The end of the calendar year provides a time for reflection, assessment, and a look ahead. As I sort through my notes and ideas, I am acting early on the resolution to post more of them in (semi-) real time for our group. We will still collect the various threads and provide more comprehensive analyses and reports as we have done in the past.
In looking over my agenda, I see that I have several themes that will reference Barry RItholtz, and that probably deserves some explanation.
In our office, we like Barry. We enjoy reading his work on RealMoney, one of the Cramer sites. We enjoy seeing him on TV. We enjoy reading his blog, The Big Picture. We think that he is intelligent and articulate, stating his case in a most effective fashion. We also admire the willingness to blog, since the Cramer site philosophy ended the reader comments. (Digression: I like the Cramer site concept, so I hope that Cramer’s staff reconsiders the feedback issue. They are out of step with the modern trends in encouraging comments).
It just happens that, at least for the moment, we completely disagree with most of Barry’s conclusions. Now I could try to craft a "straw-man" argument for everything I am trying to explain, but why bother when Barry is there with a strong argument for a different viewpoint. What we say will not make any difference to him, and it will help me explain to my band of followers why we are looking for a big rally while the expert on their TV says "Dow 7000!"
Since Barry’s views change — he’s no perma-bear — and so do mine, as those who cashed in during the 2000-2001 period remember, I’m sure we’ll line up on the same side one of these days. At the moment, however, it will take some doing.
Tucked inside this recent post joining the debate on who is the bigger contrarian, is an assertion that Wall Street is tricking us into thinking the market is attractive when it is really almost 30% overvalued. Barry Ritholtz invokes a big name, Cliff Asness, and states that he has researched the forward earnings comparison. This is not what Asness and his colleagues did, as they make clear in a footnote. The problem is that most people’s eyes glaze over while reading complex research like this, despite some entertaining zingers from Asness.
Most people are not going to read the paper, so they take it on faith that people like Barry (and Mark Hulbert in his piece) are getting it right.
There are three things wrong with this interpretation of the Asness study:
- He did not look at forward earnings from 1871 onward because the data do not exist. One would expect people to know this, even without reading the footnotes! Looking at the time period where forward earnings data are available gives a dramatically different conclusion — but then it is a more bullish era.
- We should not care about what happened to the market or what the relationships were in 1871. Or 1926. Or 1956. Or maybe even 1976. Start with the question of whether any market relationships before the era of derivatives should still be expected to hold true. The desire to use data that are not relevant, just because you have it, is one of the big problems in forecasting.
- Most importantly, prediction is, after all, about looking forward. It seems obvious, but many forecasters miss the point. Using trailing earnings is especially bad at a time when there is rapid growth (as we have seen for the last three years) or a sudden decline.
Those interested in this sensible notion might want to read my paper, "Should Experts Look Forward to Predict?"
Here’s an interesting topic from Barry Ritholtz’s site, The Big Picture.
Link: What are the odds of 2006 being a positive year?.
I just had an interesting conversation with Mike Panzner, Director of Institutional Sales Trading at Rabo Securities. Mike is a quant who has an interesting take on the markets. Assuming the SP 500 index finishes about where the markets are at the moment …
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