Barron’s Mike Santoli points out a short list of market myths that currently seem to have currency amongst the investing and chattering classes.

The five are:

• “The dollar is collapsing.”
• “Portfolio managers are trailing the market and might need to rush into stocks.”
• “The hoopla over Dow 10,000 shows that Wall Street is back to cheerleading the market.”
• “The size and speed of this rally is unprecedented.”
• “Goldman Sachs is back to maxing out employee compensation.”

Each of these overstate — or at best, misstate — their respective subjects:

Dollar: The ICE U.S. Dollar Index is about where it was a year ago, and is above where it spent much of 2008.

Underinvested Portfolio Managers: The broad rally has made outperformance of the indexes the norm. Lipper fund-tracking reports the average U.S. equity fund is about 5% points ahead of the S&P500.

Cheerleading: Consensus price targets in January 2009 amongst big Wall Street firm strategists was 1050; the current consensus target is…1049.

Unprecedented rally: The massive 1937-38 market surge is quite similar. fits quite tightly. The 1974-75 gains are also similar. The 1982 rally also looks similar.

GS Comp: Q3 comp is 43% of revs, down from 48% in Q2, and off from historical average of 50%.

Good stuff, Mike!


Five Modern Myths
Barron’s OCTOBER 19, 2009

Category: Analysts, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “Modern Market Myths”

  1. Steve Barry says:

    Agree…one of his better pieces, and I’m not a big fan of his. For more outright myth-busting with very thorough analysis, try John Hussman, who has blown apart The Fed Model, Sideline Money, Fed repos, profit margins returning to their highs and others.

    If you do check out Barron’s this week, read the cover story by Andrew Bary urging Ben to raise rates. This may be some kind of 2-way market indicator…if he does raise rates, the market might gag…if he doesn’t, there is a whole list of ramifications, some I never thought of…an excerpt:

    “The Fed has virtually cornered the mortgage-backed market, buying about 75% of newly created government-backed securities this year, and that has forced the usual institutional buyers of mortgage securities into other markets, like corporate and municipal bonds. This has contributed to the sharp rally in munis and corporates.

    Better to stop the Fed’s bond-buying program sooner rather than later, and end artificially low, sub-5% mortgage rates. The more securities the Fed purchases, the greater the ultimate losses on its holdings when rates do rise. Banks also have bulked up on low-yielding Treasuries, buying over $200 billion in the past year.”

  2. Steve Barry says:

    The fed and banks are like the Hunt Brothers trying to corner the silver market…they will fail in the end, so they are in essence buting bubble-priced assets.

  3. [...] (Linkkien lähde: The Big Picture lukijakommentti) [...]

  4. flipspiceland says:

    The FED and multihundred billions and huge trillion dollar banks are immune to failure. The new dollar bill is currently being printed and the phrase, “In god we trust” has been replaced by
    “Too Big To Fail, HAH!”

  5. Mike S says:

    I dont think the outrage over pay was as much about the employees making so much but rather that the bank is making huge sums which allow it to pay its employees huge sums.

    It is bullshit.. We could have just let all of banking fail and given every person in America $3,000 quite easily and had a better result. Can you imagine the small family of 4 getting a check for 12,000? When they make 60K a year?

    We spent 450B cash money and the value of the govt backing of debt is about $450B as well.

    900B of money = $3,000 per person Instead we gave goldman Bankers $1M+ each. We are seeing the value of trickle down economics in action right now. It works like shit on a shoe.

  6. Bruce in Tn says:

    Well, ok….Mike. The dollar isn’t collapsing?

    I guess we could call it “gentle loss of value at an increasing rate of decline”

    Now I understand it.

  7. Bruce in Tn says:

    “Goldman Sachs is back to maxing out employee compensation”

    Mike, I missed the big picture on this too, sorry.

    I think I would just ask, how much of the 50% compensation rate that you quote from past quarters was funded by the taxpayer’s money?

    ….I suppose that might in just a teeny-weeny fashion explain why compensation rates equal to past rates are not appropriate for this new era…

  8. number2son says:

    Q3 comp is 43% of revs, down from 48% in Q2, and off from historical average of 50%.

    He’s gotta be kidding, right?

  9. Steve Barry says:

    My perspective on GS: since 80% of their revenue is from trading paper back and forth, and the money is being printed for this to have very little risk, it is foolish. IT ADDS NOTHING TO SOCIETY BUT MORE DEBT. Who is the other side of all these winning trades? Every small trader out there?

  10. Bruce in Tn says:

    Mike, myth usually, as I understand it, means there is no truth in it…it is mythical, whether ancient or modern. There are elements in all 5 of Barry’s summary that take the “myth” out of your conclusions.

    Wife is finally ready.


  11. harold hecuba says:

    the dollar isn’t collapsing? okay it’s nearing it’s all time low. the dollar now actually looks worse as it is nearing all time lows but is still heavily weighted to the euro which is nowhere near it’s highs. as for fund managers panicking i could not say and i doubt it’s retail piling in. this looks more like continued short covering on no volume and program trading by the cesspools. the game of hot potato will end in tears. no hoopla over dow 10k are you kidding me. that’s all the braindead media and individual investors talk about. jpm is a raging bull on the market citing cash is trash and reflation is working. okay the size of the rally isn’t unprecedented. give it a rest already. it is still one of the largest rallies in history. and in my opinion the market was not even cheap at the lows. these lows will almost certainly be revisited and broken as the depression wheres on. this last one is simply ludicrous. it’s amazing people believed that the GOLD MEN would have weathered the crises. not true the GOLD MEN were belly up like the rest of the financial shthouses out there. no one seems to understand how much money the GOLD MEN pillaged from aig. it wasn;’t simply being made good on the swaps. as aig’s derivative book was dismantled it was immediately marked down 20-30% . it gets worse. most of the portfolio was marked down an addtional 30%!!!!!!! and given to the GOLD MEN. i hear there were countless consulting bills of 500k and more paid to the GOLD MEN and JPM (these 2 banks should simply be part of the gov) don’t forget the orphan month of dec 2008 where the GOLDMEN excluded billion and billions in losses. GOLD MEN and it’s pathetic cronie banks have completely raped the entire country. GOD BLESS THE BANANA REPUBLIC.

  12. Matt SF says:

    What about…

    “there is a ton of cash sitting on the sidelines”

    Not sure if it’s a myth, but CNBC seems to fall back on this one quite a bit.

  13. 1001 says:

    Nothing like cherry picking to find the “short list”

    There are about 100 short lists out there , this is probably the only one that fits his story though

  14. willid3 says:

    not sure where every one has been but the dollar has been sliding if not collapsing for many years now. after all if you aren’t exporting as much as you have been importing isn’t that the result? and if you don’t depreciate your currency in some way (without saying that of course) you won’t be able to address that will you? and since our government doesn’t want upset this apple cart, we are stuck with a downward slide in living standards. and we have been doing that to incomes (now back to pre-2000 levels and falling)

  15. willid3 says:

    moody’s part of the reason for the deterioration of bond market?

  16. bsneath says:

    The dollar is in the process of overshooting to the downside to compensate for 30+ years of being over valued. Developing nations, beginning with Japan, used, and many continue to use currency devaluation and artificial dollar pegs as a means to accelerate their domestic economies through exports.

    Will it collapse? I think we could have a “Minsky Moment” at some time in the future. This could occur when: 1) the rest of the world loses confidence in our ability to wind down deficit spending, 2) the developing economies hit self-sustaining growth and they realize that there is nothing in it for them anymore to keep subsidizing the United States as our consumption declines and imports fall and 3) current efforts to diversify global reserve currency alternatives achieve critical mass.

    The worst case scenario is if /when demand for our Treasury securities wanes, interest costs to finance the federal deficit are forced up and the growing cost of servicing our accumulated government debt exceeds our abilities to make payments. The Feds only other alternative would be to buy the securities through QE, which would further deflating the dollar, inflating the cost of global commodities and creating a viscous cycle..

    We are currently too comfortable with the status quo. We are living in a cocoon where developing nations enable us to debt finance our consumption habits. This will eventually change.

    One can say that this is just doomsday talk. I suspect the same accusations were made however when BR, CR, Rubini, Roach, etc. cautioned us last year about the unsteady state of the financial markets.

    My perspective is that we are relieving some of the pressure that would contribute to a collapse in the dollar by letting it adjust lower today. China needs to participate in this although it may actually be in their best interests to keep the dollar artificially propped up now and to rap the benefits of a dollar collapse later.

    We essentially must engage in game theory. We let the dollar fall against other currencies until global pressures force China off its dollar peg. The sooner we can do this, the better it is for us in the long run and the less the risk of an eventual Minsky-moment dollar collapse.

  17. bsneath says:

    willid3 Says:
    October 18th, 2009 at 11:17 am

    Response: Yes, No, Yes & Yes

    (good observations)

  18. VennData says:

    Another excellent article by Mike Santoli. Also…

    1) Wealth is increasing: There’s been four trillion in US wealth created in the stock market in a few months.

    2) Future consumption: consumption is driven by the rich, who don’t depend on employment.

    2b) …everywhere:
    Fed’s balance sheet is shrinking: Even though the Fed balance sheet doubled, there’s been no collapse in the dollar, and the balance sheet is shrinking.

    3) Industrial production is up:

    4) Financial regulation, Health Insurance, Energy Independence all look to be “moderate” regulatory actions:

    5) Pakistan is taking the fight to their conservatives:

    6) Iran is killing off their conservatives:

    7) NBC earnings are up, CNBCs too?,0,2005013.story

    8-10) S&P 1,100… Dow 10,000… VWO $40.

  19. nancefinance says:

    Re: dollar myth. Technically Santoli may be correct about the dollar. But even though it is higher than 2008 levels, it is under attack as a reserve currency and that in my chattering view makes this decline qualitatively different.

  20. bsneath says:

    Market Myth – Goldman Sachs is a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”

    (with appropriate profanity)

  21. M says:

    Unprecedented Rally:

    Yes, it really is. Looked at in terms of regression lines and f’ and f” it is off the charts.

    I don’t have a convenient place to post graphics but this one is very good: The other great recoveries may rhyme a bit but for sustained rate of recovery we’re in a whole new place.

    The myth that I’m hearing a lot these days is that there is no volume in this recovery. I’d love to see somebody explore that. Seems to me that, for instance, S&P volume is at least as good as it has been in previous recoveries both in absolute terms and as a percentage of peak.

    But, all I really know about this market is that it has pushed my Rolaids consumption to historically unprecedented levels.

  22. Steve Barry says:

    The rally is unprecedented given the loss of jobs it has accompanied (hat tip David Rosenberg).

  23. Steve Barry says:

    Also unprecedented by its lack of volume.

  24. bsneath says:

    M Says:
    October 18th, 2009 at 2:12 pm
    Unprecedented Rally:

    It just goes to show you what you can accomplish with a couple of trillion dollars of Quantitative Easing!

    Personally I am concerned that the Fed is easing off the pedal too soon. I was pleased to read that some of the Federal Reserve Governors in fact discussed increasing Q. E. I suspect we will be in the second V of a W-shaped recovery before they act unfortunately.

    Michael Kamperman does a very good job of discussing QE and related topics. (TBP is on his blog role so I assume it would be OK with BR to link his blog site here)

  25. M says:

    Sorry for using “rally” and “recovery” interchangeably above. That was an error.

    I’m still having a lot of trouble with the lack of volume argument. The 6 month S&P volume SMA was about 5.5B on Friday. That’s a heck of a lot of shares.

    I can’t see an easy way to compare these numbers to pre-IRA, pre-internet, pre-discount broker, pre-HFT etc numbers. Just eyeballing some modern rallies 6 months in, a negative 6 month rate of volume growth seems typical. But, I’m skeptical that there is much signal there. It seems to me that the nature of trading volume has changed a lot and is still changing fast, so I don’t know how much historical trends can show us. And, in terms of absolute numbers current volume is not light!

  26. M,

    I think you’re suspicions are warranted. We should remember that, in a Ramp, Price, not Volume, is what is important.

  27. bman says:

    I’ve got to pipe up on this, GS compensation dropped from 48-43% of revenue, GMAFB. This has really got me thinking about one of those right wing hot topics: The Flat Tax. I think we should take them up on their offer. Here’s how my flat tax would work. Anyone earning more then 500,000 will pay 65% of their earnings to Uncle Sam. Any inheritance of greater then 500,000 will be taxed at 65%. I’m assuming you get the big picture here. If you squeeze them in just the right place and just the right fashion, I’d bet the obstuctionists would be willing to compromise on a whole range of issues.

    I think this should be applied to corporations as well.

  28. scharfy says:

    As far as I am concerned Goldman earned their bonuses.

    I mean they had the foresight to have many former high level executives in Treasury and , made substantial capital expenditures in Congress as well. With these critical strategic investments in place they were able to impress upon Congress how truly valuable all of Goldmans counterparties were to the US economy. Thus, they were repaid on their investments in spades as AIG, Bear, and Citi, all were bailed out. Additionally, opening the Federal discount window at .025% allowed for some cheap walking around money to lever up 35 to 1.

    So now you have a bank holding company with all its perks, and an investment bank with a few less competitors , all wrapped up in one!!! (With a defacto congressional mandate)

    I’d say they earned it.

    Taxing them might feel good, but all ya had to do was not write all those dam banks the check out of the taxpayers checkbook and Goldman would be flat on the year.

    Last time i checked the world doesn’t stop functioning if a few investment banks go down. Equity goes to zero and bondholders get in line… It also would serve as a stark reminder for I-banks to do a better job of checkin on OTC counterparty risk, if they knew uncle Sam wouldn’t save their asses. Many companies go bye-bye and we are better for it.

    I’m so tired of these clowns, they busted out and cried to mommy to pay off their bets. Claiming the world would grind to a halt without them.. And those pussies in DC just gave it to em…. Oh wait, i forgot, they were paid to do it.

    Sorry for the off topic rant>>>

  29. bman says:

    Nice viewpoint Scharfy, but I like to feel good, in fact I like to feel good everyday. So tax them now, and tax them heavily, tax them progressively, tax them retroactively, tax them regressively, tax them punitively with extra fines for tax evasions. I don’t care how you tax them as long as more then half goes to the government. When their grasping hands get excoriated all day, everyday they will learn to be less reckless. That will, all in all, be a satisfying feeling.

  30. Just last week D. Rosenberg put out a chart showing this rally is the sharpest snapback rally in history. Is it? Or is it not? Doesn’t seem like it’s up for debate considering they are raw numbers:

  31. beagle says:

    “The ICE U.S. Dollar Index is about where it was a year ago, and is above where it spent much of 2008.”

    And what happened in 2008? Are we better able to withstand a ramp to $100+ oil this time around?