice. They morph due to irrational steroid use, and subsequently due to their abuse of these irrational steroids, they morph again. The morphing process can be envisaged by thinking of the pigs as rampaging bulls at the front of the herd. The lead raging bull trips over; and as happens in any stampede, is crushed. The raging bulls directly behind this unfortunate animal continue to run with their heads down crushing the fat pig to death. The fat carcass of the dead pig becomes a stumbling block from some of the raging bulls who are not quite leading the herd. These raging bulls trip on the dead carcass and themselves morph into fat pigs who are also crushed to death. A snowball like accretionary process takes place with most of the raging bulls tripping over.

As usually, slowly following behind the rampaging herd of bulls has been a pack of bears. These bears pick up the fatty pieces of dead pig and have a feast. They eat to their hearts content on dead pigs. Eventually it is time to move on and the bears need to run along.

Not all of the raging bulls morph into fat pigs for the slaughter, some just lie injured. These bulls who are injured and are still dangerous to approach. These surviving bulls can be quite useful during the next bull market for identifying raging bull conditions. To do this they must be nurtured back to health and cultured in the appropriate behaviour for such exploitation to be undertaken.

Pigs will talk as if they are smart. They commonly confuse bull markets conditions for brains. This confusion is, in part, what morphs them into pigs. Often a bull will be able to control emotion for the whole bull market phase until the final raging bull market when it will loose sight and succumb to the madness of the crowd.

Driven by a desire to fit into the herd pigs are bulls who could not control their emotions. They are greedy, ignorant and/or foolish. They do not perform fundamental analysis themselves and may ignore fundamentals facts when presented with them. Being nearly entirely driven by sentiment they engage in risky behaviour without the knowledge of the risk that they are taking. It could be said that the pig plays a game of Russian Roulette with 5 out of 6 chambers of the six-shooter loaded!

While ignorance, arrogance and general foolishness may cause the pig to only comprehend what they want to hear, they perform a very significant role in the overall market. Without the pig, the bear would have no food. There is also a need for fresh supplies of pigs (piglets for the slaughter? cannon-fodder?) and as such I have doubts about the functionality of such highly cyclical markets in homogeneous societies. Diversification in any population is important and as such, pigs must be allowed to grow and populate, they must never be removed from the gene pool.

Bears.
Bears tend to run behind the crowd, they take their time, with their heads held higher than bulls they can see a distance into the future and they can see the raging bulls tripping over and turning into pigs.

Bears will perform fundamental analysis upon these dead and damaged pigs to select their meal. Such analytical ratios as the PE ratio, Dividend Yields and Net Tangible Assets will be used. Unfortunately many of the dead and damaged pigs have no earnings and pay no dividends, so one of the best tools to use is cash backing or net tangible assets backing. As a dead pig may still be rather fat, they carry cash. There is nothing like going to dinner and buying a dollar for 40 cents!

For example:

In 2007 the Royal Bank of Scotland paid $100 billion for the Dutch bank ABN Amro.

For the same amount nearly a year later (just after the credit crunch of 2008) they could have bought Citibank ($22.5bn), Morgan Stanley ($10.5bn), Goldman Sachs ($21bn), Merrill Lynch ($12.3bn), Deutsche Bank ($13bn) and Barclays ($12.7bn).

And they would still have had $8 billion in change!!!

Being a a bear sounds like a good idea, what more can you do to be a bear? Just like "Rob & Dean" used to say; "I'm glad you asked". I shall reveal my thoughts in due course.

Finale.

Bulls run along, some bulls enter a two stage morphing process turning them into raging bulls and then fat pigs, which in turn trip over, are crushed by the preceding bulls and finally eaten by the bears. These bears run along and new bulls join them in the race, eventually some of these bulls turn into raging bulls, who become fat pigs... ad infinitum... well, as far as I can tell it's been going on for at least 400 years.

The morphing process from bulls to pigs is done by the abuse of irrational sentiment steroids, as opposed to the use irrational sentiment steroids by bears. This use/abuse issue is a core differentiator of bears and pigs. Identification of excessive irrationality is a key trait of the smart bear.