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« When is the Best Time to Invest? | Main | Weighing the Week Ahead: Interpreting Sentiment Indicators »

December 22, 2010

Comments

oldprof

scm -- I am delighted that you are separating your long-term policy concerns from your investing, and that you saw through the Hindenburg Omen. Because I interact with individual investors all of the time, I know that many were spooked by the HO, the head-and-shoulders pattern, the Aunt Minnie, and the Titanic. Very few people disagreed with the HO authors, and none of us got on CNBC! Teaching about methodology is not as interesting as a feature on a blind physicist turned market analyst.

Meanwhile, what if I told you that Hussman's "bad times to invest" had the same methodological flaws as the Hindenburg Omen? Meanwhile, it was the most popular article for weeks on Advisor Perspectives. It was picked up everywhere, including the current Mauldin piece. People who have not had a good course in research design, even very intelligent people, cannot see the error. It seems compelling.

There is a lot of this type of research in the financial community. I write about it all of the time. I use the Hindenburg Omen as an example because it is the easiest for people to understand, and it has a relatively short time frame. I have a category about reviewing research and pundits. So that is what I THINK I am doing. To check, I searched my site for Rosenberg. I mention him once or twice a year over the five-year history of the blog. Hussman is more like two or three times per year in the search. That is more natural, since I write about forward earnings and he uses some form of trailing earnings.

I plead Not Guilty:) I am an equal opportunity critic of flawed methods.

If things are still slow, feel free to fire away. And I agree with much of what you write...


Jeff

scm0330

Hi Jeff,

Thanks for your further reply. We've just about beaten this to death, but allow me a couple thoughts, and I'll look forward to your reply, if you have time:

1) You are mis-characterizing something I said, by implying that my investing decision making is clouded by my politics. That's not the case -- as I indicated, I do believe we have an untenable fiscal and monetary policy (do you disagree, and believe they are?). I think these policies are, in their aggregate, creating a favorable short-term environment for risk assets, but mostly for the wrong reasons -- e.g., liquidity, and credit reserve creation -- and not because sufficient numbers of people are going back to work and producing things of value. Fortunately for investors, companies are producing to meet overseas demand, and their lean cost structures are helping to maintain earnings growth. (I know you're a stickler for the data, and I realize that my broad-brush statements are just that, but this is the big picture as I understand it.) Longer-term, our debt profligacy will hurt us. At best, it’s a headwind against future growth, since so much of the spend is transfer payments and consumption, vs. investment in productive, long-lived assets. At worst, it’s barreling us toward a debt crisis. Throw a couple of trillion at the economy, and you’ll get some action. And we’re getting it. But debt matters, more than short-term deficits.

2) At an even further risk of mis-characterizing what you do, here's something I noticed. You seem to have a bone to pick with Rosenberg and Hussman, judging from how often you call them out. Let me take Rosie for a moment. Yes, it sure looks like he got the double dip call wrong, and yes, (maybe) he took a mild liberty with over-interpreting the ECRI index. But you get real personal with that, implying that Rosie had cost investors money if they'd been listening to him back in the summer. If Rosie were the only data point, I'd agree more, but I recall ISMs that were softening, no real letup in new jobless claims (and not much yet, still), and a precipitously falling stock market. In fact, Jeff, market averages were in the red as of 8/31. After the spring highs and subsequent retreat, all the market's gains have come in the last four months -- coincident, I might add, with the first signals from Bernanke that there'd be a QE2. So, big picture, you seem to want to hang a blown call onto Rosie, but he wasn't the only "indicator" out there at the time signaling caution. Is it possible that QE2 was a stick save for the market, I wonder...?

One more thing, then I'll shut up...not sure how intentionally you do this, but let's go back to the charts in your article. Ok, in my world, the double dip risk was very real (and the market action was telling us this. Unless the market has no anticipatory power, if it’s not going up...) The Hindenburg omen was not real, though. I mean, c'mon, no one had ever heard of the thing, and a person who spent literally one minute reading underneath a headline would've arrived at that same conclusion. But in teaching with examples, you present the two cases as similar in nature. You unconsciously suggest their equivalency to a reader. That has the effect of trivializing the first discussion, that of the double dip (and of Rosie), by mentioning it in the same breath as a bogus item, that of the H.O. I'm not sure how consciously you do this, but I've observed this technique elsewhere in your work.

Sorry for all the rambling. Quiet day at the office!

oldprof

Muckdog -- How could I have possibly missed these crucial market worries?

Thanks!!

Jeff

oldprof

scm wrote:

"You also offered an undifferentiated list of worries immediately following, lots of them falling toward the bogus category just by inspection. Your graphs following the list also illustrated the bogus form of worry."

You are welcome to your viewpoint about debt and the markets. I am trying to help, but you and other readers are certainly free to ignore if you wish.

Meanwhile, the quoted comment about my graphs is another matter. I cannot allow your inaccurate assertion to stand. If you have not been following the markets, so be it. Other casual readers should be informed about the difference.

The two graphs -- the double dip recession was the big market story for most of the year. Following the wrong interpretations of the ECRI promulgated by David Rosenberg and others was an expensive mistake for thousands of investors.

The Hindenburg Omen went viral after a feature by Zero Hedge. The story was picked up on CNBC in a feature, discussed by Art Cashin, and circulated everywhere by email. People who know nothing about how to do research found this compelling, just as they do the current Hussman piece which uses a similar methodology.

The only way you can see these as "bogus" is because you now know how it played out.

Meanwhile, at the time the stories were happening, when people were going wrong, I was explaining the problems. You might try going back to check out the links in my original story.

SCM -- you seem like a smart guy, but you need to check your facts a bit. Also, you are making one of the big mistakes I have warned about -- confusing your political opinions with your investment decisions.

I hope you will consider these ideas and keep reading.

Thanks,

Jeff

Muckdog .

I think you missed a few Wall Street Worries from 2010.

* Sandra Bullock being cheated on... ( and Eva Longoria).

* Miami Dolphins 1-6 at home, but 6-1 on the road.

* Lohan in jail!

* Lady GaGa's meat dress

* Bristol Palin - top 3 in Dancing with the Stars.

And the market went up anyway!

scm0330

Hi Jeff,

Yes, not to quibble, but in the outset of the article you indeed offered four categories of "worry." You also offered an undifferentiated list of worries immediately following, lots of them falling toward the bogus category just by inspection. Your graphs following the list also illustrated the bogus form of worry. I'm only a casual reader, I can't read your mind, and I probably get all your intended nuances, but I read the article on a holistic basis as one pointing out the typical folly of undue investment worry.

The debt-related concerns that I noted are tough to quantify to a stock-specific level. But then, lots and lots of analysis is tough to quantify to that level, due to the data lacking robustness. Modern markets haven't been around long enough, and they've morphed a lot, so durable data samples are elusive. A lot of what we get left with are probabilities, distributions, and tails -- or at least our estimates of all three and more, presented as educated guesses.

WRT to quantifying the risk that surrounds the debt problem, I think we're seeing it, somewhat, in real time -- it's in the diminished market multiple. Investors are cautious on the secular future, beyond whatever cyclical expansion we're having. The yoke of debt, whether it's preserving the claim of existing creditors to current sovereign deadbeats, or paying for further bailouts and stimulus, is a claim on future growth potential, and I think investors are discounting a slower-growth future. (How can they not, when the government of the world's largest economy is spending $3 for every $2 it takes in, its central bank is buying a large portion of the resulting deficit, and is the largest holder of governmental debt, and there is almost zero political will to stop the madness?)

The real interesting part will be when the true crisis phase of developed-world debt, ours and Japan's and Europe's, dawns on us. Right now, we're just warming up before the game -- I'm not sure we've even thrown out the first pitch. Maybe the teams are just now taking the field. (And yes, in the meantime I think investors can still make money, in a variety of assets.)

I am most fond of the quote attributed to Hemingway -- that a man goes broke slowly, then all at once.

Paul Nunes

Jeff; Tom Graff over at Real MOney has an outstanding post regarding Muni issues this afternoon. For those who don't know; Tom also wrote the blog Accrued Interest; Tom has many well written pieces describing how various facets of the fixed income markets operate; Have a great holiday weekend!

oldprof

scm0330 -- I am sure that you want to be fair in your observations. If you look again, I think you will see that I do indeed have four categories and invited people to suggest more. I write about the real economic risks nearly every week, emphasizing employment and housing. I have written several articles on the deficit issue, with a link at the top of the page.

Thanks for pointing out three threats you take seriously. One challenge is to try to quantify the worries and translate them into future earnings of the companies we might buy. Or to figure out where else to look for investments.

Let's take your public pension example. How should that affect a decision about buying stocks? Do we wait for some kind of "all clear"? Until more states imitate NJ? How would we measure progress?

Thanks again for your suggestions.

Jeff

scm0330

Jeff, I think in presenting a more-or-less undifferentiated list of "worries," you end up trivializing legitimiate risks to the economy, and to the market. With that preamble, I'd add "developed world sovereign debt," "municipal finances," and
"public sector pensions" to the worry list. All trace back to the same root condition -- namely, unaffordable debt obligations, and promises. If they prove affordable, it's because we've chosen to honor them at the cost of other destinations for our economy's human and financial capital. Choices count, and there's not much escaping this reality. In the meantime, I guess we'll (you'll) regard them as the functional equivalent of the Hindenburg Omen and the BP spill as threats to the system.

Paul Nunes

The Bond Vigilantes in General;
Collapse of Euro
Japan

jeff; well done

oldprof

Thanks, Brett. Good additions to the list!

Jeff

Brett Alexander

Jeff,

This was brilliant. Some of my favorites: "There is no volume." "The retail investor is dead, probably for a whole generation." Also, the on again, off again love affair with the Baltic Dry Index depending on what point of view it supports at the time.

The real highlight of the year, for me, was David Rosenberg essentially telling the ECRI guys that they don't know how to interpret their own proprietary indicator.

We now have Meredith Whitney trying so very hard to stay relevant predicting the Muni-Apocalypse.

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