Delusional Raging Bulls ?

This seems to be an ongoing sentiment debate we’ve been having for too long: How Bullish is the investor community really?  We’ve looked at this repeatedly (here and here most recently) over the past few months.

In Sore Winners, Barron’s Alan Abelson answers the quesion with one word: Very:

"What strikes us about the current investment scene is how defensive, even delusional, the raging bulls are. And despite rolling in the long green by grace of the big market year, what a bunch of sore winners they are, insistent that everyone else is bearish and only they, brave souls, have the courage to be optimistic.

What hokum! For the fact is everyone’s bearish except the mutual funds (whose motto is "cash is trash") and the hedge funds and the private equity funds, traders of every stripe including the racy types who trade futures and options (the Market Vane and Consensus Index surveys: both 70% or higher bullish), Joe Doaks and Jane Q. Public, investment advisers (Investors Intelligence: 56.5% bulls, 19.6% bears) and brokerage house strategists (for whom "sell" is a four-letter word). Did we leave out anyone?-oh yes, and the occasional tourist from Mars.

If everybody’s so darn bearish, pray tell, who has been buying stocks like there’s no tomorrow the past couple of months? Or are they a new breed of masochistic bears that gets their kicks from buying stocks because they just know the market is doomed to tank?

All of which gives us a strong sensation of déjà vu and, more particularly, why this glorious new year of 2007 seems so much like the not-so-glorious year of 2000. As we remember, 2000 began amid enormous euphoria, with the stock market headed for the moon. While the rationalizations at the time from the good-cheer incorrigibles of why the market was neither pricey or risky differed from the current versions of why the market is, if anything, undervalued, the reasoning is as flawed now as it was then.

As we also remember, 2000 ended in tears and tears that kept flowing for a long couple of years. So keep a generous store of hankies at the ready and hope the denouement to the current manic mood doesn’t do quite as much damage to your psyches, let alone your pocketbooks. We were about to say, Happy New Year!, but maybe we’ll wait for a more propitious juxtaposition to do so."

That first paragraph is a keeper . . . Say whay you might about Abelson — the boy can sure write.

>

Source:
Sore Winners
ALAN ABELSON
UP AND DOWN WALL STREET 
MONDAY, JANUARY 1, 2007   
http://online.barrons.com/article/SB116744038394263068.html

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What's been said:

Discussions found on the web:
  1. Gary commented on Dec 30

    Richard Russell made a good point in Fridays comments on market valuations The price to dividend ratio in 1929 was 35. In Aug of 87 it was a hefty 38. Currently the bulls would have everyone believe that the market is very undervalued. So where is the price to dividend ratio now? drumroll please…54…Tada. Earnings can be manipulated by accountants but dividends are what they are, they can’t be manipulated. The market undervalued? I think not. Overvalued markets are not good long term investments. I don’t think very many people learned their lesson in 2000.

  2. Zephyr commented on Dec 30

    Dividends are largely arbitrary, as long as the company has the cash. Few distribute a meaningful portion of their income so dividends are a weak measure of profits.

    I think we are poised for a decline, but we are not high enough for a collapse.

    2006 feels more like 1998 than 2000.

    Will we have the needed correction in 2007? or will the market climb this wall of worry, overheating to a frenzied peak and collapse in 2008, in a repeat of 2000?

  3. Anup commented on Dec 30

    Barry: Great commentary in Mauldin’s newsletter. Happy New Year!

  4. ~ Nona commented on Dec 30

    Zephyr,welcome back!

    Haven’t seen comments from you for a long time. I always enjoy reading them.

  5. Bob A commented on Dec 30

    “2000 began amid enormous euphoria, with the stock market headed for the moon.”…

    …and Mr. ‘Buy High’ Mad Money (aka ‘the idiot’ in my house) was penning drivel very much like his current four part ‘Buy the Dow’ series…

  6. Zephyr commented on Dec 30

    Mad Money Jim Cramer is an odd duck. However, at the beginning of this year he predicted that the Dow would close the year at 12,460 – it closed at 12,463. So the “idiot” was off by $3.

  7. Wcw commented on Dec 30

    Comment spam?

    Oddly, this one set off Mr. Ritholtz’s comment spam detectors. Oh, well: here it is, in response to the substance and comments at the original post.

    In re dividends, the quick answer is: sorry, no. These days corporations return cash to sharehold

  8. wcw commented on Dec 30

    Hey, BR — your spam-protection service is giving me a false positive. Anyone interested in my little missive may see it on my own blog.

    Silly antispambot.

  9. Zephyr commented on Dec 30

    wcw, I think your blog comments make good sense. I am still long as well – but by less than before.

  10. V L commented on Dec 30

    No matter how I look at 2007, I see a top in stocks. There are three main (simplified) possible outcomes for the US economy in 2007.

    1. A recession => stock market sell off (somewhat similar to 2000)
    2. The economy will re-accelerate => increased inflationary pressures => Fed rate hikes => stock market sell off (stocks are priced for a rate cut)
    3. Fairy tales goldilocks economy slow down (it is still a slow down no matter how you call it) => lower EPS (unless USD depreciates but USD depreciation will bring back inflation and rate hikes) => stocks overvalued => gradual stock market sell off

    There will be a top in stocks in 2007.

    Happy New Year Everybody!

    P.S. Special thanks to Alan Greenspan for his great contributions to the market top of 2000 and 2007. Happy New Year Alan Greenspan!
    “If you had a cent for every time Alan Greenspan made a mistake. You’d owe him money.”

  11. doug commented on Dec 30

    Hi,
    Regarding sentiment… the II and MarketVane surveys are at the bullish extremes and have been for a number of weeks. However, the AAII and Birinyi Blog surveys are still showing bearish skepticism about the current market. Also, the Short Interest ratio is still very high and near to a bearish extreme. So I think there is a mix sentiment still in the market.
    Doug

  12. rebound commented on Dec 30

    wcw,

    Wow, you were determined to get that post up!

    I’d try another brief post and see if it is blocked.

    If it is, you should email thebigpicture@optonline.net and Barry will likely clear it up.

    Given that it is a holiday weekend, the blog is probably on autopilot.

  13. Aussie commented on Dec 30

    Barry,

    I remember you harping on how history shows that the stock market performed badly after the Fed stopped raising rates.

    The Fed stopped raising rates and the Dow is up 16% this year. So much for looking at history as a guide.

    If history can be a guide, then the Forbes 400 will be full of historians.

    You should revisit more of your past posts to point out how your themes and forecasts perform in real life.
    ~~~
    BR:
    That is correct: In the past, market’s have performed poorly at the end of the Fed tightening cycles. And they actually did perform poorly since the end of the rate cuts — until July 2006.

    History is never a guarantee — what it can do for us is provide what the probabilities are relative to that ONE single element (i.e., Fed cycles and markets). Major changes or newly introduced elements can and will alter the odds relative to historical precedents.

    As we have discussed previously, there is rarely a single historical factor that will always be determinative for all markets at all times (See this for more details: Single vs. Multiple Variable Analysis in Market Forecasts).

    As we have said before, one should never rely on but ONE single factor — there are too many variables (some random, some predictable) that will impact what a market does.

    For example — some people have given credit for the July to present rally on corporate profits. But that doesn’t explain why the market was ho hum for the 18 months of high profitability prior to July ’06.

    To me, the differentiating factor was 1) We were deeply oversold after the May correction, and 2) the radical price drop in Energy, tracing back to the change in the GSCI, reducing their Gasoline/energy exposure in half.

    I assume you don’t believe we should ignore what has happened historically with markets — the challenge is to contextualize them, and recognize the variables that are new and /or changing versus prior periods . . .

  14. Bob A commented on Dec 30

    ‘the idiot’ made thousands of predictions during 2006. about half of them came out right. that’s hardly remarkable. he’s still an idiot.

  15. M.Z. Forrest commented on Dec 30

    wcw,

    I would speculate your post was considered spam due to the 5 hyperlinks. Most blogs limit hyperlinks to 3.

  16. Zephyr commented on Dec 31

    Bob A, I have no idea how well Cramer’s many individual predictions have turned out. But I did see that his overall scenario for the market came true.

    He is odd, but I find it hard to call someone an idiot when their analysis has enabled them to make so much money as an investor.

    Have yours been better?

  17. muckdog commented on Dec 31

    The market seems a little toppy as it did from April-May, just due to the negative divergences in the market. Sentiment is wildly bullish. January is a month where we have historically seen some volatility. So the table is set for some sort of pullback.

    Whether or not the correction will morph into a bear market or just restore health to the bull market is tough to forecast.

    And first we have to actually have a correction. I’ve expected one since late summer/early fall, so I’ve been wrong about that.

  18. Bill commented on Dec 31

    There’s just that pesky problem of lack of mutual fund inflows by Main Street investor who are about 180 opposite in sentiment to where they were in 2000. Oh, and what about Put/Call Ratios or the Rydex Ratio, again mirror opposites of the year 2000 sentimentwise. Comparing today to the year 2000 shows a complete and utter misunderstanding of market sentiment.

    It seems the Abelson’s theory is that the market rising is proof enough that there are too many bulls. So, I guess every rally is the product of irrational exuberance… Total nonsense!

    FWIW, I expect we are due for an intermediate-term pullback maybe a few weeks to a few months of correction back to say the 200 day moving average. But anything beyond that is just the pipe dreams of dellusional bears.

  19. tj & the bear commented on Dec 31

    Dividends are largely arbitrary, as long as the company has the cash. Few distribute a meaningful portion of their income so dividends are a weak measure of profits.

    Zephyr, you’re making the case for the market being grossly overvalued.

    It’s fundamental that the broad market cannot grow faster than the economy itself. Therefore most established publicly traded companies must offer a dividend to compete favorably against other investments. The fact that dividends are at insane lows just shows that share prices are irrationally high.

  20. tj & the bear commented on Dec 31

    Dividends are largely arbitrary, as long as the company has the cash. Few distribute a meaningful portion of their income so dividends are a weak measure of profits.

    Zephyr, you’re making the case for the market being grossly overvalued.

    It’s fundamental that the broad market cannot grow faster than the economy itself. Therefore most established publicly traded companies must offer a dividend to compete favorably against other investments. The fact that dividends are at insane lows just shows that share prices are irrationally high.

  21. tj & the bear commented on Dec 31

    Dividends are largely arbitrary, as long as the company has the cash. Few distribute a meaningful portion of their income so dividends are a weak measure of profits.

    Zephyr, you’re making the case for the market being grossly overvalued.

    It’s fundamental that the broad market cannot grow faster than the economy itself. Therefore most established publicly traded companies must offer a dividend to compete favorably against other investments. The fact that dividends are at insane lows just shows that share prices are irrationally high.

  22. tj & the bear commented on Dec 31

    Dividends are largely arbitrary, as long as the company has the cash. Few distribute a meaningful portion of their income so dividends are a weak measure of profits.

    Zephyr, you’re making the case for the market being grossly overvalued.

    It’s fundamental that the broad market cannot grow faster than the economy itself. Therefore most established publicly traded companies must offer a dividend to compete favorably against other investments. The fact that dividends are at insane lows just shows that share prices are irrationally high.

  23. m3 commented on Dec 31

    It’s fundamental that the broad market cannot grow faster than the economy itself.

    Therefore most established publicly traded companies must offer a dividend to compete favorably against other investments.

    The fact that dividends are at insane lows just shows that share prices are irrationally high.

    ?

    *scratches my head*

    i don’t get this. the economy has been slowing down, yet the market is up double digits. the market and the economy are not always tied together. the disconnect is even greater b/c of credit growth.

    also, the vast majority of people buy stocks for capital appreciation, not dividends/income. people have no trouble buying dividend-less stocks like GOOG or even berkshire hathaway.

    the s&p is at around 17 times earnings. that is not irrationally high by any stretch of the imagination, especially with double digit earnings growth. that’s a 5.9% earnings yield, compared with the 10 year at 4.7%. it ain’t a bargain, but it ain’t half bad…

  24. Philippe commented on Dec 31

    The investment universe seems quite unidimensional stock market only?
    Please look at the world bond markets they are now increasing the risk premium in holding stocks.
    Are the genuine stock holders so rich that they can afford to forego the value of dividends against future capital appreciation at this market height ?
    Are they so rich that they are willing to subsidise through their purchases of stocks the insiders sales.
    Strange enough but many banks had foreseen this upwards path in the equity market
    HSBC market strategist was recommending to overweight the US market as of September this year meanwhile their economist was broadcasting a US recession in 2007..
    Credit suisse was doing the same inviting the swiss market stockholders to switch to the US market as of september/october this year.
    Those are names associated to a deep, deep knowledge of the bond markets and risk premia stock markets /Bonds.THESE MARKETS HAVE NOT BEEN BUILT WITHOUT MANY INSIDERS.
    What if the bond market would be now rehauled to where it should have beeen since long? and this shift from bonds to stocks a temporary transit?
    The big picture has always been an interaction between several components of the economy, current account financing needs, interest rates,savings, investments,stock markets are TO BE a by product of these balances and not a cause for employment real income….
    Economy will seem very soon to lag behind the stocks markets worldwide.Do not confuse cause and effects.

  25. Barry Ritholtz commented on Dec 31

    Aussie:

    That is correct: In the past, market’s have performed poorly at the end of the Fed tightening cycles. And they actually did perform poorly since the end of the rate cuts — until July 2006.

    History is never a guarantee — what it can do for us is provide what the probabilities are relative to that ONE single element (i.e., Fed cycles and markets). Major changes or newly introduced elements can and will alter the odds relative to historical precedents.

    As we have discussed previously, there is rarely a single historical factor that will always be determinative for all markets at all times (See this for more details: Single vs. Multiple Variable Analysis in Market Forecasts).

    As we have said before, one should never rely on but ONE single factor — there are too many variables (some random, some predictable) that will impact what a market does.

    For example — some people have given credit for the July to present rally on corporate profits. But that doesn’t explain why the market was ho hum for the 18 months of high profitability prior to July ’06.

    To me, the differentiating factor was 1) We were deeply oversold after the May correction, and 2) the radical price drop in Energy, tracing back to the change in the GSCI, reducing their Gasoline/energy exposure in half.

    I assume you don’t believe we should ignore what has happened historically with markets — the challenge is to contextualize them, and recognize the variables that are new and /or changing versus prior periods . . .

  26. alexd commented on Dec 31

    First off on a technical basis the NASDAQ looks very dicey.

    The dividend argument is too simplistic. Stock buybacks may be seen as supportive of price. If I were an executive holding large amounts of stock options where would I benefit? Am I being paid dividends on those options? Or is the actual price of the stock’s perceived worth being lowered by the distribution of those dividends.

    I am of the opinion that in many companies personal greed has repeatedly trumped working for the benefit of the shareholders. Ever notice that the companies that are most beneficial (as a stated policy) to shareholders. Have a tendency to do what is best for the company. They seem to want to invest in themselves for reasons of avoiding taxation and that they firmly believe that their own best interests will be served by the true growth of their own company. Anyone here forget that the dividend at BK.A is measured in cents? Or that the head of the company is a major stockholder? I suspect option holders have a much shorter economic view than W. Buffet, but they both seek price appreciation of the companies stock.

    Cherche la moola!

    Cramer: If he called the market that close he is more accurate than anyone here. At least for that call. He made himself rich. He has made some decent general calls on the market and in some ways espouses aspects of value investing. At least in the way he says that if a stock goes down and there is no change in the story that made you buy your initial investment then load up the truck. He also encourages thinking and many of his investing rules have validity. He can be annoying, but has the decency and forethought to let us read a synopsis of the show. He gives money to charity. He likes children and believes that educating the younger generation and the people is a good idea.

    Okay for the person who complains that he is right only 50% of the time. You can make a lot of $ off being right one third of the time. If you handle your money well. If I have three bets and I make my maxium loss R (which is a set amount at the time), then I have to have a system where if I loose on two bad bets (2r) then the likelihood is high that I can make at least 2r on my third bet to break even or preferably more. That is assuming that all things are equal. If I increase the dollars in the bets that are working in a manner that tends to work so much the better. If I have a system that is right 70% of the time but bet excessively on the losers I can still have a rough time. I also need to plan ahead to have the flexibility in terms of cash management to survive a string of bad events.

    It’s like finding a spouse. You can date a lot of people with mixed results. But at the end of that dating you find someone where staying together is mutually beneficial and makes both of you better, are you a loser?

    Let’s see 7 bad affairs and one that makes you happy for the rest of your life?

    In the same way the idea is to increase your wealth not make a statistical boast.
    Now don’t get me wrong. I am not saying that there is anything wrong with being right but rather it is just one part of the total picture.

    Who the hell cares if the market is going up or down! How much do I bet and on what?

    Even in a bear market there are companies and investments galore how do we bet?

    I want someone to give me a running play on the odds of markets going or down, same for interest rates.

    By the way the ever-advancing numbers of middle class people in the world is quantitatevly different from what occurred one century ago. Not human nature but rather the lifestyles and view of possibilities of vast numbers of people. The way they communicate is now different. The rate of change is increasing. The trick is to figure out what changes and what remains the same.

    All this is easy to say, much harder to do, so I will rely on your inputs to improve my ideas and attitudes.

    Happy New Millennium! (We are still at the beginning! :o))

  27. Bob A commented on Dec 31

    Dear Zephyr. Never argue with idiots. Idiot is an entirely subjective term. One man’s idiot is almost always another man’s saint. One should not be reluctant to share their view of what an idiot is just because it might offend someone who has the opposite view. Especially if the intent is to alert the uniformed and naive to dangers of listening to an idiot who masquerades as and is widely promoted as a savant. The person in question, if he was a savant, would be an idiot savant. Don’t be afraid to call me an idiot if you think that’s what I am. Happy New Year.

  28. tj & the bear commented on Dec 31

    also, the vast majority of people buy stocks for capital appreciation, not dividends/income.

    m3, that’s only a recent phenomenon. Try looking back at the markets pre-Greenspan (i.e., before the liquidity pumps were turned on for every market hiccup).

  29. tj & the bear commented on Dec 31

    also, the vast majority of people buy stocks for capital appreciation, not dividends/income.

    m3, that’s only a recent phenomenon. Try looking back at the markets pre-Greenspan (i.e., before the liquidity pumps were turned on for every market hiccup).

  30. tj & the bear commented on Dec 31

    also, the vast majority of people buy stocks for capital appreciation, not dividends/income.

    m3, that’s only a recent phenomenon. Try looking back at the markets pre-Greenspan (i.e., before the liquidity pumps were turned on for every market hiccup).

  31. tj & the bear commented on Dec 31

    also, the vast majority of people buy stocks for capital appreciation, not dividends/income.

    m3, that’s only a recent phenomenon. Try looking back at the markets pre-Greenspan (i.e., before the liquidity pumps were turned on for every market hiccup).

  32. Gary commented on Jan 1

    The current market action would suggest that the prevailing sentiment is wildly bullish. The market is in the 6th upleg since the bottom in Oct. 02. The trend has significantly accelerated into a parabolic rise. These kind of advances always collapse. This looks like typical topping action created by a long bull market. All fear has been washed out. This is exactly the kind of action that leads to a severe decline. You can bet that the smart money wants nothing to do with a parabolic advance and is currently selling into this rally. The smart money will be buying only after the coming decline has run its course. Greed is a tough emotion to control. But then again I suppose overcoming fear when the time is right will be even harder. Although it will be easier if I haven’t watched most of my profits from the last 4 years disappear. “We attempt to be fearful when others are greedy and greedy only when others are fearful” Warren Buffett

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