As part of my work I speak with smart people from differing backgrounds:
- Individual investors -- clients and potential clients;
- Business leaders -- colleagues on corporate boards;
- Leading economists and journalists -- both groups well-represented at the recent Kauffman Conference;
- Colleagues in the blogging world.
There is an interesting pattern. Most of them feel more confident about their personal circumstances, but they are worried about everything else. When it comes to the stock market, the fear is palpable.
Even the pros are struggling to get a handle on this market. Readers know that I love Art Cashin. A good friend gave me an autographed copy of his book. I have been reading his daily wisdom since I started in the business in 1987. He really does have the pulse of the NYSE floor. When Art says that the normal yardsticks are not working, we should all pay attention.
If Art and the NYSE traders find the market confusing, the rest of us are in good company!
There are two perspectives -- trading and investing -- with differing time frames. I explained this here, and I encourage everyone to read it as background.
The traders must deal with all of the issues Art Cashin raises. Our Felix model finds it all confusing, and has sent all of our 28 trading sectors to the penalty box. Felix realizes that traders should not press when confidence is low.
The investor perspective is more interesting. My email and comments suggest that the most helpful work I have done relates to explaining something called "the wall of worry."
When I first saw this term, I confess that it seemed rather silly. As an academic who began an investment career with some basic confidence in the efficient market hypothesis, I expected fresh information to be quickly reflected in market prices.
I soon learned that this was not true. Warren Buffett (one of my heroes, and we all wish him the best) put it well when he said, "I’d be a bum on the street with a tin cup if the markets were always efficient.”
This meant that an astute investor could beat the market, but it required better methods.
The single biggest source of investor profit relates to evaluating what many call "market fundamentals" and others call "headwinds."
A List of Worries
Here is a list of worries for your consideration:
- ETF liquidation doomsday scenario
- Flash crash -- and overall worries about market manipulation
- Bush-era tax cut expiration
- Collapse of the euro and/or European Union
- The Hindenburg Omen
- Increase in US budget deficits
- Ominous head-and-shoulders pattern in market averages
- Dow 5000
- Dow 2000
- Dow 1000
- The collapse of the US consumer
- The double-dip recession
- Sell in May
- Sell in October
- Sell, Mortimer, Sell (OK, I sneaked that one in for those who know).
- The BP spill
- Fear of Obama
- Weakness in the dollar
- Strength in the dollar
- Weakness in China's economy
- Strength in China, leading to higher rates
- Initial claims spiking to over 500K
- Initial claims falling, but results skewed by seasonality
- Shadow housing inventory
- Foreclosure robo signing
- Overstated and exaggerated corporate earnings
- Fed blunders -- QE II
- High frequency trading
- Worldwide collapse and deflation
- Worldwide hyperinflation
If some of these seem a bit outdated, you are reading carefully. The list is from December, 2010.
It is a good look back on the history of worries. Readers should note that worries and headwinds are not quantified. Anyone can deal in words and anecdotes. It requires some expertise to include data. Those of us who have been data-driven have beaten the anecdotal crew by a wide margin.
Let us turn from the old list to the most important issues raised by current market skeptics. Dick Green at Briefing.com examines the most important "bearish arguments to ignore."
Dick hits a number of themes that will be quite familiar to regular readers of "A Dash." Here is his list:
"The Bearish Arguments That Are Wrong
Three of the most persistent bearish arguments were highlighted in a recent article on a major financial web site.
The arguments are:
1) Market valuations as measured by Price/Earnings (P/E) multiples aren't low.
2) The 10-year Shiller P/E shows stocks overvalued.
3) Profit margins are high and using a "normal" profit margin shows stocks are overvalued."
I strongly urge readers to check out his article. He explains that these methods are backward-looking, do not reflect interest rates, and assume that margins will mean revert without any corresponding change in employment or gross revenue.
As I said -- arguments familiar to (and profitable for) readers of "A Dash."
A Final Thought
If you are an investor who is not mesmerized by fear, you will be able to join me in doing two things:
- Finding stocks that have strong anticipated earnings and cash flow.
- Finding stocks with strong dividend yield.
The Wall of Worry is a difficult concept to explain, and even tougher to appreciate in real time. The daily stories seem so tangible --- often augmented with TV video.
For a free education on this topic, you could dip into my archives.
For those in agreement on the economic theme and Europe, I like JP Morgan Chase (JPM), Caterpillar, Inc (CAT), Aflac (AFL), and Oracle (ORCL).
The dividend yield concept is more challenging, since I have an ever-changing roster of great dividend stocks where we sell calls to enhance the yield. Intel (INTC) and Abbot (ABT) are among the recent choices.