Category: famous last words?

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 FT.com 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.

Neutron Jack unphased by financial jitters

This system is resilient and there is so much liquidity around, that these problems get solved… Our economy is strong and all of this doom and gloom is nonsense. – Jack Welch, as appeared on CNBC, October 24, 2007

No surprise that Welch, a card-carrying member of the financial establishment, is oblivious to the ongoing credit crunch.

Wachovia takes $1.3 billion hit to its ego

As the WSJ reported yesterday, Wachovia took a $1.3 billion hit to its bond portfolio during the 3rd quarter:

“We had an institutional bias against subprime,” G. Kennedy Thompson, Wachovia’s chairman and chief executive, told analysts in a conference call. But subprime-backed bonds held by the fifth-largest U.S. bank lost as much as half their value when credit markets suddenly froze, even though the vast majority of the bonds were AAA-rated, according to Wachovia. “We didn’t expect paper could degenerate that fast,” Mr. Thompson said.

The $347 million in resulting losses from those securities was just part of an overall $1.3 billion decline in the value of various investments held by Wachovia’s corporate- and investment-banking unit. The unit’s profit tumbled 80% to $105 million from $533 million a year earlier.

Contributing to the losses was the ill-timed acquisition of Golden West Financial in May, 2006:

The Charlotte, N.C., bank also reported a large boost in the size of its loan-loss provision, as it girds itself for more trouble from the weak housing market. Of particular concern to some analysts and investors are mortgages that Wachovia inherited from Golden West Financial Corp., a thrift acquired for $24 billion last year. Golden West’s loans were concentrated in California, where home prices are slumping, and the thrift specialized in option adjustable-rate mortgages, which let customers choose how much to pay each month.

As it turns out, the housing bubble had peaked roughly nine months earlier, yet Thompson was optimistic about Golden West, a mortgage lender operating right at its epicenter:

“We feel like we are merging with a crown jewel. This is a transformative deal for us.”

On June 28th of this year, Thompson spoke with CNBC‘s Maria Bartiromo about his stewardship of Wachovia:

“I’d say look at our track record. We’ve done four large mergers since I’ve been CEO and they’ve all been successful.”

My comment: The credit bubble floated many egos and dicey business plans. We are about to find out who is swimming without a bathing suit as the tide goes out.

Cramer on the public investor

People are getting back in to the greatest game on earth. — Jim Cramer, CNBC‘s “Mad Money,” October 18, 2007

Economists drinking the Bernanke Kool-Aid

A monthly WSJ.com forecasting survey showed the vast majority of economists giddy over Bernanke’s recent rate cuts:

The economists overwhelmingly approved of the Fed’s decision on Sept. 18 to cut the target for the federal-funds rate by a larger-than-expected half percentage point. Seventy-six percent said the move was appropriate, compared with just 22% who thought it was too aggressive. Just one economist felt that the cut wasn’t aggressive enough. That contrasts with a recent, but unscientific, WSJ.com reader poll in which 60% of respondents said the Fed action too aggressive.

Indeed, confidence in the central bank was reflected in the economists’ average grade for Ben Bernanke. In the wake of the interest-rate cut, the Fed chairman scored 90 out of 100, the highest mark he has received in the survey since his tenure began.

They also gave high marks to the ECB:

European Central Bank President Jean-Claude Trichet, who was the first to respond to the credit crisis by injecting liquidity into markets in August after BNP Paribas froze three of its asset-backed securities funds, also received a score of 90. Meanwhile, Bank of England Governor Mervyn King didn’t fare quite so well, scoring a 78 with the economists. Mr. King largely stood on the sidelines while the Fed and ECB were pumping liquidity into markets, only stepping in following a bank run on Northern Rock PLC triggered by the midsize U.K. lender’s credit problems.

Faith in the Fed, circa 2007:

“Some of the uncertainties have faded, partly due to the fact that the Fed moved more aggressively,” said Lou Crandall, chief economist at Wrightson ICAP. “The Fed’s willingness to pull out all the stops played a role in bolstering the economy.”

Faith in the Fed, circa 1929:

“It may be well again to stress the all-important point that the Federal Reserve has it in its power to change interest rates downward any time it sees fit to do so and thus to stimulate business.”- Financial World, April 10, 1929

My comment: The only thing we learn from history is that we never seem to learn from history.

Mark Hulbert: Top timers bullish

In a MarketWatch article, Mark Hulbert took the pulse of the nine top-performing market timers in his database:

The bottom line? None of these nine top timers is bearish. The average equity allocation among all nine is 86%.

To be sure, this 86% is slightly below the level from early August, when it stood at 90%. But the current reading is still quite high. And it is particularly bullish relative to the average forecast of the 10 stock market timing newsletters with the very worst risk-adjusted performances over the past decade. Their average recommended equity exposure right now is 40%.

In other words, the best market timers are, on average, have more than double the equity exposure of the 10 worst market timers.

In addition, the article contained a few sentiment gems:

“We expect significant additional stock market progress into next year as investors discount growing corporate earnings in an environment of low inflation and benign interest rates.” – Bob Brinker, MarketTimer

“Historically, the risk of a serious market decline is almost nonexistent when the sentiment, monetary, major trend and seasonal stars are aligned as synergistically as they are now. If history is any guide, stocks are much more likely to advance in the next 12 months than they are to fall. And if they do fall, the damage will be minimal.” – John Harris, Vantage Point

“There are no guarantees. But to bet on a new bear market right now, you have to bet against the timers with the best long-term records and with those whose records have been awful.” – Mark Hulbert, Hulbert Financial Digest

My comment: We’ll go with the so-called “dumb money” as the valuation, economic and sentiment stars or extremely well aligned for a killer bear market.

Mr. Mozilo goes to Washington


Yesterday some of the country’s largest mortgage lenders went hat in hand to DC to chat with Treasury Secretary Hank Paulson. The parade was made up of Countrywide CEO Angelo Mozilo and high level execs from Wells Fargo, Citi Mortgage, JP Morgan Chase, and HSBC. As CNBC’s Diane Olick blogged, there was some turf defending and finger pointing amid the “let’s do what’s right” love-fest…

Hank Paulson:

Unlike periods of financial turbulence I’ve witnessed over many years, this turbulence wasn’t precipitated by problems in the real economy. This came about as a result of some bad lending practices

Angelo Mozilo:

Real estate values have clearly caused most of the problem.

After the meeting, Mozilo did what he does best – shmooze with the press. We parsed the interview and offer our own interpretation…

I don’t think there’s anybody doing more than Countrywide in terms of trying to help these people stay in their homes where that’s possible. So we just continue to work as diligently as we can to make certain every step is taken to preserve the integrity of homeownership. And we’ll continue doing that, and working with the government and any agency we can to make sure that we continue to do the right thing, and we get as much help as we can from the agencies – from Fannie, from Freddie, from FHA… I think everybody wants to do the right thing, and everybody’s on the same page.

Translation: We all just want to save our bacon, even if it comes at taxpayer expense. Bringing the American dream to the less fortunate is the best way to cover our scam. Reporters, especially, fall for this all the time.

Countrywide’s doing fine. And we’re gonna continue to grow…

Translation: We’re in deep doo doo.

It’s always been a prejudicial problem. You know, it’s a risk-based process that we have in this country. But my concern really is that with constraints now being placed on lending, particularly subprime, is the gap is going to widen dramatically between the have and have-nots. That’s my deep concern.

Translation: I have no problem playing the class envy card. Most are too ignorant of economics to realize there’s no free lunch when it comes to buying a home.

In terms of increasing the Fannie/Freddie limits, increasing the FHA loan amounts, getting the cap off Fannie and Freddie… I’m for that because we need liquidity in the marketplace… And the government has to play that role right now, in creating liquidity, so I’m in support of it.

Translation: We have a $209 billion “distressed” loan portfolio against a mere $14 billion in equity and would love to have the GSEs take some of it off our hands.

I think when you have increasing values as we had – tremendous values similar to the tech boom – everybody wanted to own a piece of real estate to get into the game. And so the rapid increase in values was the problem, and with that came some lending practices that certainly, in retrospect, were not acceptable. And now you have those values receding and… now all the sins of the past are being exposed as a result of receding real estate values. We’ve got to get real estate values at least stabilized in order to keep these people in homes so they can finance themselves out of the problems that they have.

Translation: I’m tossing you a crumb of truth here, so listen up. After the Fed dropped interest rates through the floor earlier this decade, they inadvertently ignited a housing boom. Everyone and his brother thought real estate always went up and we simply let them place that bet on massive margin. Our bad. I’d love to tap the leveraged speculator on the shoulder and get him to bring his equity up, but it’s too late for that – you can’t get blood from a turnip. So now we’re left holding the bag and our lenders are tapping us on the shoulder. We’re basically screwed, and the only thing that can save us is a new bull market in real estate.

Today, Countrywide issued a press release that admitted mortgage loan fundings for August dropped 17% from a year earlier. David Sambol, President and Chief Operating Officer, was stoic and reassuring:

Looking forward, the Company expects that it will be a long-term beneficiary of the current conditions and corrections in the mortgage industry, and we are confident that the actions which we have taken in response to the current environment will position us for profitable future growth and success.

My comment: How does anyone in his right mind believe any of the spin coming out of Countrywide these days?

Fannie Mae to the rescue

Senator Charles Schumer, Democrat from New York, introduced a bill that would lift the cap on the mortgage portfolios of Fannie Mae and Freddie Mac by 10%, which he says will free up about $145 billion to purchase new loans, reports MarketWatch.

The measure “will deliver a shot in the arm that could make refinancings possible for tens of thousands of Americans trapped in the subprime mess,” Schumer said in a statement.

“Times like these reaffirm the need for Fannie Mae,” Fannie’s executive vice president Thomas Lund told attendees Monday at a Lehman Brothers conference.

My comment: The Dems are oblivious that Fannie is part of the problem, not the solution. Apparently, they missed Milton Friedman’s lecture reminding “there’s no free lunch.”

Value funds catching falling knives in financials

More evidence in a WSJ article, “Value Funds Seek Opportunity in Volatility.”

“Adversity creates opportunity for value managers, especially long-term value managers,” said Neil Eigen, a managing director at J&W Seligman.

Buying BofA, JP Morgan, Countrywide…

Mr. Eigen said some stock sectors, such as commercial-banking shares, have gotten cheap. One name he likes is Bank of America Corp. Chairman and Chief Executive Kenneth D. Lewis “is certainly one of the premier bankers in the world,” he said. And, Mr. Eigen noted, the stock offers a 5.15% yield. J.P. Morgan Chase & Co. is “the same thing. It’s a great bank, with great trading activity. It’s very well managed, and it’s depressed because of the mortgage markets,” he said.

Though it is too early to look at housing, some of the mortgage brokers, such as lender Countrywide Financial Corp., offer value, he said, noting that Bank of America recently invested $2 billion in Countrywide. Bank of America “did its due diligence, and I guess they feel [Countrywide] will survive,” Mr. Eigen said. “Countrywide Financial was making one of six mortgages in the U.S. at their peak, and they will survive.”

With the Fed as backstop…

Mr. Eigen said he doesn’t think investors have seen a bottom to the market in terms of fundamentals, but he expects that if the Federal Reserve cuts interest rates later this month, the stock market will rally.

“That doesn’t mean we’re out of the woods fundamentally, but I think we’re closer to a bottom than we were a few weeks ago,” he said.

My comment: Growth investors were the dupes during the 2000 tech bubble; value investors are the bagholders for the current credit bubble.

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