Massive Shift In Sentiment Underway

“I defined variant perception as holding a well founded view that was meaningful different from market consensus….. It was also critical to have a keen understanding of what the market expectations truly were.  Thus, the process by which a disparate perception, when correct, became consensus would almost invevitably lead to meaningful profit.  Understanding market expectation was at least as important as, and often different from, fundamental knowledge.”

– Michael Steinhardt, the legendary hedge fund investor and one of the greatest investors of all time in his autobiography No Bull!, p. 129.

What we are witnessing as 2008 gets underway is a massive shift in sentiment.  Many analysts and investors who were formerly in the soft landing camp are shifting their views towards forecasting a recession.

That is especially evident today when the market action was clearly more about psychology and perception than fundamentals.  The two key stories of the day were the rumor that Countrywide (CFC) was going to file for bankruptcy and the comments by AT&T (T) CEO Randall Stephenson about a slowdown on the consumer side of their business.

After Countrywide publicly denied the rumors the stock market recovered and we were again on pace for a moderate up day.

The real story of the day was the reaction to Randall Stephenson’s comments at Citigroup’s Annual Global Entertainment, Media and Telecommunications Conference in Phoenix, AZ.

In the context of talking about strength in the enterprise and wireless segments of AT&T’s business, here’s what Stephenson said (Transcript – subscription required):

“So we’re really experiencing some softness on the consumer side of the house from the economy.

……

The main place we’re seeing it is non pay disconnects…. whether there be traditional access lines or broadband or even wireless – but so much in wireless.

…….

But on the broadband side we did see the effect of it, so there is a little slowing of broadband in, again, non pay disconnect on consumer access lines.  I’d have to tell you if you focused it, that’s where we’re seeing it.  We’re not seeing it in wireless, we’re not seeing it in enterprise yet.  But we have seen a slowdown on the consumer side.”

These comments led to a massive, high volume, panic stricken selloff in AT&T shares (T 1 Day Chart) which infected the entire stock market (SPY 1 Day Chart).  You can see how volume picked up dramatically in both AT&T shares and the S&P 500 ETF on the downside after Stephenson’s comments around 2:30pm EST. 

You can also see the spike in the Volatility Index (VIX), sometimes referred to as “the fear guage”, which represents investors paying up for puts (VIX 1 Day Chart).

UPDATE (Thu 1/10, 10:20am PST): GigaOM linked to this post yesterday afternoon.