E-motions: Vol. No. 1, Issue No. 9, September 16, 2005

Brought to you by California News Tech (OTC BB: CNTE)

Hopes and Dream Can Drive the Market More than Realities

1. Emotions in Focus: Raised Expectations Change Individual Perceptions of Values Great and Small

     Most investors would argue that they know the value of a dollar. In reality, however, the value of a dollar may be very subjective matter. In the late 1980s and early 1990s, economists and investors all rallied behind the idea that individuals, as well as the market, behaved based on a series of straightforward cost-benefit analyses that could be summed up by what was frequently referred to as "Rational Choice Theory". As time went on, however, there were too many examples, both theoretical and from the market, that countered Rational Choice Theory and instead pointed to many instances of irrational exuberance. Two Individuals who helped to end its popularity were Nobel Prize-winning economic psychologists, Daniel Kahneman and Amos Tversky. One of their many findings related to irrational exuberance focused on the very question of the value of a dollar. Their findings can be discussed at neurological, psychological and economic levels.

      There are endless amounts of sensory information available in the environment, which the human brain could not possibly process entirely. Therefore, the brain must take some cognitive short cuts, called heuristics, in order to process enough information for us to function successfully in the world around us. During our evolutionary history, these heuristics, including the way that we perceive images, estimate amounts or hear sounds, were usually more than sufficient. However, there are some situations and stimuli in the modern world that are so complex, or different from our primordial environment, that our heuristics begin to lead us astray.

     These sorts of errors often occur with one such short cut, which Kahneman and Tversky call the "anchoring heuristic". In short, people base their estimates for what "a lot" or "a little" is based on the other amounts in their environment. Early in human life, when sizes, such as a herd of wooly mammoths or reserves of firewood, were relatively consistent, this way of estimating quantity was rarely a problem. Today, on the other hand, when we are presented with amounts of money, its value depends on many more factors. For instance, experimental subjects frequently say that they would drive three hours out of their way to save $20 dollars on a $30 cell phone, but they would not drive three hours out of their way to save the same amount on an $800 computer. While the cost, three hours of their time, and the benefit, $20, are exactly the same in each case, the savings seems a great deal more significant when taken out of the relatively smaller value.

     Investors frequently make anchoring heuristic mistakes when valuing stocks based on a large number of complex factors, including the price and earnings of other companies, past stock values during market conditions, and highly subjective earnings estimates. Therefore, given one set of comparisons a stock may look great, but given another, it may look terrible. Ultimately, the value of your dollar depends on how much your other dollars are worth, and how much other people value dollars of their own.

2. The Big Movers and Why

     Last week Best Buy (NYSE: BBY) was a prime example of this sort of irrational anchoring heuristic. Best Buy reported earnings Tuesday morning that showed net profits, and an overall very strong company. Nonetheless, the company did not meet the earnings estimates made by analysts, and as a result, went down 12.44%. As a leader in the computer and personal electronics sales industry, many analysts may have had very high hopes for the company relative to its competitors. Also, Best Buy did not do as well as in years past. Given the current weaker economy, and the fact this year many American households used their expendable capital to buy cars, reaching those previous profit levels may have been unrealistic. Much enthusiasm and overvaluation may have been, subconsciously or otherwise, that analysts wanted to buy the stock, so they also wanted it to spike in value.

3. How to Use the News

     Ultimately, companies such as Best Buy may be strong buying opportunities when they miss analysts' highly optimistic estimates. With strong fundamentals and room for growth, such companies are likely to go up after an initial dip based on disappointment related to earnings releases. When looking at MediaSentiment Heads Up™ recommendations in the future, do some research on your top thumbs-up picks and learn about their market context. If a company is very high profile and at the head of its sector, it may be difficult for its on-paper value to keep up with the media's irrational exuberance. In such cases, stocks that release positive earnings reports can still often miss analysts' estimates. In other instances, companies may be strong while their sector, or the overall economic climate is not. In either case, it may be wise in the long run to buy and hold this kind of company.

4. Last Week in Media Sentiment

     This last week was a period of the quarter with relatively few companies releasing earnings. Unfortunately, this low level of activity meant that MediaSentiment Heads Up™ did not collect enough data to yield statistically significant recommendation accuracy results.

     Instead of the correlations between Heads Up™ recommendations and next day stock price and volume that we usually present each week, Media Sentiment™ would like to introduce some exciting results from a recent Heads Up™ performance report.

     A big benefit of MediaSentiment Heads Up is that it posts its "Hot Stocks" tips on future "Big Mover" companies sooner than other online sources for news and analysis. This superior speed enables traders to beat their competitors to good investment opportunities and to make more from their trades. From Heads Up's seven weeks of data, we selected the biggest mover each day, and only in two cases were there no Big Movers in a given day. We then compared the time we made our recommendation for each Biggest Mover based on each stock's earnings reports with when other major financial news sources made their own recommendations. Sources we used for comparison include Reuters, Associated Press, Market Watch and Briefing.com. Overall, we beat these sources to the story 95% of the time. Even more strikingly, out of the 20 big-story stocks we examined, which all had great potential for profitable trading, there were 10, a full 50% that none of these news sources discussed at all. In addition to being faster with our recommendations than other major sources of news and analysis, MediaSentiment Heads Up™ is also twice as thorough in covering all of the hot earnings releases of the day

5. Links You Can Use

Best Buy Misses Profit Estimates

Best Buy Could Be the Right Buy After Slight Stumble, Analysts Say

Irrational Exuberance

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