Determining the Contrarian Position

Continuing our analysis of the Contrarian Approach to investing, a concept we strongly endorse, we run headlong into the question:  Where is the crowd?  We want to be somewhere else!

Much of the opinion about market sentiment is anecdotal.  Those with contacts in the hedge fund community claim to know which way positions are leaning.  Others look at forecasts or sentiment indicators.  You can look objectively at a number of quantitative indicators, as we see in this Barry Ritholtz analysis.

Do these indicators capture the current situation?  A Cody Willard story yesterday explored several themes that match out own observations.

  • The Bears reign on Wall Street, according to the read of his networks.  It is anecdotal, but he is well-placed to know.  I might add that long-only managers are not getting inflows and that hedge funds use leverage, increasing their impact.
  • Sentiment indicators like AAII’s miss the mark — because….
  • The individual investor is out of the market.  This is the big one.  Cody’s conversations in his travels square completely with ours.  People lost money in 2000 and they have moved to the sidelines.  Many have turned to second and third homes and investment real estate.
  • The economic news has been given a bearish twist by people, even though their personal circumstances are fine.

It is a nice article, but it would be even nicer to have some quantitative measures to back it up.  We will outline some indicators in our Contrarian Picks for ’06.

End of Rate Hikes a Catalyst?

Will the market rally when the Fed has finished the tightening cycle?  Is 1994 a good parallel?  The Ed Keon interview on CNBC explains it.  Look at this summary of the standard story from Doug Kass via Barry Ritholtz, then refutation from Ed Keon.

Link: 1994 Parallel?.

The delightfully impish Doug Kass (The Anti-Cramer) looks at the parallels between the 1994 tightening period and the present. There are bullish implications for using the 1994 Fed tightening template: 1995 – 2000 was (if memory serves) quite a run. Not …

Continue reading “End of Rate Hikes a Catalyst?”

Forecasting Consumer Guide Part III: Historical Comparisons

There is a forecasting feast in USA Today, offering us a nice summary of the most important viewpoints.

Several of the comments deserve review, but let’s start with that of Tom Au.  Tom is obviously a really smart guy, well-educated, and with great experience at Value Line in identifying value investments.  He is the author of a highly regarded book on value investing.

Tom’s view is that this decade is like the 70’s:

The economy is very much like it was in the ’70s.  The stock market was also in a funk in the 70’s gaining a meager 17.2% in the decade.

He cites the Iraq war, the spike in energy prices, and the fall in President Bush’s approval ratings as similarities to Vietnam, the Arab oil Boycott, and the Nixon impeachment and resignation.  Sometimes his comments also thrown in corporate malfeasance and trials as akin to the Nixon situation.

Tom Au is not alone in invoking the "stagflation term" to describe what they think might happen in this decade.

Since Tom is an honors graduate of Yale, I am amazed at the cavalier and superficial nature of this comparison.  In particular, consder his points:

  1. Iraq is not Vietnam — and we all hope it never will be.  Let me be clear that I do not disparage the commitment of those who served and sacrificed in Iraq, including the children of good friends and neighbors and my nephew.  Having said this, the losses are different by the order of 50-1; there was a draft; there was a widespread protest movement that disrupted much activity and which led to armed conflict and death; and I am just getting started.  Vietnam split the country in a way different from any war before or since.
  2. The energy spike is totally different.  It was much higher in real terms in the 70’s and it was sparked by OPEC’s intention to punish countries supporting Israel.  Energy was also a larger component in overall spending.  The current situation is different on all counts.
  3. Anyone comparing the current administration’s dip in the polls, even with the recent use of the "Impeachment" word, needs to do a real study of the effect of the Watergate hearings and Nixon’s resignation.  Maybe young people just do not realize how vulnerable everyone felt when the Commander-in-Chief was virtually powerless in the middle of the Cold War.  For a time, there was no Vice-President, since Agnew had also resigned.  We were paralyzed for months during the Watergate hearings and the activities of the special prosecutor.  It took a couple of healing years with Gerald Ford filling in for political stability to be regained.  This is nothing like Bush’s poll ratings, or Ken Lay, or anything like what we are seeing now.  It is not close.

Moving beyond the very superficial comparisons Tom makes, he should take a look at econonic growth, inflation, and interest rates during that era.  He is speculating (against the prevailing economic consensus) that these factors will destroy a currently strong economy.  That was not the case in the 70’s.

It is a very big prediction.  I would be much more interested in Tom’s viewpoint if he were to write a "compare and contrast" piece on the two eras.  It should be something significant and reflective, displaying the same level of scholarship that he shows in his book.

Conclusion:  Consumers of forecasts should be wary of facile historical comparisons.  Look for some depth of analysis and intellectual rigor.