Bearish Blogger Too Optimistic!
I've been way too optimistic.
That may come as a surprise to some friends (Paul!) and other blog watchers in the media.
But its true -- going by the numbers, I was too bullish in my expectations for the indices this year. My mid-year and year end expectations (see this post for the 2008 forecast) was for a 10-15% selloff by mid year (video here).
The market's surpassed those numbers before the first quarter was even over. And, while we are now in oversold rally mode, as of the beginning of the week, just about all of the major US markets were already below my targets for July 1:
| ndex | 2008 Mid-Year | 2008 Final | March 10 Close |
| DJIA | 11,900 | 12,800 | 11,740.15 |
| S&P 500 | 1275 | 1350 | 1,273.37 |
| NASDAQ | 2275 | 2400 | 2,169.34 |
| Russell 2000 | 580 | 639 | 643.97 |
| 10-year yield | 3.75% | 4.10% |
3.56% |
>
Other than the Russell, the market shave exceeded the forecast to the downside.
There you have it. My big flaw: Too Bullish!
Friday, March 14, 2008 | 06:54 AM | Permalink
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And this is despite the fact that, as Paul so eloquently discusses, the Bears have the best arguments
http://paul.kedrosky.com/archives/2007/12/13/why_bears_alway.html
Posted by: Barry Ritholtz | Mar 14, 2008 7:17:30 AM
The inflation did us in the rest of the way. Euro inflation CPI at new record of 3.3%. I would expect us around 4% then. The market is already realizing this and selling off this morning.
BR if we go into the stagflation again the stock market typically has fallen 50% from the peak during this condition right?
Posted by: John Borchers | Mar 14, 2008 7:26:43 AM
Speaking of inflation, Goldman Sachs and Morgan Stanley are talking about an "intervention watch", stating that central banks may step in to try to stem the dollar's decline. Likelihood? Usefulness? It seems like a weaker dollar is one of the few saving graces (exports) these days.
This may also mean the end of the commodity bull. Is there anyplace left to hide? Heh.
Posted by: spencerh | Mar 14, 2008 7:32:29 AM
Foreign banks will typically come in and buy the dollar when it gets painful to them. For now I think they wait till next week's Fed meeting.
I think the rate cut is completely out of the question now.
Posted by: John Borchers | Mar 14, 2008 7:34:24 AM
It would seem a new prognostication is in order then ? Not my business, in either sense, but your original did strike me as too optimistic because of the interaction of an organic slowdown, Housing/MEW/Consumers and then the metastasizing credit contagion. IMHO we're very early stages in cyclic downturn in the economy which just became obviously visible with the recent employment and retail sales numbers, reflecting the organic slowdown. We're at best ~ 1/3 of the way thru the Housing mess (cf CalculatedRisk of course) which the Street is just admitting. And despite the Fed the credit markets are broken. Earnings estimates and PE's don't strike me as reflecting any of this. My take on the real retail sales (which aligns with CR's) PLUS a whole bunch of high-frequency data is here:
http://tinyurl.com/2llgxr
And a discussion of the business cycle plus the Fed vs credit breakdowns is here:
http://tinyurl.com/2tz8p5
Both FWIW but to pull together a bunch of stories and data.
Posted by: dblwyo | Mar 14, 2008 7:34:48 AM
I guess reality will set in when there is a one day drop between 600 to 800 points which will break thru the bullshitbarrier - then, and only then, we as a country, will face, and catch up, to where we are. It's not if (600 to 800) it's when! We should break 11,000 that day. There is one caveat. If large amounts of foreign money come into our markets in "buying America at a discount and at any cost - because of that discount" All bets are off - and quantification of any values will be astonishing.
Posted by: la grande poussée | Mar 14, 2008 7:35:16 AM
"May 10 Close"?
You mean March 10, Barry?
~~~
BR: Doh! I'll fix above
Posted by: freejack | Mar 14, 2008 8:00:52 AM
Why are you saying you are too bullish - guess you always have to maintain your bear spin and not be flexible ? Maybe your targets are right. Just becuase the market has confirmed some of your suspicions (that were several years off) now you are convinved you are right this time and too bullish - sounds like the tail wagging the dog. Your stuff is good but you never call em the other way - are you immune to admitting the market doesn't always have to be bearish ? Let me guess you will pull out the one or two posts now that you may have written several years back that shows ONCE you called for a bull move - Save it dude your a perma bear !!
~~~
BR: Wrong.
If you look at my long history, I have repeatedly flipped Bullish and Bearish throughout my career.
I know its much easier to call someone a perma-bear when they challenge your happy-happy-joy-joy worldview, but its wrong.
Posted by: Toots | Mar 14, 2008 8:16:47 AM
"rethink your personal belief system". may we all do that each and every day.
Posted by: scorpio | Mar 14, 2008 8:21:23 AM
Care to revise your Bullish Year End estimates lower?
You have no idea how bad the markets are going to get between July & October this year when not just the "Alt-A" mortgages (people with Great Credit who over-stated their income on their last refinances), and "A-Paper" Full Document mortgages, who being overly optimistic stretched and got approved for the biggest loans they could take on --- at 4.00% (and when the old underwriting guidelines of 2003 allowed them to qualify on the interest only payment). Today they're looking at rates over 5.00% (a 25% increase in their largest monthly expense) in a best case scenario, AND they need to qualify for the Principal & Interest payment going forward. If they were at their maximum borrowing potential 5 years ago at 4.00% interest only, how will they qualify at 5.00% or higher fully amortized?
They won't. So they will be forced to accept their re-set rate (and a monthly payment jump of 70% to 80% in a conservative estimate based on current index). How much will that drag down Consumer Spending and Corporate Profits?
Posted by: Mike Castronovo | Mar 14, 2008 8:22:30 AM
I trade the Russell a lot via the IWM and various options strategies. Last year it was my vehicle of choice for expressing my bearish view of the US.
However I think the trade is now too crowded and short sellers are falling over themselves trying to stay short. For instance, yesterday it was the strongest broad index and the first one to break intraday highs.
So I would suggest that the reason the Russell has not hit your forecast is due to its popularity with short sellers.
As I have said on this site several times, I still believe that trying to short financials at this point will not be successful because the trade is too crowded, the major stocks are cheap based on historical relationships, and the dividend yields are a headwind.
Posted by: Vermont Trader.. | Mar 14, 2008 8:33:28 AM
Barry a perma bear? Not. He's just early like most introspective people.
Fauvistic markets are hard to time and navigate. Sometimes 'taking the other side of the trade' is necessary to stay in the game. A good sense of humour also helps.
Can we put the bull bear arguement about commodities to rest. It is a market OF commodities not THE commodities market. Coppper, nickel, zinc have all had 50% corrections while wheat, beans and corn hit new all time highs.
Commodities rise and fall because of supply- demand. A weak dollar does have some impact but a weak dollar is not the end all explaination.
I suppose a strong dollar would be bad for some commodities but would a strong dollar imply a recovering economy? If so, demand for commodities would......increase?
Anyway, damn fine blog and for the most part, good people posting.
Posted by: Ross | Mar 14, 2008 8:49:03 AM
A BIG slap from Arthur! Skittish Bear! As usual, I remain bullish!
Cheers
Posted by: Ben | Mar 14, 2008 8:55:46 AM
"Those who have knowledge, don't predict. Those who predict, don't have knowledge." ~ Lau-tzu
Personally, I believe predictions in the financial markets are foolish, especially because emotions are not quantifiable.
With that said, however, you have to give Barry credit for having the courage to publish his "forecast" for all to the world to see (and criticize).
It is all too easy to say Barry is "wrong" after the fact. Also, I thought "mid-year" was July 1, not March 10...
Any person willing to criticize should give there "forecast" now and let Barry post the "best" and the "worst" at the end of the year for the entire blogosphere to see...
Posted by: The Financial Philosopher | Mar 14, 2008 8:58:50 AM
not a perma bear. Barry has the cojones to voice an honest opinon.
Posted by: woolybear1 | Mar 14, 2008 8:59:21 AM
Fuel and electricity costs were down sharply in the month of February...
Why didn't I get that memo? LOL
Posted by: Jay Weinstein | Mar 14, 2008 8:59:53 AM
not a perma bear. Barry has the cojones to voice an honest opinon.
Posted by: woolybear1 | Mar 14, 2008 9:00:43 AM
Tame inflation! Dam, I'm getting everything wrong. Perhaps I should stop reading blogs?
Posted by: JustinTheSkeptic | Mar 14, 2008 9:01:02 AM
Barry - your doubts with the BLS have totally spread to all of the CNBC on air staff. Only Liesman seems to be keeping the faith.
Posted by: Karl Smith | Mar 14, 2008 9:02:56 AM
Since we have yet to pass mid-2008 or year-end 2008 , I would submit that your "grading" system is neither right nor wrong , as we're barely 25% through the year.
~~~
BR: Does no one get sarcasm at all?
Posted by: jj | Mar 14, 2008 9:05:21 AM
Great article about the spurious nature of the government inflation numbers...
http://www.financialsense.com/editorials/benson/2008/0313.html
Posted by: JustinTheSkeptic | Mar 14, 2008 9:09:51 AM
Prediction: If the numbers do not fit into his bearish propaganda (better than expected), he will criticize the data. I have never seen Barry criticizing the data when it is bad only when it is better than expected.
Posted by: Nouriel | Mar 14, 2008 9:15:05 AM
At the time of the late January lows, market breadth indicators dropped to levels below 2002/2003 lows - quite a feat considering what went into those lows.
Presumably your 'optimism' suggests markets will be lower than where they sit now by July 1st?
If markets recover in a fashion which the breath indicators have marked in the past I suspect your current 'optimism' will termed 'pessimism' by the time summer rolls in.
No doubt you won't be marking this achievement.
DJF
Charts here: http://www.fallondpicks.com/Mar1308.pdf
Posted by: Declan Fallon | Mar 14, 2008 9:46:29 AM
I don't really do predictions on market targets, and I really don't invest in a way that depends on a bear market (though I expect to make money in one)but my expectations, if I had been forced to say, were certainly that it would bottom well below where we are now.
As for the perma bear argument, that is silly. Even on the upside the returns this decade in the US (as measured by the S&P500 and Dow) have been miserly. The S&P500 trails cash since early 1998. The decade trails cash and inflation by a large amount, and likely by the bottom of this we will be trailing cash since 2003 as well. Exactly where have the bulls been right unless it means that sometimes the market has gone up?
Secular bull and bear markets are about what you end up with at the end of the day, not cries of vindication due to tepid run ups followed by losses that wipe out all the inflation adjusted returns you scraped together.
Whining about people who point out risks (the proper management of which is what leads to reasonable real returns in this kind of market) and attacking the short term "timing" of them presenting themselves, is like complaining about the doctor who tells you your arteries are getting clogged, you are overweight, smoking is bad and other ill behaviors and conditions because the heart attack happened three years later.
If after the three years, and however long the downturn lasts, following the advice leads you to real returns significantly above inflation, and not doing so doesn't, why should I care about the "timing."
Posted by: Lance | Mar 14, 2008 9:48:33 AM
I think what Barry doing now is observation rather than prediction, guys, be FAIR!
But the skittish BEAR remains. Hehe!!!
Posted by: Ben | Mar 14, 2008 9:55:01 AM
They're going to do everything they can to paint this tape and close it up today.
Watch for some massive late-day futures-led buying out of nowhere.
My advice is to have on a little something long when the margin clerk finishes between 2 - 2:45.
Posted by: zackattack | Mar 14, 2008 11:10:31 AM
>> I agree with you 100% -- he always sees a glass half empty! I have been reading Barry for three years now (I like to see what the bears think). 99.99% of his posts are bearish.
From my recollection, Barry's been bearish on *US* equities about 75% of the time during the past 2-3 years. (He flips to bullish sometimes after selloffs.) And, you know what?? Measure your investment in anything but depreciating dollars. You'll see Barry's been right to be bearish on US equities.
Posted by: wunsacon | Mar 14, 2008 12:12:04 PM
You are in good company in your optimism. Roubini keeps upping his estimates of pending losses; I find him to be likely conservative. All published real estate data is reflective of purchase decisions made 3 months before publication and doeras not account for the likely eventual sales price of the still-unsold neighboring houses. Mainstream media and many economists had no trouble believing you could flip a house in days or weeks but have trouble thinking prices could fall at the same rate. Realistic estimates of the full impact of the slowdown on highly leveraged commercial real estate are missing from most analyses.
Posted by: Leo Schlosberg | Mar 14, 2008 12:19:14 PM
This not worst that I imagined it would be.
It is worst than I can imagine.
Posted by: Vader | Mar 14, 2008 2:04:25 PM
I guess you'll have to be a Sterner Bear in the future...
Posted by: microtherion | Mar 14, 2008 3:09:00 PM
Oh, come now, Barry! There are still three and a half months to go for you to get that bounce you need to hit your mid-year prediction!
Posted by: Ironman | Mar 14, 2008 3:41:32 PM
Barry,
Long time, no post, but I have been reading religiously, of course.
Last summer, I told everyone who asked that 2008 will be ugly, 50/50 it could be the ugliest overall in the past 30 years - if you factor in inflation, eroding dollar, and asset price implosion.
After the close today, Pisani on the exchange floor, commenting on CNBC on the VIX, says "fear is a good thing." Not sure how to take that...
I don't think all the major indices will not see the Oct.'07 levels approached again until next decade, 2012 at the earliest.
The real estate ravage is just now getting rolling here in sunny SoCal. I'm telling friends who ask to not even think about looking until 2010. It's going to be better to rent for the next 3 years. And anecdotally, I'm seeing not only more for sale signs, but more "For Rent" signs as well. Which have been rare birds in Santa Monica for over a decade.
Have a relaxing weekend. We’ll need our strength.
-Todd
Posted by: Todd M. | Mar 14, 2008 7:14:59 PM
It's interesting to read that link (http://paul.kedrosky.com/archives/2007/12/13/why_bears_alway.html) Barry posted on Kedrosky's site.
Read the comments. Now that they're proven wrong, it's interesting to see how they reasoned away arguments contrary to their own.
Posted by: wunsacon | Mar 15, 2008 4:40:30 AM
The real hazard is the failure of financial instituions to increase theit liquidity reserves to account for monumental derivative exposure. This exposure is going to cascade down through the financial markets faster than fecal matter through a goose's intestinal tract.
Posted by: 49er | Mar 15, 2008 3:59:51 PM
"Those who have knowledge, don't predict. Those who predict, don't have knowledge." ~ Lau-tzu
Personally, I believe predictions in the financial markets are foolish, especially because emotions are not quantifiable.
The minute you make a trade you are making a prediction. Managing risk is all about prediction. If you can't handle making an educated guess about what the markets will be doing going forward then you ought not be in the game at all. If you did that though you'd only be making another prediction
The most successful people in the market are probably part prophet
Posted by: DavidB | Mar 16, 2008 7:46:30 AM
