A Debate from TheStreet.com

Two of my favorite market pundits are Scott Rothbort and Doug Kass.  They both write for the professional (and more expensive section) of TheStreet.com, and get some air time on CNBC and mentions in other places as well. I like Rothbort’s analytic approach and maybe the fact that he still teaches a college class on investing.  I like Kass’s out-of-the-box thinking and constant scrutiny of his conclusions.

Today they had a discussion that was more than the usual bull-bear debate on the market’s next leg.  Rothbort has an interesting analysis that we have really been in a bear market for five years.  (I’ll try to find a pointer to a public paper by him).  It is interesting and pretty persuasive in approach.  He noted today, promising to expand on the theme, that there were both technical and fundamental reasons to think this might be a significant market bottom.  One point was the rebound back above the 200-day moving average.  This is the most important technical indicator.  Those who have access to my client commentaries know that we have been following it closely.  Rothbort’s other point is that earnings have been excellent, with the exception of a few outliers like UPS, COF, and MMM.

Kass responds with a laundry list of stocks that have missed earnings estimates for various reasons.  He asserts that the market is foolish for not seeing how the underlying factors will eventually be felt by all companies since we have "lumpy and uneven economic growth" with the worst yet to come.

I’m going to look at the UPS case more carefully in a separate post, but for now, let’s note a few things:

Kass’s arguments are invariable anecdotal, not based on broad data.  In fact, he dismisses virtually every form of data looked at by others, saying that there is something wrong with it.  He has a thesis that the economy cannot expand "without stimuli."  This position is not accurate either empirically or theoretically.  He also mis-understands what is stimulative in both fiscal and monetary policy.  Finally, he has a thesis that consumer spending is about to collapse.  Let me quote:

"There is now ample evidence that the economy, in general, and the
consumer, in particular, is transitioning to a period of slowing growth
in a world without stimuli."

He cites a number of stocks that are trading in a way that supports his view, and a few other indicators of the moment.

The problem?  He wrote those words more than two years ago!

Now anyone as prolific as Kass will have some incorrect predictions.  But this is his major economic thesis, held through two years of excellent economic growth and record corporate profits, achieved as the Fed gradually tightened rates and oil prices climbed higher.

I suppose that some day there will once again be a recession, but there should be some statute of limitations on this sort of prediction!

The real answer to this debate relates to what is already priced into the market.  If stocks already reflect substantial expectations of a recession, then we may be in for a big rally if/when it does not happen.  The end of the Fed tightening might be the catalyst.

At "A Dash" we try to be eclectic, finding the best insights and ideas from many sources.  We do not pretend to have all of the answers, but we are pretty good at determining who has which answers, and then paying attention.

Discounting and “Baking in”

This note is important to understand what is going on with the current earnings reports and the market reaction.  Read to the end for a nice illustration, even if the concept is one familiar to you.

The market is, of course, forward looking.  Everyone with money at stake is attempting to make predictions about the course of prices, while using a variety of different tools.

Sometimes these predictions involve specific events.  If the outcome of an event is widely expected, the stock price movement may seem (to the unsophisticated observer) to be very surprising.  When a company delivers a great earnings report, but then the stock declines, analysts nod wisely and say that the earnings had been completely expected.

There are a lot of terms for this behavior including the following:

  • Buy the rumor and sell the news.
  • Buy on the cannons and sell on the trumpets (a very old one, getting recent play).
  • The earnings and been "discounted" in advance.  (This is the best technical term, meaning that the impact was "factored in" through modeling or accounting for future cash flows.  It is ambiguous for non-professionals, since there is a sense of the word "discount" that means exactly the opposite).
  • The information was "baked in" the stock price.  (I personally dislike this one and it is already over-used, but I guess it captures the meaning.

My favorite illustration of this occurred the morning of the Iraq war.  After an evening display of "shock and awe" U.S. troops had met little resistance as they raced into Bagdahd.  Apparently friendly citizens flooded the streets and began tearing down various Saddam Hussein pictures and the like.  The stock market opened with a nice rally, and moved higher as those who had stayed out of the market now felt it was safe to make some buys.  The Iraqi’s were working on a statue of Saddam, trying to pull it down.  They did not have the right tools for this large statue, and it was going to take some time.  It was rather fascinating to watch, so CNBC stayed right there and Mark Haines extended his hours to keep covering this event.

It was pretty obvious that the statue would eventually go down.  And when it did ……the market sold off.  Whether or not the statue fell had little to do with U.S. equity prices, but that is how it traded.

“Back in the Day,” Part II

Jeff Matthews has an entertaining and well-written commentary on conference calls, guidance, and forward looking statements.  It is always fun to pick out predictions that later look foolish.  The more predictions that someone makes, the easier it is to find an error.  The question is whether Jeff’s analysis of a homebuilder has any relevance for CAT.  Take a look at his story:

Link: “Back in the Day,” Part II.

"What that means for investors is a very consistent, highly margined, very predictable cash-flow stream," Glenn Christenson, chief financial officer, said in an interview. "We’ve been able to give guidance all the way out to 2007."

Continue reading ““Back in the Day,” Part II”