Be Your Own Guru
Well, in case nobody noticed, U.S. equity markets "finally" suffered their third straight declining year since the Great Depression. Statistically, that wasn't supposed to happen. Everybody knows markets "never" decline for three years in a row.
Surprise! We just made history! That is if we judge history since the end of World War II. I am always fascinated by peoples' egocentricity manifested in historical shortsightedness.
(Mark Phillips wrote an excellent article on the "since WWII" blathering of analysts and the financial media that talks about the fallacy of statistical history. You can find it here: http://www.optioninvestor.com/page/oin/education/traders/2002/12-30.html
I hate to keep harping on this, but for the sake of the new readers I'll repeat it again. We are in a bear market - a bear market fostered by the greatest inflationist bull market the world has ever seen. U.S markets have witnessed the most speculative bubble in history; greater than the South Seas Bubble; greater than the Tulip Bubble. We're not just talking about since WWI, the Great Depression, or "turn of the last century". We're talking over the last nearly 400 years of economic history.
But one thing is for sure. EVERY bubble pops. And what typically accompanies the popping is a correction of equal magnitude to that of the bubble in the first place. In other words, with the spectacular bull will likely result a spectacular bear.
I personally believe that the bear has yet to run its course. Running its course would include the return of significant dividend and earnings yields. Bear market bottoms have happened in the past when average dividend yields hit 6-7% and P/E ratios are single digits of value. With the Dow's dividend yielding less 2% and real P/E ratios well over 30, we aint there yet. That is why it is so incredible to me that all the gurus are predominantly bullish. Abbey Joseph Cohen sees a Dow at 10,800 by year-end and Ed Yardeni sees a Dow of 10,500.
Based on what? Don't get me wrong, I'm no guru either and don't ever want to referred to as such. They don't exist because eventually, they are wrong. Such is the case, I believe with "Gurus de jour" trotted out on the covers of Barron's, or paraded on the guest interviews during financial media circus hour. I shake my head in amazement as Rukeyser and his elves predict an upturn in the market this year after being dead wrong over the last three years.
Again, based on what? Mostly, the answer is based on the theory that lightning never strikes twice in the same place. Never is a pretty strong word. While it isn't probable that lightning will strike the same place twice, it is possible. It is also possible that the markets could be down in 2003 for the fourth year in a row.
The trouble with analysts and gurus is that most believe we will not suffer a fourth declining year because, statistically we haven't done it since the 1929-1932 crash. With thousands of years of economic history and a score of bubbles to review that always ended in correction to boot, isn't looking back to just '29-'32 a bit short sighted? "History" for most people is that which happened in their lifetimes. Thus if we haven't seen it in our lifetimes, we tend to think of it as "improbable". But "improbable" still happens.
Thus, when I hear most analysts predicting a recovery in equities for 2003 based on recent (since The Great Depression) history that says markets never suffer three down years let alone a fourth, I feel pretty certain in a contrarian way that they will be wrong, surprised and humiliated for, well, their lack of humility
I always hearken back to the quotes of great financial minds and timeless principles that never go out of style. As Scott McNeely of Sun Micro noted back in 2000, "If they didn't see the cliff coming, how do they know when they've hit the bottom?" The short and simple answer is that they don't know.
Let me offer my also simple thoughts on when they will know. They'll know when CNBC is off the air for lack of viewers; when headlines reading, "Investors stayed the course" are replaced by, "Equities dead, never to return again"; when investors pull the plug and wouldn't want to touch stocks with a 10-foot pole, much the same way in which nobody would touch gold with that same pole last year; when cash on cash returns (dividends) are compelling compared to anything else available.
Until then, the hopeful will suffer at the hands of "The Great Humiliator". What is TGH? It's a description of the market's job as coined by Ken Fisher, money manager and regular Forbes columnist - to humiliate as many people as possible in the shortest amount of time. Simply stated, the majority is often wrong and the markets will see to that since not everyone can be right at the same time.
Summarized: Place your bets on the contrarian. Expect the herd to be wrong. Be your own guru by doing what nobody else is doing.
There was no Santa Claus Rally, there was no late 2002 recovery, nor was there recovery in 2001 or 2000. I wonder how those who dogmatically made those predictions can keep making them in a confirmed secular bear market. I marvel at their consistent wrongness. What the analysts really lack is the ability to do good analysis. They evade the reality of an inflationist Fed, the popping of the equity bubble, the rising of the housing bubble, the heavily debt-burdened consumer, the fiat dollar, worldwide production overcapacity, the Chinese production powerhouse, and the shrinking dollar. Instead, they rely on a statistic to replace the analysis.
Maybe they mean well (or maybe they are just interested in management fees and commissions earned from asset gathering), but how can we trust the judgment of consistently wrong people? Whether on purpose or accidental, we must conclude their judgment is wrong and seek to avoid making the same mistakes that they do.
Folks, if we are seeking expert advice to help us buy fine gemstones, we don't give our money to a brick maker!
OK, I'll get off the soapbox, which is a good thing because I go on about this for a novels worth of reading. But it also means I'm our of writing space for today, and I had originally intended to offer my silly forecasts for 2003. They are so absurd, nobody would believe them anyway!
Alright, well, if we want to hear the absurd, I'll start that series in this column on Thursday of next week. We'll get to what Fundamentals Guy thinks of stocks, bonds, commodities, inflation, the dollar, and how to profit from a huge wave of change born of financial to hard asset conversion.
Happy New Year and best wishes for a prosperous 2003 to each and every one of you. Think independently and be your own guru!