Our Best Predictions: A Review

Last March, at the market bottom, we wrote a three-part series on why a bottom would not be recognized by most investors.

Investors would be misled on valuation.  The debate is playing out just as we forecast.

• David Rosenberg, the economist hero of the bears, continues to see the market as overvalued.  We have all been suckers.
• Eddy Elfenbein sees things as more balanced.

We predicted the wide disparity in methods, suggesting that backward-looking methods would fail.  The forward-looking methods continue to catch criticism. 

Investors would be misled on politics.  We suggested that the failure to deal with "troubled assets" would provide scope for criticism.  This was correct.

Investors would be misled on economics.  We accurately noted the consensus forecasts, much better than most thought at the time, and now proved to be accurate.

Our Current Take

Anyone who is a serious investor or trader should click through to read the old articles, but most will not.  Most people start with a viewpoint about market valuation, politics, and economics and stubbornly adhere to this viewpoint even when the evidence changes.

In the face of improving economic data, many focus on their political viewpoints rather than finding investments, a theme that we cover regularly.  It is an unfortunate fact that most people highlighting investment articles do not realize that this is an important theme.

In April, we described how this was a classic Wall of Worry.  This is also a good read, and one met with skepticism when we wrote it.

Many investors now worry that they have "missed the rally."  Here is something to consider.  The market is still 10% below the pre-Lehman levels.  This was a time when the market was expecting a recession, and some saw a deep one.

The situation is now different.  There is a massive stimulus effort, with more to come.  There are many problems, as we suggested.  It is no longer a question of  just "buying the market" but the story is not over.  There is still plenty of opportunity for those analyzing specific stocks and sectors.

Comments

[oldprof]

Mike -- I have to laugh at the idea that Rosenberg's replacements are a little more bullish. Anyone would be!

As to the question about asset allocation. I think you would be surprised at how little difference in performance there is between pundits with ostensibly different viewpoints.

My company provides different services, including client-specific asset allocation advice. Those clients were warned about housing problems, for example, several years ago. One program is basically long-only. Those investors make their own asset allocation decisions. Another program goes either long or short.

Unlike many others, I put up an investment posture every week, and it has changed with the times. While this may not be unique, it is unusual.

So I do not just go by market valuation. Having said this, I disagree with your statement that forward earnings lag in a market decline. Do you have more than one case in mind?

Thanks for a typically provocative comment.

Jeff

[Mike C]

A bit of an old response, but I just saw these today, and remembered this post, and I think they add just a bit of color, detail, and balance to any Rosenberg discussion.

http://www.ritholtz.com/blog/2009/12/when-economists-collide-%e2%80%93-part-ii/

http://bonddad.blogspot.com/2009/10/when-economists-collide.html

FWIW, in my view back in March, the market was technically oversold to a degree not reached in decades and bearish sentiment was off the charts. Just those 2 ingredients alone was enough to provide the fuel for a substantial rally like we've seen regardless of the "real" fundamental economic backdrop.

Seems one potential problem now is we have the reverse with the market technically overbought after a 9-month 60%+ rally, and now we are at bullish extremes ins sentiment.

I think the jury is still out on whether we are closer to the top here or just in the early to middle innings of a multi-year economic recovery and bull market. That said, December is historically positive so I expect a strong finish to the year to the upside.

I remain mostly invested with one finger on the sell trigger.

Jeff, just curious, and I'd really like to see you address this topic in a future blog post. What specific metrics either fundamental, valuation, technical, or sentiment would trigger you to either reduce/trim/sell/hedge overall equity market exposure. I think you have some valid points about forward earnings especially over shorter time frames like a year, but that said, history clearly shows the market will turn down substantially long before even the first sell-side analyst reduces either a top-down or bottoms-up estimate so forward earnings are not useful as a trigger to get defensive. I know Random Roger uses a break below the 200 DMA. I really would be sincerely interested in how you approach the sell side of the decision.

[oldprof]

John F -- You might want to check out this piece by Eddy Elfenbein.

http://www.crossingwallstreet.com/archives/2009/10/rosenberg_rewri.html

He has tracked this more carefully than I.

I have also had some corporate bond positions, and they have certainly worked well.

Jeff

[Dean]

Good post Jeff and congratulations on your many good calls. I just noted that the Dow was 10,800 pre Lehman. Why many investors did miss this rally, there were those of who listened to people like you. Perhaps I need to listen now and curtail my selling into this climb up the wall of worry.
PS Sorry I didn't dig into the links on your Olympics post to understand your perspective, my folly.

[JohnF]

Rosenberg has done just fine.

He has suggested people buy corporate bonds versus stocks. How has that investment done? I would guess quite well. Also, he had people weighted more towards Canada than US equities. Seen the Canadian dollar lately and Canadian Stocks? He's probably ahead on total return on that call.

His only call that hasn't been huge has been staying in treasuries. He recommended them when the yield hit 4%. He's still up on that call.

I read his research every day. He has certainly led people to buy the right sectors, even if he can't stomach it for himself.

His research is realistic and based on thorough research...

[VennData]

To paraphrase Adam Smith, Investors can remain irrational as long as they cam remain solvent.

[Brett]

If I were Rosenberg, I wouldn't be sleeping too well at night. He has been as tragically wrong as any professional can get. If I were able to make a small suggestion to him it would be to adapt the "John Mauldin" defense. After sitting out the rally from the 03 lows recommending disaster ahead, sometime in 06 Mr. Mauldin claimed "I didn't miss the rally, I chose to sit the rally out." Pure genius really.

[Mike C]

Good post, and kudos on the April wall of worry call

There is still plenty of opportunity for those analyzing specific stocks and sectors.

Maybe future posts here? Maybe time for a change of pace from market analysis and macro analysis. Might be instructive/useful to see some stock/sector analysis outside of the ETF model.