Category: quotes

On the edge of a precipice

This is a note sent to a like-minded colleague yesterday:

I think we are on the edge of the precipice, a combination of confidence, enthusiasm, selective euphoria, blind optimism, faith (in central bankers), and buy-the-dip mentality (any correction is healthy).  The Bernanke put is the hook.  Everyone fixated on the magical powers of the Fed, totally blind to the utter economic destruction going on.  No one is stopping to consider that stocks are long dated economically correlated assets… and that the economic foundation has been reduced to quicksand. There are signs of delusion everywhere.  Two of my favorites: cash on the sidelines and a wall of bearish sentiment for stocks to climb… patently absurd.

With a follow-up today:

Notice how the bulls are scratching their heads today.  How can the market go down with the economic reports relatively strong this morning and Uncle Ben assuring us that his economic experiment was a success?  They simply can’t fathom the opposite.

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.

Lew Rockwell on the "Great Fakeroo Recovery"

A year ago this month, the whole country was in agreement that we had been living an illusion for the previous ten years and that the prosperity we thought we were enjoying was not sustainable. There was no dissent on this point. Even Obama admitted it. Today, the illusion is even more egregious than it was, and yet people are once again embracing it as if it will not end.

The policy response to the downturn has been one of the most short-sighted and economically irrational in the entire history of mankind. Why did they do it? It’s all about the politics of the short term. The entire economic structure has been phonied up in order to make a success of the Obama cult. This is the driving motivation, alongside the obvious desire on the part of financial and banking bigshots for a bailout.

~ Lew Rockwell, “The Great Fakeroo Recover,”, September 9, 2009

Comment: As my partner, Bill Laggner, wrote recently, “Everyone sits at the bailout trough in American finance.” 90% of the investment industry is still living in the delusional world of 1982-2007 in which every downturn was arrested by Fed intervention, markets quickly recovered to new heights, and second-guessing the financial meddlers meant career suicide. An inflection point has been reached. The rules have changed. Economic gravity has reasserted itself.

The mother of all margin calls

On credit expansions:

This new money [inflation] is never evenly distributed, but instead gets funneled into whatever narrow area happens to capture the public’s fascination. As prices and valuations soar, greater doses of credit are required to keep the game going. Either more marginal borrowers are drawn in at ever more precarious levels or greater leverage must be applied to existing borrowers. This is what ultimately doomed the housing bubble. In the end, nearly anyone who could fog a mirror was getting an invitation to join the party.

The trouble with pyramid schemes is that they’re not designed to go in reverse. Eventually, the number of willing dupes is exhausted. The same people who panicked late to get into the game are just as likely to panic when the music stops. The longer the music plays, the more leveraged and unstable the inverted credit pyramid becomes. As the late economist Hyman Minsky observed, “stability is unstable.”
~ Kevin Duffy, “It’s a Mad, Mad, Mad, Mad World,” May 22, 2007

The financial establishment and power elite have known all along that their asset inflation scheme was not designed to work in reverse. The consequences for them (as opposed to the rest of us who bear most of the costs) would be too terrifying to face. Despite 13 months of massive government intervention, D-Day has arrived. The mother of all margin calls is finally upon us.

Peter Bernstein on the perfect financial storm

Nothing like this has ever happened before. There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary.
~ Peter Bernstein, author of Against the Gods, a classic on risk management

My comment: I just watched talking head Vince Farrell on Bubblevision assure viewers that every financial crisis is a buying opportunity. He has no idea the magnitude of this storm.

Addendum: Speaking of Mr. Farrell, here is a snippet from a March 9, 2007 interview with Susie Gharib on the Nightly Business Report:

Gharib: Let’s go over your list of stock recommendations that you have for us tonight. At the top of your list you have AIG, the insurance company. Why do you like it?

Farrell: AIG had an analyst meeting last week in which they reported a very good quarter. And keep in mind, half their business is life insurance. We think of it as property casualty, but it is life insurance as well. They announced an $8 billion share repurchase and said under normal circumstances they would increase the dividend 20 percent a year. That is an extraordinary statement by management that it is very optimistic about the outlook for the next couple of years.

Gharib: Bank of America is another one of your stock picks. What is the attraction?

Farrell: They had an analyst meeting within the past week and the chairman said they’ll be able to grow earnings organically, meaning from the businesses they have, no acquisitions, 10 percent a year and the stock trades at only 10 times earnings. The market is at 15 times earnings and the dividend yield on Bank America is almost 4.5 percent and the yield on the 10-year Treasury is just above 4.5, so you get a Treasury bond yield and the opportunity for growth at the same time.

All told, Farrell recommended five stocks on NBR: AIG (was $69.07, now $12.14), BofA ($50.95, now $33.74), Transocean ($77.57, now $122.69), GE ($34.32, now $26.75), and ExxonMobil ($71.12, now $77.50). In all fairness, his overall picks fared much better than AIG and BofA, with the average pick -13.57% on a total return basis versus -7.87% for the S&P 500.

Warren Buffett on investment opportunity

Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investment career. The sillier the market’s behavior, the greater the opportunity for the business-like investor.
~ Warren Buffett, preface to the 4th Edition of The Intelligent Investor, by Benjamin Graham

Comment: We count ourselves very fortunate to be living in such delusional times.

Martin Van Buren on government bailouts

Those who look to the action of this government for specific aid to the citizen to relieve embarrassments arising from losses by revulsions in commerce and credit, lose sight of the ends for which it was created, and the powers with which it is clothed. It was established to give security to us all. … It was not intended to confer special favors on individuals. The less government interferes with private pursuits, the better for the general prosperity.
~ Martin Van Buren, 8th President of the United States, 1837

My comment: Mr. Paulson, you’re no Martin Van Buren.

Nassim Taleb and Charles Mackay on the boom and bust cycle

Learning from history does not come naturally for us humans, a fact that is so visible in the endless repititions of identically configured booms and busts in modern markets.

~ Nassim Taleb, Fooled By Randomness, 2nd Edition (2002)

Taleb’s quip brings to mind this classic…

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

~ Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (1852)

My comment: We are still largely in the delusional phase of the current bust.

Friedrich Nietzsche on crowd behavior

Insanity in individuals is something rare – but in groups, parties, nations and epochs, it is the rule. ~ Friedrich Nietzsche

Exhibit A: A massive credit bubble fomented, sanctioned and maintained by a U.S. government cheered on by lenders and speculators who made reckless, ill-conceived bets.

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