Race to Call the Bottom
My friend Peter Boockvar has a nice quote in this morning's NYT article,
Forecasters Race to Call the Bottom to the Market.
The article discusses various extreme forecasts of the past: Bears like Owen Lamont (Dow 1,000), Nouriel Roubini, Peter Schiff, and Bulls such as Kevin A. Hassett and James K. Glassman (Dow 36,000), and even Elaine Garzarelli (she's now a permabull, but in 1987, forecasted a crash).
Boockvar's discussion of markets was mistook for a forecast of Dow 5,000, and caused some interesting mayhem around the office:
"More than a few eyebrows were raised last week when news flew across trading desks that Peter Boockvar, who tracks equities at Miller Tabak, was predicting the Dow would crater to 5,000 by next year, a 40 percent decline from the current level.
Among the shocked: Mr. Boockvar himself. “It was mischaracterized!” he said in a telephone interview on Friday, adding that he had no idea if the Dow would sink to 5,000.
“Based on my calculations, I said we can go from 5,000 to 7,000,” he said. “No one’s smart enough to answer the question as to where we’ll be a year from now. I think it’s silly to pick a number, that’s why I picked a wide range.”
It had been an exasperating 24 hours for Mr. Boockvar. “I had to deal with it half my day yesterday,” he said."
Been there, done that. I understand Peter's exasperation. You get grief from people who believe that the media drives the markets (its the opposite) and from people who wont even contemplate an ordinary cyclical sell off.
The Times article adds: "Even in normal times, forecasters have a strong incentive to make extreme predictions, which is why those “Dow 1,000!” reports persist. “It’s eye-popping. It’s relevant. It seems exciting.”
Here's the funny thing: There is a degree of truth in that, but not in the way they imply in the Times article. The Cult of the Bear articles at the Street.com, with the infamous Dow 6,800 call, generated a disproportionate amount of publicity. Some people looked at it as a good career move. It probably worked out that way, but that was never the intention.
I mentioned this a long time ago, but I'll repeat it here again: I was really utterly surprised by the fierce reaction to the Dow 6,800 forecast. I have always thought of forecasts as laughable. The track record of economists and strategists is notoriously poor, no one ever consistently gets the year out forecasts correct several years in a row -- its just totally random. I had warned readers away from them many times prior (see The Folly of Forecasting). So I was genuinely shocked anyone took that call remotely seriously.
I can relate to Boockvar's agita. I had written back then: "The slow-motion slowdown. It starts with the consumer, who after years of spending, finally tires. Soon, it infects corporate revenue and profits. Slowly, it cascades its way across different sectors: housing, durable goods, discretionary spending, entertainment. Eventually, the decay spooks the markets."
That was the main point, but it was widely ignored in favor of focusing on the downside number. I can easily imagine what Peter was going thorugh. The pushback to the cult series was so bizarre to me. And the troll comments in 2007, especially at the peak of the market, are unbelievably amusing to read today. The current crop of anonymous trolls regarding the recent BUY EM call, are similarly laughable. There's an interesting discussion that looks at the anonymous troll at Wired: Twitter, Flickr, Facebook Make Blogs Look So 2004.
Hey Pete -- welcome to my world!
>
Sources:
Forecasters Race to Call the Bottom to the Market
MICHAEL M. GRYNBAUM
NYT, October 26, 2008
http://www.nytimes.com/2008/10/27/business/27markets.html
Twitter, Flickr, Facebook Make Blogs Look So 2004
Paul Boutin
Wired, 10.20.08
http://www.wired.com/entertainment/theweb/magazine/16-11/st_essa
Apprenticed Investor: The Folly of Forecasting
The Street.com, 06/07/05 - 01:05 PM EDT
http://www.thestreet.com/_tscana/comment/barryritholtz/10226887.html
Cult of the Bear
The Street.com, Part 1 01/05/06 - 07:18 AM EST
http://www.thestreet.com/markets/marketfeatures/10260096.html
Monday, October 27, 2008 | 07:10 AM | Permalink
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"That said, your blog will still draw the Net's lowest form of life: The insult commenter. Pour your heart out in a post, and some anonymous troll named r0rschach or foohack is sure to scribble beneath it, "Lame. Why don't you just suck McCain's ass." That's why Calacanis has retreated to a private mailing list. He can talk to his fans directly, without having to suffer idiotic retorts from anonymous Jason-haters."
Can you relate?
Posted by: Paul Boutin | Oct 27, 2008 7:18:03 AM
Barry,
Somewhat related, we all thought Paul Volker's stance somewhat hard in 1980, we didn't see that years later he'd be a cult hero...your bearish forecasts probably will only enhance your future as his actions did back then..
Sometimes it is tough to be right.
Posted by: Bruce in Tennessee | Oct 27, 2008 7:20:08 AM
Hmm.. Pretty sure I posted that here a week or so ago when you went bullish. Something about never counter trend trading. There was nothing on the chart to suggest buying, and yes they all want to say they got it right both ways. Why economists are almost always lousy traders. Good for Pete.. Funny thing is his brother was always the smarter one.
~~~
BR: Keynes was a fabulous trader . . .
Posted by: Derivs | Oct 27, 2008 7:22:04 AM
I have a pretty good idea in general, but can't supply specifics because I don't know enough about the world of hedge funds.
The natural instinct of normal people in a situation like this is to do nothing and wait it out. Thus, the only ones selling are those who have to sell and are masters of bad timing. I would also suspect that those who are leveraged the most are the ones hurting worst.
Panicked hedge fund managers are probably driving this, most of whom waited until the last minute to sell. They most likely believed that everything would right itself at the end. Since everyone was thinking the same thing, it became a proverbial race to the door at the very last minute.
So, if there are technical reasons why hedge funds are selling now, rather than next week, then please share them. Then, you have to analyze what is being sold and how it has to be sold. Then cause and effect relationships among those things being sold. For example, will selling 'A' cause you to have to dump 'B'?
Once the forced selling stops, the market drop will stop, eventually. Any insights into who is being forced out today and who will be forced out later?
Posted by: dead hobo | Oct 27, 2008 7:34:20 AM
The "Barry Timer" looks like a winner here.
The "Barry Timer" is triggered when Barry makes a definitive buy call.
Simply add 5 to 10 trading days and begin to put on LONG positions. SLOWLY scale out of shorts for the first few days and then SLOWLY scale into longs after a minimum of 7 days.
Looks like over the course of the next 1 to 3 trading sessions I will be 75% LONG from current position of 25% short S&P's and 75% cash.
THANKS BARRY!
Posted by: Kirk | Oct 27, 2008 7:42:10 AM
Barry,
just in case you are interested: German insider buying has reached a record level last week. I can only point you to a german language article. The insiders are not bears changing sides, but record level buying should tell us something.
Posted by: jpo | Oct 27, 2008 7:49:30 AM
Barry,
Your analysis has been splendid but aren't you a bit shamed by your timing. Your DOW 6800 call was a forecast for 2006! I'm an amateur but have learned never to forecast anything and to qualify every guess with a maybe.
That said, the low will be set Wednesday morning and it just might be DOW 6800.
~~~
BR: That's exactly right -- I wrote the Dow would rocket to 11,800, and then the rollover would happen. It sure took much longer than even the "Slow motion slow down" I expected.
That said, forecasting market prices one year hence is just folly. I tried to make it clear in the article that this was just an exercise, (we NEVER invest off of forecasts) --- but I obviously did a bad job of communicating that.
I don't know what price the SPX or Dow is going to happen one year from now -- and neither does anyone else.
Posted by: Dan | Oct 27, 2008 7:51:56 AM
“Anyone that invests 10 cents on the basis of someone’s forecast of the Dow is desirous of losing a good portion of their 10 cents,” said William A. Fleckenstein, president of Fleckenstein Capital, a money management firm in Issaquah, Wash. “It is almost the height of arrogance to say this is where the Dow is going to trade.”
Ummm...Is that the definition of a derivative?
Sanity check please!
Posted by: Lois Denominator | Oct 27, 2008 8:14:40 AM
I'm amused by this race to call a bottom. Barry, I've been thinking of your "W" pattern you mentioned late last week. Another attempt to go long, counter-trend, in a down market. So much better to realize this is a bear market and short upswings.
Since Bear started to crumble in August of 2007, so-called professionals have made at least 6 attempts to say we've hit "THE bottom," and look where we are this morning.
Meanwhile, these professionals continue to ignore the 1,000 lb gorilla in the room -- JAPAN. Overnight it hit 7,162, down from 39,000 going on twenty years ago. So exactly why, eventually, can't the Dow fall just as much, percentage-wise, as the Nikkei index? We could be in the very early stages of an extremely long bear market.
Posted by: DaninOrlando | Oct 27, 2008 8:27:44 AM
Any insights into who is being forced out today and who will be forced out later?
Posted by: dead hobo
How interconnected is the check and wire transfer system between banks? Super computers are ... should we say super these days.
Posted by: Greg0658 | Oct 27, 2008 8:36:08 AM
In related thinking, most of us now are thinking in terms of deflation vs. inflation. There is no doubt, at least to me, that deflation is the near term outcome. But there is also a race to see who can inject the most money into their economies, and to me this means that eventually we must have inflation, even if we have an unsound economy with it.
That is why I have continued to buy short term cd's. I think they will appreciate over the near term, and when called or at the end of the term, if inflation has become evident, it will certainly be the time to be out of cash equivalents...
..good luck today.
Posted by: Bruce in Tennessee | Oct 27, 2008 8:54:09 AM
I also have a second theory of where the bottom is, but it has elements of tin foil hat thinking. Here goes ...
As payment for protecting Kuwait from Saddam in the first Gulf War, Bush I extracted a promise from Arab oil producers to keep the world well supplied at low cost until 2000, more or less. After Y2K, oil prices started to rise appreciably. Prior to the rapid rise, oil had traded in the $15 - $40 range for many years.
When GWB was elected, he decided to compete with his father in numerous ways. He probably was dismissive of his father's tit for tat approach to oil prices. Taking Iraqi oil and flooding the world with it would accomplish the same thing without requiring the need to get along with anyone. Unfortunately, things didn't work as expected and everything fell apart in the worst possible ways, due to his obvious incompetence at everything he touches.
Now, oil prices are falling back to the level they otherwise would have been at if Bush hadn't made a mess of everything by starting war, deregulating the world and unleashing a credit mania as an obvious byproduct and a hail mary to pay for his borrow and spend idiocy.
Copper and natural gas both look like they are approaching normal trading levels for an economy such as this one. When oil finds it's bottom, the world will probably be where it would have otherwise been if GWB wasn't such a screw up. This should be near the stock market bottom.
And yes, I accept peak oil theory as a normal consequence of using natural resources. I utterly reject it as a flash in the pan reason for oil prices over the past couple of years, and maybe longer. High oil prices in recent years were a natural consequence of an oversupply of easy credit and a demand for uses for the easy credit.
Posted by: dead hobo | Oct 27, 2008 8:59:33 AM
You are taking way too much unnecessary risk with this position of scaling into the market over the last few weeks. I simply don't understand your rationale other than greed. And, you above all should know bear markets punish greed. What happened to the old Barry?
~~~
BR: We are making a trade -- putting some cash to work because we see a good risk/reward set up. Thats what we get paid for.
I am not suggesting this is the perfect set up, or is appropriate for everyone -- but it works for us. When you miss most of a hug move down, you have more room to play . . .
Posted by: bdg123 | Oct 27, 2008 9:04:00 AM
Tangentially, speaking of 'market sentiment', coincident indicators, and future projections, was anyone else, 'out and about' last night?
Here, virtually, noone was out, Restaraunts, Bars, Grocery Stores, Roads, all were Traffic-Free. Even the Chains that have been popular, to date, were barren..
I hadn't seen that since Katrina('005) struck, and Gas prices took their first jump into the U$D ~2 80-range..
Yes, there was no, reported, 'Curfew', per the local 'Wrap, thoughit really seemed like an 'Economic Curfew'..
http://legal-dictionary.thefreedictionary.com/Curfew
earnings today for this piece:
http://finance.yahoo.com/echarts?s=TXRH#symbol=TXRH;range=5y
seeing that it still has a + bid, there's still room for some shorts..
Posted by: Mark E Hoffer | Oct 27, 2008 9:05:55 AM
Appears your comments and the names submitted with them are not matching. Just a heads up.
Posted by: derivs | Oct 27, 2008 9:24:58 AM
Bottom, schmottom. We have not had recessionary P/E ratios in over thirty years, so the so-called professionals are blinkered and stupid about the market. Most of them are probably 22-35 and so only know P/E's of 18-25 as well as permanently bullish markets (every dip is a buy, every small retracement is a sharp "V").
Using a longer-term view and realistic predictions about earnings (hellooo! no more bank dividends until they pay back the Fed), we should be expecting the P/E for the Dow to head to 6-7 range, assuming there is even any "E", which is not a given for the next three years. GM, Ford, and Chrysler are all kaput. Housing is in shambles. Unemployment is heading to 10% (yes, even with Bush-onomic stats).
I won't make predictions about the level, but judging by the rest of the world, if we don't hit 7000 it's only because we are still pretty frickin' stupid.
Posted by: Sing Expat | Oct 27, 2008 9:38:07 AM
Implied by all this 'bottom' talk is the belief that it will go up once it reaches that mythical point. If it flatlines for a few years - which seems very likely right now - then calling a 'bottom' is a wasted exercise. There will be years to do that.
Posted by: wally | Oct 27, 2008 9:44:37 AM
Was just hoping Pete would see the brother comment. But economists and quants i still hold as few and far between as traders. And did you use the word Fabulous???
Posted by: derivs | Oct 27, 2008 10:16:33 AM
Everyone is looking for "the" bottom, which means we will never see it. Many are holding back their bids, waiting for the forced selling from hedge fund redemptions. They will be disappointed because most of the forced selling is occurring off-exchange in the dark pools. At this point, I think we are more likely to see capitulatory buying than selling, as impatient buyers finally make bids. We will not see a well defined bottom in the charts, so it's best to just dollar cost in across the trough.
Posted by: tranchefoot | Oct 27, 2008 10:32:35 AM
Calling bottoms will leave you with one thousand wounds. You can be absolutely right, but wrong on timing and get killed in the markets. Beware the thieves:
"When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time, a legal system that authorizes it and a moral code that glorifies it."--Frederic Bastiat
Posted by: SPECTRE of Deflation | Oct 27, 2008 10:39:32 AM
For those that think history cannot rhyme:
"Don't be deceived when they tell you things are better now. Even if there's no poverty to be seen because the poverty's been hidden. Even if you ever got more wages and could afford to buy more of these new and useless goods which industries foist on you and even if it seems to you that you never had so much, that is only the slogan of those who still have much more than you. Don't be taken in when they paternally pat you on the shoulder and say that there's no inequality worth speaking of and no more reason to fight because if you believe them they will be completely in charge in their marble homes and granite banks from which they rob the people of the world under the pretence of bringing them culture. Watch out, for as soon as it pleases them they'll send you out to protect their gold in wars whose weapons, rapidly developed by servile scientists, will become more and more deadly until they can with a flick of the finger tear a million of you to pieces."--Jean Paul Marat, 18th Century French Visionary
Posted by: SPECTRE of Deflation | Oct 27, 2008 10:44:20 AM
I've heard that we're trading near PE multiples that represented bottoms in previous bear markets. People have pointed to the slight relative premiums on today's multiples because of lower interest rates and inflation data. But what about the fact that the world has more cash on its balance sheet to invest. Doesn't that suggest that we might expect to see bear market fundamentals for this current bear trading higher than in previous instances?
Posted by: Patrick | Oct 27, 2008 11:02:50 AM
I think the comments to your postings are in general excellent. Whatever you are doing to cull the asshats, and promote intelligent discourse, is working as well as can be expected for this venue. Keep it up!! Fight the good fight!
Posted by: heather | Oct 27, 2008 11:03:49 AM
Barry - why not a thread for investment ideas, so one can be ready with names in the event of another wave of panic selling?
For example - I like ITW -Illinois Tool Works.
4.1% Yld, 6.2x '08 OperCF, 13% D/Equity.
Great Management. Great portfolio of owned companies. And what do they do? They buy small companies. They do it without debt. It must be a good environment to do acquisitions for them now.
Posted by: dave101 | Oct 27, 2008 11:22:35 AM
Best and safest prediction to keep firmly in mind: The worst is yet to come.
Posted by: Reno Dino | Oct 27, 2008 12:14:17 PM
