Category: investors – wise guys

Where are the ominous headlines?

Biotech Index - 140413


The momentum stock bubble burst last week, with highflying stocks showing significant declines from their February/March highs:

  • brokerage stocks: -10.8% (high set on March 20)
  • housing stocks: -9.4% (February 27)
  • Internet stocks: -17.1% (March 4)
  • biotechnology stocks: -21.1% (February 25)
  • Tesla Motors: -20.0% (March 4)
  • Netflix: -28.2% (March 4)
  • Twitter: -45.4% (December 26)
  • 3D Systems: -50.1% (January 3)

Yet a brief scanning of the financial headlines shows little concern:

  • – “Stocks fall as volume rises, but here’s why not to worry”
  • The Wall Street Journal – “Stock-Market Jitters Put Investors at Ease; Recent Turbulence Is Seen as a Healthy Sign”
  • CNBC – “Last week’s big selloff ‘probably over': Pro”
  • – “Don’t let these stock market gyrations scare you; It’s likely that we’ve seen the end of recent declines”

The common theme among pundits is that the momentum bust is isolated, contained, healthy, and even predictable.  CNBC quoted Jonathan Golub, chief U.S. market strategist at RBC Capital:

“I think the selloff is probably over.  If you look at the economically sensitive stuff in the market, it’s not really selling off. It’s tech. It’s bio-tech [which makes up about 10 percent of the market.]  The other 85 to 90 percent is in perfectly fine shape.

This weekend Barron’s patted itself on the back for predicting the tech bust several months ago:

In November, when pundits began to natter about a stock market bubble, we pointed out in a prescient cover story that it was a tech bubble, not a market bubble.  Our advice has paid off handsomely.

Barron’s quoted perma-bull Jim Paulsen, chief investment strategist at Wells Capital Management:

My guess here is that we’re having a valuation adjustment in one small part of the market, in the highflying momentum stocks that got ahead of themselves and are now correcting.  I think this is more of a buying opportunity.

The article concluded:

All this suggests that despite some ominous headlines, the stock market’s health is still good. [emphasis added]

Where are the ominous headlines?  We don’t see any.  We see complacency as far as the eye can see with the assuredness that the momentum stock bust is “contained.”  We heard these same words in April, 2000 after the dot-com bust and March, 2007 after the subprime bust… early warning signs that were overwhelmingly ignored.



Bring in the clowns

On May 3rd the DJIA hit 15,000 for the first time.  Right on cue, Ralph “Make ’em Poorer” Acampora predicted Dow 20,000 by 2017 on CNBC in an interview with Maria Bartiromo.  She heaped praise on Acampora’s recent bullish prognostications while conveniently hitting the delete key on his past, which included this blooper from the top of the credit bubble on July 18, 2007 (also on CNBC):

“I’m predicting Dow 21,000 by 2011. It’s only 40% from here [actually 51%, but who’s counting]. It’s a lay-up.” When asked about recent credit jitters, he responded, “Bad news is good news; never fight the tape.”

USA Today: Bull market on solid footing

“The dizzying 2013 stock market rally was reignited Tuesday by multiyear highs in home prices and consumer confidence, a sign the bull run reflects a healing economy and not just the Federal Reserve’s easy-money policies.”  The front page USA Today article quotes two popular permabulls: Brian Belski…

“The economic numbers we’re seeing are confirming what the U.S. stock market has been telling us all year: The economy is on a stronger footing and improving longer-term.”

… and Jim Paulsen:

People are having trouble understanding why the market is going up when the economy is growing slowly, jobs are hard to find, and corporate profit growth is slowing, and they are left with the idea that the rally is just a sugar high from the Fed.  My take is that rising confidence is driving the stock market higher, [adding that investors now believe the worst-case fears they’ve harbored since the 2008 financial crisis won’t be realized].

So there you have it: the 2008 meltdown in the stock market and economy was simply a technical malfunction caused by credit locking up.  The Fed diagnosed the problem correctly, applied some anti-freeze to the credit radiator, and got the economic engine back up and running.  Mission accomplished.  The Fed’s mechanics can now do a victory lap and go back to their auto repair shop and watch paint dry. But what if the sugar high metaphor is more appropriate?  Could the recovery in housing be artificial?  Consumer confidence baseless?  The economy on quicksand?

Does a bull on the cover of a popular mainstream newspaper signal misplaced optimism and impending doom?

The Siren song of CNBC’s Jim Cramer

The lands of Greece may be an economic and financial basket-case nowadays, but they are also the site of origination of the multitude of parables of ancient Greek mythology. In a way, current economic and political conditions in Greece are a continuation of this moralistic tradition of the use of story-telling as a precautionary tale of how not to live one’s life or as a way to describe in memorable detail particular dangers that mortal man must watch out for lest he fall prey himself. By looking at what the Greek economy has become, and why it has become this way, a warning is sounded– come not this way, weary traveler!

But there are other lessons for the investor to be learned from Greece and her mythology. One recurring character in Greek mythology was the Siren, a dangerous creature in the form of a bird-woman who often traveled in a flock. The Sirens of Greek myth lived on an island in the sea, and with their beautiful, enchanting singing they would lure unwary sailors into the choppy waters along the coast, ultimately destroying the sailors’ ships on the treacherous rocks just below the surface and stranding them.

Ulysses, the hero of the Greek epic The Odyssey, spared himself a similar fate. Knowing that tragedy would befall himself and his men if they allowed themselves to be fooled by the songs of the Sirens, Ulysses had his men stuff their ears with wax while he himself was lashed tightly to the mast of their ship. In so doing, Ulysses and his men safely passed the island of the Sirens unscathed and were able to return home to Greece with their health and wealth in tact (well, alright, The Odyssey is a bit more complicated than that, but you get the picture, hopefully).

Today’s investor would be wise to heed the moral of Ulysses’ encounter with the Sirens because today’s investor faces islands of Sirens on the investment sea himself, the loudest and shrillist of which would probably have to be CNBC’s Jim Cramer, former hedge fund manager and host of the show Mad Money.

Cramer’s siren-call is something seemingly out of a legend itself– having completely blown it on his calls on the Tech Bubble (the greatest bubble of all time, until the Housing Bubble, and then the Credit Bubble and then who knows what’s next…), Cramer remains as unashamed, unapologetic and unreasonable as ever as this perma-bull par excellence who never saw a Fed rate-cut he didn’t like has gone on to deny ever more fundamentals and tout ever more marginal stocks in his quest to help the poor, benighted citizens of “Cramerica” get rich quick.

To the untrained ear, to the undisciplined mind and to the unsteeled heart, Cramer the Siren belts out some soothing, truly fantastical notes, no doubt. Who doesn’t want to make big bucks with minimal effort and even less thinking?

You should be buying things and accept that they’re overvalued, but accept that they’re going to keep going higher. I know that sounds irresponsible, but that’s how you make the money. Right now up is down, left is right, peace is war, all that 1984 stuff. But don’t laugh, ’cause this could very well mean the difference between closing out the year on a high note and getting crushed. All these things are driving the pros batty and making tons for amateurs, and it’s not over yet.

So what should you do now? Stop trying to out think it. Stop trying to be smarter than the market. Forget what you used to know; it’s not working right now. The bottom line: you have to recognize, like we do in Cramerica, that there are bull markets – oil, tech, alternative energy, fertilzer, ag. You gotta play ’em. So go buy some Transocean, go buy some Deere, go buy some Baidu. Just go do it – it’s ok. Go buy some Google. Buy a little. Stop worrying that everything’s too expensive at the moment. Welcome the rate cut, take a little off after it goes up, and thank me later. (Oct. 31, 2007)

Who wants to be the one sucker on the block who didn’t dive headfirst into a pile of easy money because he was being overly-cautious?

Do you hold your nose and buy ABK because of those rallies? I believe, oddly, yes. Now, there is simply no percentage in admitting you would ever recommend a worthless security. But this is a game of performance, not a game of valuation. There are plenty of genuinely worthless stocks that have gone up huge. There are tons of cases where gigantically worthless stocks — almost every dotcom circa 1999-2000 — gave you great returns. (Apr. 13, 2010)

Never mind when the “gigantically worthless stocks” Cramer serves up on a silver-platter of platitudes, such as Wachovia or Countrywide Financial, turn out to be… gigantically worthless stocks. This is Cramerica, where fundamentals don’t matter and neither does anything else besides continual Fed rate-cuts to juice the stock market ever higher. “Ladies and gentlemen, the bull is back” (Sep. 19, 2007) and you can thank Mr. Cramer later.

Now, Sirens have always proven pretty deadly and disastrous in their own right and for thousands of investors, Jim Cramer is no exception. And as badly addicted to easy credit and central banker-bailouts (“People have to realize the IMF is going to be successful. It’s going to save us from the total collapse of all these sovereign bonds.” May 13, 2010) as Cramer is, the thing that’s most nauseating and frustrating about him is the fact that the man is an unprincipled hypocrite. Yes, this Siren is exceedingly quick to change his tune, as Cramer explained on Monday, May 10th, 2010:

This morning several people asked me if my Dow 9,000 price target was still on because I did hint about that last week and the answer is: no.

See, remember what I said, I said, we could go back there if Trichet, the head of the European Central Bank, continued to do nothing to solve the euro’s problems and the disaster that is Greece. But that’s not what happened. I said I was negative because Trichet had left the building, remember I had said he had left the building– he came back in Friday night! Dragged by other countries’ ministers, particularly France and Germany.

He and his fellow European finance ministers did something, and not just anything. They did amazing things this weekend along with the EU and in coordination with our Fed Chairman Ben Bernanke and Treasury Secretary Geithner, they understand these problems we’re facing better than any other people in the world. And you know Ben Bernanke is the best central banker in the world, I said that on Friday.

Now, when that European contagion risk is taken off the table, what am I supposed to do, just stay negative? I can’t! When a plan that basically delivers all the things I was calling for and crying for on Thursday and Friday comes along, I can’t fight it and say, “Uh uh, nope, it’s not what I want, gotta stay negative, uh uh!” I can’t. The plan was exactly what I wanted.

In the words of the late, great economist and investor, maybe the best of both, John Maynard Keynes, who would have absolutely approved of Europe’s solution, and I quote, “When the facts change, I change my mind. What do you do, sir?”

Essentially, this right here is all you ever need to know about Jim Cramer and the rest of the flock of financial Sirens. When you hear soaring songs of adoring adulation for fiscally-insane $1-trillion bailouts and the proud heralding of the wishy-washy “wisdom” of the world’s number one economic terrorist, John Maynard Keynes… stuff your ears full of wax, watch out for rocks concealed just below the surface and be thankful that the stewards of your investment dollars in the Bearing Fund had the good sense to lash themselves to the mast long before.

Abby Cohen sees S&P 500 at 1250-1300

Isn’t it funny how the same talking heads who were wrong at the top of the credit bubble are back again, as bullish as ever. Abby Cohen just made these predictions at the Barron’s Roundtable:

We see a range of 1250 to 1300, and the market might not be at the high end at the end of the year if economic growth starts to slow in the second half. We might not see multiple expansion. Instead, stocks will move higher on the basis of profit and revenue improvement. We’re forecasting S&P 500 earnings of $75 to $76 this year, and $90 next year. But it is too soon to be paying for 2011 earnings. Importantly, revenue will increase this year, by about 10% to 12%. Another thing that will distinguish 2010 is a decline in volatility.

Remember, this is what Abby said on CNBC on July 31, 2007, right at the top of the credit bubble:

We get paid to look around the corner and into the future, and over the next several months and quarters we think that the equity market looks to be in good condition. We don’t see an economic recession, we think that corporate profits continue to grow at a moderate pace, and importantly valuation – we think – is not at all stretched in the equity market. Indeed, the S&P 500 is currently trading at under 16 times earnings. Normally when inflation is under 3% the average P/E multiple is 18 ½ times. So we’re below where we normally would be on a P/E ratio basis. Using the more sophisticated dividend discount model, or discounted cash flow models, we believe that the appropriate year-end value for the S&P 500 is about 1600, or about 10% above where we are now.

We believe that many of these companies in the financial services industry are still in very good condition. What we know, for example, is commercial banks have been applying very good lending standards and the problems seem to have existed among those lenders who may or may not be part of the S&P 500 who relaxed those standards too much.

Ouch. And this is what she at the end of 1999, less than 3 months away from the top of the tech bubble:

I used to be a superbull. Now I’m just a bull… What we’re telling our portfolio manager clients is that technology deserves to be a core holding.

Keep in mind, Abby Cohen is Senior investment strategist at Goldman Sachs, the same company that somehow manages to always “dance between the raindrops.” Yet their most conspicuous research spokesperson is now going for a rare hat trick: being duped at the top of the three greatest bubbles of all time in a period of ten years (if we include the current sovereign debt bubble). These are the smartest guys on Wall Street?

Ken Fisher: 1,300 on the S&P 500

Yesterday our favorite Pied Piper, Ken Fisher, was quoted by Bloomberg predicting 1,300 on the S&P 500 (+19% from Monday’s close):

“It’s just a reversal of excessive pessimism. We still have a lot more bull market to go because we had such a huge bear market.”

Ah, to live in Ken Fisher’s oversimplified dreamworld. The tide goes out and returns. If it goes way out the recovery is that much greater. Classic “V” bottom. This applies to both the stock market and economy. As long as the Fed is accomodative and “applying liquidity” investors have the green light:

“The economy is not recovering at a slow pace. America is faster than people think. Third-quarter GDP numbers knocked the socks off of expectations.”

Not surprisingly, Fisher is overweight industries most levered to economic recovery: raw materials, industrials, consumer discretionary, technology, and emerging markets.

We’ve been critical of Ken Fisher for the past seven years, figuring his faith in Keynesian economics and super-sized ego would eventually take him off the rails. In an August 23, 2007 op-ed he declared the 6-month old credit crunch “phony.” A few days later we blogged about Fisher with this conclusion:

Ego, rationalization, and delusion are hallmarks of manias. Ken Fisher displays these in spades. He is predictably digging in his heals after going public recently with his bullish views and will likely go down as one of the great casualties of the bust now in progress.

After such a bloodletting, Fisher and his ilk should be eating humble pie. Instead they’re crowing about economic recovery and a fresh bull market. There is no recovery short of a government-induced sugar high. The next leg down will be brutal for Ken Fisher and his lemming followers. “Invest assured,” people.

They’re back!

Don’t look now, but those masters of the universe who arrogantly whistled past the greatest credit bubble and bust in history are again gracing the covers of popular business magazines. For example, the October 12 issue of Barron’s featured none other than Bill Miller “riding high again as one of America’s top fund managers.” Yes this is the same Miller who beat the S&P 500 15 years running, was named “Fund Manager of the Decade” by in 1999, and anointed “greatest money manager of our time” by Fortune in November, 2006.

To say Bill Miller didn’t see the financial train wreck of 2007-2008 coming is an epic understatement. For the 18-month period ended this March, his Legg Mason Value Trust lost 72%, wiping out a decade of gains. When the first subprime cracks appeared in March, 2007 he thought Countrywide Financial would be a long-term beneficiary. When the Fed began easing August 17, 2007 he chose not to fight the Fed:

“We bought financials after the Fed [first] injected liquidity. That’s what you do in a liquidity crisis… This turned out to be a collateral-driven crisis caused by underperforming debt… We’ve analyzed that mistake and tried to make adjustments to risk management and the portfolio-construction process.”

Besides Countrywide, his fund’s investors were buried in Bear Stearns, Lehman Holdings, Fannie Mae, and Freddie Mac. He even had the audacity to blame the government for his mistakes:

“Lehman was investment-grade Friday and worthless short-term paper on Monday,” Sept. 15, 2008, Miller notes. Miller blames the feds for the Lehman debacle, saying their “pre-emptive seizure” of Fannie Mae, another ill-fated Value Trust position, and Freddie Mac caused the other financial dominoes to fall. “It was a gratuitous wiping out of equity capital,” says Miller, referring to the preferred shares issued by the mortgage giants as their troubles grew. The government, he adds, “told them to sell capital.” He bought the stock because they both met capital requirements and Fannie had been bailed out once before. “I expected forbearance like in the early 1980s, but they didn’t do it this time.”

Like at least 90% of those in the investment industry, Bill Miller expects – no, demands – that government to step in and backstop his risk taking. When the feds are powerless to do so and overwhelmed by market forces, he whines like a baby. When he rides a wave of artificial stimulus (Value Trust is +37% year-to-date) he attributes his oversized gains solely to his guts and acumen.

What does Miller like now? More than 25% of his portfolio was in financials as of June 30, 2009 and positions included State Street, NYSE Euronext, and Goldman Sachs.

Bear markets do not end until behavior changes and the necessary lessons are taught. By all appearances, this process has been subverted by trillions of dollars in bailouts, stimulus, credit backstops, and injections of liquidity. Old habits die hard…, i.e., the secular bear is still a cub.

Jim Cramer: Still drinking the Kool-Aid

Don’t let the press confuse you. We are almost at Dow 9,400 because things are better than you think, and still improving by the day.
~ Jim Cramer, CNBC’s Mad Money, August 13, 2009

Note: Thankfully, the best contrary indicator of the past 3 years is still gracing us with his rants. The bear market in stocks has no chance at bottoming until this carnival barker is shown the door. In fact, before this secular bear is over CNBC will likely either be shut down or spun off from its bankrupt parent company, GE.

Delusions of optimism

The cover of this week’s Barron’s refers to an article on page 7 with the tease, “Bullish news: Fear is rampant.” The author, Jonathan Laing, cites a report put out by James Paulsen, Wells Capital Management’s strategist and long-time talking head on CNBC:

Also bullish is the fact that investor sentiment is in the dumpster. [Paulsen] calls it “dominance of doubt.” Investors put little trust in bullish developments such as the much-maligned economic green shoots, the sharp narrowing in the yields of all manner of fixed-income instruments over Treasuries, or even corporations reporting better-than-anticipated earnings. This psychology could lead to huge upside price potential in stocks once the bears become converted, he argues.

Leaving aside Paulsen’s credentials as a perma-bull who failed to see the greatest economic crisis since the Great Depression coming, the evidence of bearishness appears thin. For starters, Newsweek declared on the cover of a recent issue, “The Recession is Over!” The “VIX,” a measure of expected volatility (referred to as the “fear gauge”) hit a low of 23.09 on July 24. This was the lowest reading since September 8, 2008 when the S&P 500 stood at 1268, right before plunging 37% in 2 1/2 months. The Investors Intelligence poll, which showed 47.2% of newsletter advisers bearish in early March, is now down to just 26.4% bears. Similarly, the Consensus Inc. survey showed just 18% bulls at the March low vs. 51% today.

Our favorite sentiment indicator is still the asset mix of Rydex bull and bear funds. Currently just 26.4% of the assets in these “directional” funds are betting on the downside. At the height of the credit bubble the lowest bearishness reading was 30.8% on October 31, 2007. At the time the S&P 500 stood at 1549; yesterday’s close was 1006. For perspective, at the March 9, 2009 bottom (S&P 500 at 677), 52.0% of the assets in Rydex’s timing funds were positioned for a further decline.

Contrary to the claims of the bulls, there is no “dominance of doubt,” just a preponderance of delusion.

Note: The Fund’s equity short position was 136% on September 8, 2008, 21% at the beginning of this year, 2% at the March 9 low, and 67% as of yesterday’s close.

Be careful what you wish for

In August, 2002, nineteen months into Alan Greenspan’s experiment in easing credit to contain the fallout from a bursting tech bubble, a New York Times columnist and so-called economist weighed in with this bit of wishful thinking:

The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Although the Maestro was optimistic, our economic guru had his doubts:

Despite the bad news, most commentators, like Mr. Greenspan, remain optimistic. Should you be reassured?

[W]ishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it’s a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn’t realistic unless the story line makes sense.

If you haven’t guessed, our opinion writer was Paul Krugman and he managed to get it wrong on two counts. First, the Greenspan medicine was successful in stimulating consumption and blowing a housing bubble for the ages. Second, Krugman’s recommended cure ended up being much worse than the disease.

Has Mr. Krugman (and Messrs. McCulley and Greenspan for that matter) faded into oblivion for his fatal advice? Not exactly. Last October, in the depths of a stock market collapse he failed to forecast, Paul Krugman received the Nobel Prize in Economics. (The award is given by Sweden’s central bank and by coincidence Krugman is a long-time supporter of fiat money.)

Krugman’s modus operandi is simple: during the bust always advocate “stimulus” in the form of government spending and cheap credit via the Fed. When the artificial boom arrives, take credit and assume it rests on a solid foundation. When the fake boom inevitably turns to bust, blame it on lax regulation and “greed.”

On March 20 of this year, Krugman cheered the Fed’s herculean attempts to inflate at any cost:

In effect, [the Fed’s] printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so! The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.

Memo to all interventionists and inflationists: Be careful what you wish for.

Memo to fellow contrarians: When the bubble blowers and their apologists are still employed and appearing in the Mainstream Media, the secular bear market remains in its early stages.

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