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The sentiment debate continues: The WSJ (free) looked over the full BW list of strategists, and determined that the "consensus outlook for the U.S. stock market in
2007 reads like a Southern California weather report: sunny and mild,
with barely a chance of clouds."
Even the perspective of modest growth seems to be getting misinterpeted: Coming off of a year that saw 2H essentially going straight up, an 8% forecast for 2007 is not what i call excessively bearish. (See our prior discussions Sentiment? Depends on who you ask and Signs of a Market Bottom?).
Here’s the overview:
"In a recent Russell Investment Group survey of 87
money managers, 86% said they expected stocks to rise in 2007, and just
12% said they expected the market to fall. Nearly a third expects
stocks to rise 10% or more, while only 1% expects a 10% decline.
"Underpinning managers’ confidence is a growing conviction the Federal
Reserve Board has achieved a soft landing for the U.S. economy," wrote
Russell chief portfolio strategist Randy Lert.In a much smaller survey of a dozen strategists this
week, The Wall Street Journal Online heard that same belief repeated
over and over again. So powerful is the sentiment that many of last
year’s pessimists have capitulated, including Richard Bernstein,
Merrill Lynch’s famously bearish strategist, who recently forecast an
11% gain in the S&P 500 next year.But Mr. Bernstein and a few other strategists —
including Goldman Sachs’ Abby Joseph Cohen, who describes the market
environment as "reasonably pleasant" — warn that volatility may return
to the market next year after a long, blissful period of complacency.
That could set the stage for a less-pleasant 2008. (emphasis)
In descending order from the most-bullish to the
least-bullish (and you’ll notice there’s not much difference between
the two, unlike last year’s survey),
I am the bottom of the barrel.
Check out the full list — and tell me if you think it is a bearish group view . . .
Source:
The Outlook for 2007: ‘Reasonably Pleasant’
Strategists See Modest Stock Gains
And Soft Landing for the Economy
December 22, 2006
http://online.wsj.com/article/SB116671139892256725.html
The bears have seemingly gone into hibernation this winter. Bernstein almost always gets the macro right and I read some of the specifics of his position. He’s not terribly bullish but it appears he wants to keep his job. Wasn’t it Clough to Merrill ushered to the door for being a bear in 2000? Nary a one with a 10% correction. Isn’t this the longest time since Genghis Kahn’s reign that we haven’t had a 10% correction?
Alot of fancy schamcy derivatives strategies keeping volatility low? Or are we seeing people buy portfolio insurance? Anyone look at the COT data recently? Now, what was were people doing in 1987? Buying portfolio insurance? A degree of invincibility? Oh, and what is next year? 20000000……..7? DOH!
GET IN MY BELLY!
It is amazing that there arent any bears out there. Even during the bubble of the late 90s there were some bears. I wonder if there is any data about what happened when the strategists were so bullish.
As a contrarian I am becoming more convinced that something bad is going to happen.
It seems pretty risky to bet against the unholy trinity (wall street, a corrupt treasury secretary, and inflationary fed). I think that explains the confident (all knowing) wall street sentiment. There will be days like today specifically set aside to intice shorts, bears, and other fools into the trap.
The consensus currently appears to be quite strong for core CPI diminishing to around 2% and GDP growth around 2.5%, i.e. growth in nominal GDP of around 4.5%. That strikes me as pretty much where we are now, and probably a bit hotter than the debt markets are pricing in and towards the high end of what the fed wants to see.
Assuming the calls for around 10% gains are based on earnings growth of roughly the same magnitude, these forecasts also imply that corporate profit margins will continue to expand as a proportion of GDP. Given that margins are already at or near historic levels, and it’s arithmetically impossible for profits to grow faster than nominal GDP forever, the consensus hardly seems bearish.
These surveys are loaded with too many long-only guys and sell siders for my taste.
How about Iceland getting its credit rating cut and potentially having to push interest rates to 16% to prevent capital flight? No need to worry about hedgies getting spooked and unwinding out of that high yielding currency and creating havoc?
Nope. Nothing to worry about. Equities deserve a lower risk premium and fatter multiples on slower growing earnings at peak margins.
Okie Dokie.
People forget that a slowing GDP can and has coincided with a strong stock market (e.g. 1983, 1986, 1989, 1995, and 1989.) Yes — THIS is a variant view!
Bears continue to miss one of the biggest forces effecting stocks and the economy going forward…THE FLAT WORLD (economy). Emerging economys are maturing, and massive new middle classes (read: consumers) will earn and spend. The dollar will not collapse, as those countries will contine to invest their $$’s here. The biggest challenge we face is “re-tooling” our workforce to compete in this new world, and (yes) tech led revolution. This will destroy inflation, and generate a positive sloped yield curve and 2 strong years in stocks. Liquidity, liquidity, liquidity!
There will also be a DRAMATIC drop in the number of hedge funds.
Note that all of your examples took place in the early stages of an (18 year long) secular Bull market, as interest rates and inflation came way way down from extremely elevated levels.
This go round, we are in a cyclical bull within a broader secular Bear market, and interest rates are coming up off of extremely low levels.
“This go round, we are in a cyclical bull within a broader secular Bear market, and interest rates are coming up off of extremely low levels.”
With much due respect (and it is due), that is your opinion/view from your (bearish) perch. I don’t expect long rates to move up much at all…in fact short term rates will fall by 50%, and chase the 5% money market squatters to more attractive alternatives (stocks!). Prime rate will fall to 6%.
Run, don’t walk to read Tony Crescenzi’s piece, “Top Supporting Factors for 2007”.
Peace
~~~
BR To quote The Daily Show’s Rob Corddry: “How does one report the facts in an unbiased way when the facts themselves are biased?”
Fred – Be careful what you wish for. In order for s/t rates to drop by 50% (2.75%, 11 cuts @.25%!) GDP growth would almost certainly have to turn negative, and profits fall off a cliff with it. At that point, expect the “money market squatters” to find greener pastures elsewhere and flee the US peso, and congress to start making some truly nasty protectionist noise. Ugh.
Completely OT, but … whoa.
Cramer blows the lid on hedge fund manipulation:
http://tinyurl.com/yxluuz
Barry,
Thank you for a great year of content on your blog!
If you ever again become semi-famous as “the most-bearish” – and people are howling, you should simply state, “First and foremost, I reserve the right to be incorrect. If I was to do otherwise, I would be unable to enter into trades, further my education, or make money.”
My Christmas wish list for next year, from Santa Barry Ritholtz, includes the the following:
– John Mauldin has an “Outside the Box” e-letter where he publishes outlooks which don’t jive with his point of view. It would be fantastic if you posted something like “Here is a potential trade opportunity developing in stock or sector X. … and I have provided a link to a respected blog which is recommending taking the opposite position.” Some additional blog content on potential trades would be a good counterbalance to the macro-economic reporting of how markets are not heeding the fundamentals. It could be a good sweet and sour combo meal.
– I would enjoy an educational series on the scale and inner workings of the derivatives markets. (Not the mom and pop variety, like puts and calls, and not a sermon on utilization of the Greeks.) A fundamental understanding the mechanics and flow of these massive and poorly understood markets could help shed some light on the macro economic scene … given there are hundreds of trillions of dollars involved. Understanding the massive derivatives market would help us develop a better understanding the “Big Picture”.
– More posts on the phenomenon of ever decreasing volatility. Root cause analysis. The ramifications are huge if it continues. The ramifications are huge if it does not continue.
– Consider taking a serious trek over to the PBS Nightly Business Review. Your unique skill set as an educator, a columnist, an investigative blogger, and a trader might nicely mesh with such a quality program. Other appearances on flashy shows might be good short term trades, but contributions to PBS & the NBR might be a good long term investment.
– More links to YouTube or to broadcaster web site content where you are the guest speaker. Maybe you could stipulate that in order to appear on these shows, they must agree to alloy you to Tivo or PVR your appearances so you can post them on your humble blog. My my PVR is never set up to catch you. Clicking on a link to see your Videos is a very nice time saver and feature.
– More B.R. video content would be good, but please don’t fall into the blog trap of easy filler with music videos from YouTube. Your CD recommendations are great, but I’m seeing more and more music video “filler” posts on other political, economic, and financial blogs which detract quite heavily from the focus, experience, and subject matter. Your quality to quantity ratio is very well balanced. No need to go over to the dark side.
Have a great new year!
I see tonight on Kudlow that Roubini has gone to 1% 4th quarter GDP rather than his previous 0%.
That’s giving a reasonable nod to an economy that turns out to be stronger and slower to respond to macro events than he’d otherwise expected…
The next 90 days will be possibly the most interesting 90 days since the early 1980s.
I would have to agree with Barry. We are in a secular bear market. It’s been 7 years since the markets topped. The Naz is still down by more than 50%, the S&P still underwater by almost 10%, yes the Dow made a nominal new high but only after the Fed printed enough money to devalue the dollar by 30%. This doesn’t sound like any bull market I’ve ever heard of. On top of that I think every bear market in history has lasted roughly 1/3 the time of the preceding bull. So far the bear has only lasted 2 years. I bet the Japanese thought the bear was done in 93 also but they still had a ways to go or Jan 73 if you like everyone was celebrating the new bull market. I don’t see how the Fed can keep all the liquidity they’ve created from finding it’s way into commodities just like the 70’s & 80″s. Unless they can find a way to control inflation I suspect we will end up with the same result, stagflation. Yes the price of oil is down from this summer but since 99 its still up 600%. BTW the liquidity just flowed out of oil and into grains. Its kind of like the little dutch boy with his finger in the dike.
Disagree Electric, Roubini’s theory is based on time. So GDP is 1.5% this quarter and 0% in Q1 of 2007. Sounds about right in a fixed universe. Especially as growth is revised downward a tad in Q3.
Remember, Consumption is the last thing to go. With Industrial Production(December is going to be QUITE the drop) and FixedRes decreasing signifigently now, meaning consumers have to spend that much more to break even with growth and annualized, growth doesn’t always equal what you expect.
It could actually be -.6 in Q4 2006 and then 3% in Q1 2007.
You cannot reach a top until the shorts throw in the towel.
That me (I’m short Qs, IYR and CBST) and Doug Kass. Ther ain’t a whole lot of other shorts around
I followed you in on IYR and QQQQs and HOV/WCI in a paired long /short trade so me too! So far, so good.
Fred, I just had to re-quote you:
“In fact short term rates will fall by 50%, and chase the 5% money market squatters to more attractive alternatives (stocks!). Prime rate will fall to 6%.”
which should have been followed with…
“With much due respect (and it is due), that is your opinion/view from your (bearish) perch. I don’t expect long rates to move up much at all.”
Some of us are just slightly more bullish on things like…interest rates and commodities. Let’s just say we’re bullish on inflation (and mining stocks!) :)
I’ll cover my Q puts when the commercials get long in the futures market. Until then I can’t see any compelling reason to be long. Eventually their selling is going to turn the trend since nothing goes straight up. Maybe its only a 5-10% correction. But then again this is one of the longest bull markets in history so the odds are good that the next correction could turn into a full blown bear of 20-30%. I have no desire to ride that down, come to think of it I have no desire to ride down a 10% correction either.
Yeah, we got long GE and Short: QQQQs, IYR, CBST, EBAY over the past few weeks
Cherry – for clarification:
While I may agree with your view (I’ve said here that the economy has surprised me), I’ve just replayed Kudlow from yesterday, Friday the 22nd, to make sure I heard correctly based on my earlier post. Roubini was on there with Arthur Laffer.
Since so many people that pay attention to what he says come here as well, I thought it at least worthy of discussing why he changed to 1% for this quarter.
Indeed, Roubini’s gone to 1% from his prior zero call for 4th quarter GDP, and is calling for a recession to be underway clearly by q2.
He did give a nod to consumer spending; he said, “…although consumer spending is holding up,” to my mind as somewhat of a reason to have changed his view of the 4th quarter from 0% to 1%.
He says 20 of the 25 indicators he watches are negative, and I think he implies that there will be a dramatic slowing in q1 which I agree with and was surprised did not happen to a greater extent during the present quarter.
I don’t fault him for modifying his view of the 4th quarter, but it may turn out to be low enough to surprise even Roubini when we see the q4 results.
Just for future reference, the 3 people I pay the most attention to for accuracy and unbiased opinion are: BR, Roubini and Mark Hulbert over at MarketWatch.
Let’s talk about Laffer for a moment. He’s a nice man and very intelligent, but to be singin’ a rosy econo-song while at the same time agreeing with Roubini for as much as a 3/4% decline in the T-Bill rate over 2007 is a bit puzzling to me.
Laffer seems to me more dependent on the Fed cutting rates than I’d be in the circumstances of claiming the economy would remain so robust.
It’s my view if the economy slips that the Fed won’t be able to halt it by cutting rates. The reasons are beyond cure by monetarism, itself too highly regarded by the current crop of hocus pocus supply-sider economists like Laffer, particularly in a crisis were we to have one.
I’ve written extensively here about the reasons for monetarism’s failure.