I got an interesting email last night about the Everyone is Bullish! Kudlow commentary. Mike writes "With all due respect, you are in no position to be ridiculing anyone’s wild prognostications."
Why not? I am not suggesting my prognostications are any better than anyone else’s. That misses the ENTIRE point. The issue at hand isn’t if a single forecaster is right or wrong; we are focusing here on group sentiment, the psychology of the herd. What should matters to investors and traders is the psychology of what happens when EVERYONE flips bullish.
That is a very significant occurrence, as it is both a rare event, and one that tends to occur at rather ill timed places in the market cycle. The last time such an alignment of sentiment took place was inauspicious to say the least. (see this Bloomberg article: Stock Strategists Raise Alarms With Call for Rally; I assume this article is based on the recent Barron’s roundtable).
Speaking of forecasting: I must admit to being totally surprised by how people responded to last year’s Dow 6,800 discussion. Perhaps this was naive of me, but there you have it. Why surprised? First, because I put so little weight on forecasts, I was truly surprised just how seriously so many people take them. Where the markets will be precisely 12 months from now is a guess, pure and simple. I have always put precisely zero credence in year ahead forecasts, so I was quite stunned that others took it as gospel.
Indeed, long before that forecast, I explicitely discussed why these are so silly in The Folly of Forecasting:
• No one truly knows what tomorrow will bring. Nobody. Any and all forecasts are, at best, educated guesses.
• All
prognostications are instantly stale, subject to further revision.
Conditions change, new data are released, events unfold. Yesterday’s
prediction can be undone by tomorrow’s press release.• In
order to "become right," some investors will stand by their predictions
despite a stock or the market going the opposite way, hoping to be
proven correct. Ned Davis called this the curse of "being right rather
than making money."
And yet, people get genuinely worked up over these. Go figure.
Before the year is over, I plan on revisiting the Cult of the Bear series, offer up my mea culpa, and discuss what was wrong — and right — about the forecast. Keynes was certainly correct about failing conventionally versus succeeding unconventionally (he never said much about failing unconventionally!)
The second surprise was how others read just what they wanted into the forecast and the Cult Series: Call it selective perception: I got emails from Perma bears who were upset anytime I was long/discussed/recommended/owned anything — except gold; that was okay. (What’s that about?) And the perma bulls utterly refused to acknowledge my published expectations for the "Rally before the fall:"
"Why the bull call before the fall? Because that’s
how market tops get made: In the 12 months leading up to the October
1987 highs, the Dow ran from 1800 to 2700 (a 50% gain), while the
S&P 500 sprinted from under 240 to about 340 (about 42%). From
October 1999 to March 2000, the Nasdaq nearly doubled. Although I don’t
expect anywhere near those gains in the first half of 2006, the pattern
could be quite similar: A leap to new highs on some widely held
assumption, which subsequently turns out to be false." (emphasis added)
–Cult of the Bear III (1/20/2006 5:28 PM)
Hmmm, a widely held assumption which subsequently turns out to be false . . . Soft landing anyone?
When the Businessweek piece was published, the bears ridiculed the 11,800/1350/2620 expectation prior to a correction (which I still expect). At the same exact time, the bulls trashed the 6800/880/1100 low forecast.
A brief explanation of thow those levels came about: Those high numbers were my expectation of a double bubble — the reinflation of a bubble that occurs post crash (there’s lots of academic papers on this), leading to an eventual parabolic move. That’s why my Nasdaq top numbers was so aggressive (2620). The low numbers were derived from an eventual retest of the March 2003 lows — something that has happened in prior post crash periods — Japan (1989-98), and the US Dow (1929-33). Like I said, these were edumacated guesses.
I’ll have more on this before the year’s over, as well as that mea culpa.
>
Sources:
Apprenticed Investor: The Folly of Forecasting
Barry Ritholtz
RealMoney.com, 6/7/2005 1:05 PM EDT
http://www.thestreet.com/_tscana/comment/barryritholtz/10226887.html
Stock Strategists Raise Alarms With Call for Rally
Daniel Hauck
Bloomberg, Dec. 18 2006
http://www.bloomberg.com/apps/news?pid=20601109&sid=aGyizpC68Jc4&refer=home
Non-Spam Post!
BR, people want certitude, and I think that is the unreasonable reliance on forecasters. Frankly, it is a compliment that others were angry with your forecast. First, it means that they value your opinion enough to listen, and second, they value your opinion enough to denigrate you when you are wrong.
If I’ve learned anything this year it’s that no one knows a damn thing about what is going to happen. The luminaries do not know any better than does my dog. But it does fill up air time, print and blogosphere space to sell precious ad space! Gosh, over at Real Money I can hardly find the content anymore!
So while prognostications are fruitless, pointing out the stuff that makes our head hurt to understand is both noble and useful. And for those who have a different POV, that’s fine. Reading and understanding the positions of others who take a different stance enriches our own viewpoints. Demonizing folks who hold a different POV is a waste of time and energy, and I marvel at how many exert both to do so.
That’s an excellent point.
To show how absurd some of the diatribes had been, I got a slew of email (and a few comments) proclaiming that because the BusinessWeek forecast for 2007 “only” expects a move down to 10,750, I had capitulated!
I am the 2nd lowest forecast for midyear on the Nasdaq, Dow and SPX — Not the lowest! I guess that means I had thrown in the towel . . .
Maybe you could make on a comment on why construction materials are a favorite sector given all the dismal piece you run on housing. Is it related to the low interest rates you forcast, or more the global warming link in the linkfest (ie catastrophe that requires rebuilding)?
The only excuse that one may have in continuing prognosis is not to read his own blog,the one of BP before Thanks giving day was densely populated with statistics and statisticians and the implied conclusion was “THIS MARKET IS NOT COMPLYING WITH STATISTICAL NORMS OF DISTRIBUTION GAUSS OR POISSON”.
The other consolation may be found in the CBOT they are 158 PUT FOR 100 CALLS which are waiting to be right on their prognosis.
Leisa’s comment is on the money. And yes, Barry, you should take any anger directed at you as a compliment.
We all want certitude. Fergettaboutit!
I still think there’s a lot to be said for cycles which, to my mind, means “reversion to the mean.” That’s why I’ve been about half in cash, waiting for the reversion for most of this year.
So, I’ve been wrong! Still, I can’t get myself to buy. My great consolation is that I got 100% out of tech nearly a whole year before the tech-wreck, enduring a lot of cat-calls for months on that decision. If history at least rhymes, if not repeats….
I’ve finally figured out that, for me, the best approach to long-term NON-TRADING success is to create a shopping list of great companies that produce common life, everyday needed and necessary products and then wait for the companies that make them to go on “sale.”
Patience, a very wise investor recently taught me, is a necessary ingredient of investment success. If anything, this year has taught me to practice patience.
The definition of the market top is when the number of bulls is at a record maximum.
It NEVER happens otherwise.
As another poster mentioned, why is an 8% avg. expected gain for next year considered a “Bull”? I guess on this site anyone who thinks any stock will go up in a given year is a “Bull”. Let’s face it, the majority of stocks (ex Google) are reasonably priced. Record profits will surely fall, which may or may not lead to a downturn in the market at some point. However, we may get a bit of multiple expansion (which has been non-existent through this profit driven rally). If we get it, we can have an OK ’07. Maybe not as good as ’06, but better than bonds/cash.
I WAS getting a kick out of Barry getting on Kudlow to say “everybody’s bullish!” Now it’s just getting old.
The Bloomers consensus of 12 only calls for an 8% gain, which is below the historical average, and even though all twelve called for some gain, two of them placed it at less than 3% for the year, and only one had the temerity to predict an above-average year (14.4%). Median, mean, and modal annual returns on the market index are all pretty much 12% and 15%+ returns happen about 4 years out of ten. The Bloomers group of 12 isn’t especially bullish in my opinion … wake me when a consensus estimate is above 12% or so, I’ll start buying puts or selling calls.
Some of your readers are having trouble wrapping their heads around what’s bullish and what’s bearish. Let me ‘splain.
If I told you that equities would end the year of 2007 at 1500, that is BEARISH. The return is 1500-1422 = 78, which is 78/1422 = 5.5%, does that sound like a bull call? Frickin’ money markets make near that with no risk.
Get the picture?
Who’s gonna buy equities with that kind of return? It downright dipspit stoopid to call any projection of gains “bullish” when those gain projections are so low (3%? 5%?) that an investor is better served by Treasury notes or money markets.
1500 = bearish.
Market returns are double digit on average. The S&P 500 going from 17.05 to 1420 in 37 years is 12.7% compounded. The Dow going from 252 to 12400 in 37 years is 11.1% compounded. Predicting a return that is half the fricking average is BEARISH.
Now, on the other hand, it would be “business as usual” to get a return of 10-13%. So a BULLISH call should be significantly ABOVE the typical return.
Hence my comment, earlier. 1500 = bearish, 1600 = neutral, 1700 = bullish.
Sentiment is bearish, amongst bloggers, the Bloomers survey, and the BusinessWeek survey. Everyone is expecting the market to post lower-than-average returns. What does bearish sentiment imply?
Barry, keep doing what your doing. You look hard at the facts. It is very refreshing. The facts make a compelling bearish case. This will likely come to fruition but on the market’s own timetable.
You know you can’t win don’t you? Once you stick your neck out, everyone will want to chop it off. Well, not everyone. It’s fair to disagree but it’s more than that. I disagree with some of your posts but that’s it. I disagree with alot of people. If you don’t, only one person is doing the thinking. For many it is a matter of bringing you down since you are a public figure.
It’s no different than politics. Each topic or issue they make their position clear on loses more voters. You are no different. Watch what happens with Obama. Everyone loves him right now. They have no clue what he stands for or where he stands on issues.
Well, frankly, I’d vote for him no matter what because he’s a breath of fresh air and he projects an image of diplomacy as opposed to polarization. He offers a reasonable personality to bring diverse groups of people together and that is what we need right now. But, many/most will not feel that way.
So, you lose! lol.
Barry, I think you’re missing my entire point which is that it clearly doesn’t matter what some analyst or economist might be saying about the direction of the market. It’s nonsense to listen to the noise of anyone calling for a market direction, the tape speaks louder than words.
~~~
BR: Mike, not only do I get your point, I agree with you.
However, looking at what the collective punditry is doing can provide insight. Compared to prior years, there are no negative big firm strategists. THATS the key point I making here. Whether Richard Bernstein or Steven Roach are right or wrong each eyar matters not a whit to me. When they all back away from the bearish camp and throw in the towel, TAHT matters to me.
And that is what has happened.
I’ve been having this debate with Rev Shark all year:
The Dow within 1% of its high; Themarket has been staright up since July; No major firms’ strategist is bearish; The VIX was jusrt at a decade long low; Kudlow unable to find any Bears to come on his show; As of this writing, the Dow is off 15 and the SPX is down 2 pts.
And despite what people see before their very eyes and hear from retail and shipping companies (ie, WMT, BBY, HD LOW, YRCW, etc.), the masses believe there is no inflation, retail is great and housing has bottomed.
Complacency rules: Even today’s PPI data — a challenge at the very least to last week’s magical CPI numbers — was greeted with a big yawn.
Yeah, these are all signs of excessive bearishness!
Barry, I think the problem you are having with the economy is that the numbers keep mixing up the picture (i.e. not playing along with you). One day people are worried about an excessive slowdown (disinflationary), next day a set of numbers come out that show slight inflation (PPI), then corporations are knocking the cover off the ball with very strong profits. So, which is it? Is the economy slowing which would cause the fed to cut or is the economy growing to fast which would cause tightening? Since the numbers are mixed, stocks keep moving towards the path of least resistence.
Isn’t the picture always a bit mixed at points of inflection?
Barry forgets that the Barron’s 2001 or 2002 prognostication average was for a +30% move in NASDAQ (maybe the S&P also, I forget). That’s bullish. Now at 8%, its only normal. By the way, instead of being up 30% the market was down 30%!
The masses don’t buy stocks, Barry. They are herded into mutual funds by their lawsuit-fearing HR departments that don’t allow self-directed 401Ks. It doesn’t matter what the masses think. The majority of investing is done by a slim minority.
Markets HAVE to be close to their highs in order to go higher. Every new high in the markets was first preceded by … another new high. Just because the market is at a high is not a signal to be bearish.
As discussed, you have a misperception of what “bearish” means. +3% is bearish. You seem to think that anything over ZERO is bullish, which is totally out of sync with the history of the markets. “Neutral” is, and always has been, from a historical perspective, that equities will outperform cash and bonds by a healthy margin. Anything less than that is bearish, and negative returns on the market, over a year’s holding time, are rare.
Bottom line: the Bloomers survey is predicting BELOW AVERAGE RETURNS. Do you know what average returns are? 8% is below them. Two of the twelve are predicting below 3% returns. Do you know what p1ss-p00r returns are? 3% is p1ss-p00r. The Business Week survey is predicting below average returns, with 52 of the 80 predicting below average returns. The TickerSense bloggers poll is predicting below average returns.
I smell bearish consensus, and I’m fading it.
Jdamon, I agree with your points, save this one: “… a set of numbers come out that show slight inflation (PPI).”
How do you come to the conclusion that 2% (1.3%) month-over-month headline (core) PPI inflation is “slight”? Granted, it’s only one month, but those are some of the greatest MOM PPI inflation numbers in the last 30 years.
Good point, Norman, and it echos mine.
“Average” or “Neutral” returns on equities are between 10% and 13%, more if you include dividends, and it varies based on whether you use only end-of-year data, or use “any given day” data, or go to 1967, or 1950, or 1900 to present. Regardless, it’s easy for any observer to show that double-digit returns are the norm, that outperforming bonds is the norm, and that positive returns are a given, the vast majority of the time, over a year’s holding period.
Therefore, the only reasonable standard of “bullishness” is an expectation that is ABOVE AVERAGE. Anything in the 10-13% range is neutral. The +30% NASDAQ consensus call was certainly bullish.
Given the historic performance of equities, when someone projects a return that is below cash or below corporate bonds, but still nominally positive, it takes a PERMA BEAR to characterize that as “bullish.” Jeez, a +8% consensus is below average. 2 of 12 calling below 3% means you’ve got two BEARS in the survey. Similarly, the Business Week call of +5.5% or so is about half the average return.
Based on the Business Week consensus, I should be in cash. But it IS a positive return. Does that make it “bullish?” Only if you’re a PERMA BEAR.
So, Bloomers 12, BW 80, and Bloggers 25 all had a consensus view that was BELOW AVERAGE. That is bearish consensus.
wondering what this guy was prognosticating 5 hours before…
http://www.pantherhouse.com/newshelton/are-we-there-yet-2/
RE: GBGII
Way too harsh. Calm down. Different opinions make the market.
~~~
BR Norm:
Don’t bother — he’s banished back tot he Yahoo message boards . . .
Bill a.k.a. NO DooDahs said:
As discussed, you have a misperception of what “bearish” means. +3% is bearish. You seem to think that anything over ZERO is bullish, which is totally out of sync with the history of the markets. “Neutral” is, and always has been, from a historical perspective, that equities will outperform cash and bonds by a healthy margin. Anything less than that is bearish, and negative returns on the market, over a year’s holding time, are rare.
This sounds valid and reasonable. Has Barry addressed this?
Posted by: Barry Ritholtz | Dec 19, 2006 10:09:15 AM: “the masses believe there is no inflation, retail is great and housing has bottomed.”
You might be right about that, except for the following big five: 1. cost of a house; 2. the monthly household expense; 3. college tuition; 4. healthcare costs 9and premiums; 5. energy (home & car). So, despite the worthless government numbers people in the middle know there’s some inflation in their lives…..
Michael C. – I don’t think Barry will address it, because it would poke a hole in his “everybody is bullish” thesis. Another comment thread has a discussion on typical equity returns over a year’s holding time, and although it depends on your measuring period (year-end or any day entry, start and end point, etc.) the S&P 500 returns are usually higher than the “bullish consensus” 8% in the Bloomers piece.
From 1980 to present, measured with any possible day entry (not just Jan-Dec), average and median returns are 10.8% and 11.2%, with a start-to-finish move of 10.1% annualized from a “buy” on the first trading day of 1980 to a “sell” at close today.
Regardless of quibbles over start and end dates, 3% projections are bearish in the fact of ANY reasonable, long-term view of the markets. For Barry to admit that, would require him giving up his “we bears against the world!” angst, and I don’t think he’s gonna do that.
barry you were awful last night on kudlow. you caved in and were overpowered even succuming in your weak reply twice saying the pacific rim is strong(knowing that many of those markets in parabolia blowoffs). i was laughing as kudlow is worried theres so many bulls around he had to drag a bear(you) in off the street to show theres still some bears alive.stand up and be counted and talk about massive insider selling,70% market vane bulls,how nobody on earth expects even a 5% correction and how only you and one other person in business week out of 80 even thinks we can have a down year. what about all the weak econ #’s the last 2 months? be a man and tell the world whats going on
First off, sentiment is a little bit of bullshit. It’s grandy for adding to your positions in a bull market. But, sentiment can and does get overly bullish and overly bearish for long periods of time. Long term sentiment is as the highest level in nearly forty years by a measure I use. It’s not based on market data, it’s based on people data. But, it’s not based on some squawking survey of flip floppin idiots. It’s based on what they do.
If you think you can project returns from 1980 till today today and those are going to hold up for the next 25 years, I have some land to sell you in St. Bernard Parish in the great state of Louisiana.
In fact, bond returns aren’t that much different than stocks over the last one hundred years on an annualized percentage basis. You cannot divine the future by using the biggest blowoff bull market in history. That’s cheating. Frankly, it’s rather assinine.
Let’s make a bet. Barry’s original call for a market correction of significance comes true before we reach Pax Globalia.
BDG-
Don’t waste your time, man. DooDah thinks 12.7% is the average return for SP500 historically and has placed that into his models/thinking from here on out. Got his stats from Yahoo.
Now where exactly is that land in Louisiana? I have some developer clients looking to build….
Well MPM,
You are too late. I already sold that land to Doodah. You see, since home prices in the Southern US have appreciated at greater than 10% per annum over the last decade, we made a deal based on said fact. His investing horizon is over the next 25 years so we took that assumption of 10% per annum and I present valued the land value in 2032. I kept half. DOH!
I just thought I’d come over here and stir the pot while waiting on a call.
Don’t waste your time, man. DooDah thinks 12.7% is the average return for SP500 historically and has placed that into his models/thinking from here on out. Got his stats from Yahoo.
I get around 11% return for the market from 1940 to 1999.
But whether you get 10%, 11%, 12% depending on the data or index or time frame you use, his point is still valid and unaddressed.
1940 has the same problem as 1980. Both years are very close to the beginning of secular bull markets. 1999 is near the end of a secular bull market. If you get your averages from a period of abnormal returns, you shouldn’t expect them to represent normal returns. Try 1929-2000 if you want to see normal returns.
Try 1929-2000 if you want to see normal returns.
His point still stands if you use that time period.
If you think a call for SPX 1500 is bearish, you could always sell DEC07 SPX 1500 PUTs. You get about a 37% return if you max out your leverage and SPX is above 1500 Dec 21, 2007. You break even if SPX is above 1420. You can get above a 50% return if you sell the 1600s instead and SPX is above 1600. And you only lose 0.4% of your money for every point below the target. What a deal!
This should not be considered trading advice, and anyone stupid enough to make a trade based on some comment on a blog without doing their own research should expect to lose every penny they have. This is a highly leveraged trade, and if it goes wrong you will lose lots of money.
From Market Beat:
“Optimism abounds among portfolio managers heading into 2007, according to Merrill Lynch’s most recent survey of global fund managers. While they believe global growth and corporate profits will weaken in 2007, the nightmare scenarios are being discounted, and investors see the so-called Goldilocks scenario coming to fruition as the pace of economic growth declines without a recession. “Compared to three months ago, 8% of our panel no longer think we are in a late-cycle environment, but are instead still in the mid-cycle phase,” they write.
Overall, fund managers see global growth receding in 2007, and for earnings to decline. But they believe corporate balance sheets are in good shape, with a net 55% saying balance sheets are under-leveraged. Oddly, while managers believe, on average, that stocks will be higher 12 months from now and believe equities are undervalued, most investors are taking slightly lower-than-average risks in their portfolio, suggesting a somewhat defensive stance — and their sector allocation proves it. Investors are overweight in banks, pharmaceuticals, energy and insurance. They’re underweight in consumer discretionary stocks and industrials.”
Sentiment? Depends on who you ask
Our last discussion of sentiment (see Signs of a Market Bottom?) generated a heated debate about whether everyone was too bullish or too bearish. The short answer is: It depends upon who you ask. For example, the WSJ’s Marketbeat just reported: Optimis…
Load up the truck! Underlevered balance sheets is always near the top of my reason to buy. I’ll just sit back and wait for private equity to lever them up and we’ll all make a killing!
It doesn’t put me in the holiday spirit to knwo this is the mindset of the average fund manager.
Overweight banks and energy seems like a bad idea. Foreclosure numbers are up all over the place, which can’t possibly be good for banks. Neither is a flat/inverted yield curve. Energy prices still seem to be falling, so energy shares seem likely to fall. If many investors are overweight those sectors, the margin calls when they fall will bring down other sectors.
Michael C.-
His *point* was that 12.7% annualized was the average market return. He later modified it in another comment to “between 10-13%”. Admirable that you want to stick up for him but I find it rather alarming that a supposed financial blogger doesn’t have historical market returns at his fingertips, that he could throw around erroneous figurs so carelessly in attempting to make his points, and that you have to have to play Wingman for him.
Best and worst annualized S&P 500 gain (ex-dividends) since 1950
10 year period:
16.8% (Aug 1990-Aug 2000)
-2.8% (Sept 1964-Sept 1974)
20 year period:
14.4% (March 1980-March 2000)
2.4% (March 1962-March 1982)
Not surprisingly, the overall annualized gain since 1950 resembles the simple average of the best and worst: 8.1%
Basically, any real debate on this subject depends on whether you believe the fundamental shift in stock market returns that occurred in the late ’70s/early 80’s is permanent or not.