Friday, March 16, 2012

It's Official! "It Is Ridiculous To Be Bearish"!

It's official everybody! "it is ridiculous to be bearish". If you didn't know, now you know! At least that's what Thomas Lee, chief equity strategist at JPMorgan says according to USA Today:
"Stocks are levitating like a balloon" adds Thomas Lee, chief equity strategist at JPMorgan. With stocks undervalued, underowned and cash-rich U.S. companies strong, "it is ridiculous to be bearish," says Lee, adding that the S&P could even take out its record high of 1565.15, set in October 2007."
Now that the S&P 500 (at 1403) is approaching Thomas Lee's original target (1430) for 2012, the "non-ridiculous" equity strategist needs to raise his target, it "could even take out it's record high of 1565". After all, how is JP Morgan gonna sell everyone stocks if their equity strategist doesn't say stocks are going higher?
Thomas had essentially the exact same forecast last year. And, yes, on the very day (April 29th) that markets peaked last year (at 1363) he came out with an increase to his forecast to 1475. At which point the market preceded to fall 19% and finish the year where it started. But seriously everyone, "It is ridiculous to be bearish". 

I mean, you have to be crazy! This guy knows cheap when he sees it. Just look at what he was saying in June 2008 when the S&P 500 was (interestingly enough) at 1360. According to bloomberg:
"The biggest rise in the unemployment rate since 1986 is an ``aberration'' and investors who sold equities today are ``completely misreading'' the outlook for economic growth, according to JPMorgan Chase & Co."
The Dow Jones Industrial Average fell as much as 412 points today after the Labor Department said the jobless rate increased by half a percentage point to 5.5 percent, the highest since October 2004, as an influx of students into the workforce drove the biggest jump in teenage unemployment since at least 1948.
``The surge in unemployment is probably an aberration,'' Thomas J. Lee, the New York-based chief U.S. equity strategist at JPMorgan, said in an interview. ``It's not because there were fewer jobs, it's because there were more people looking for jobs. Stocks are completely misreading the situation.''  
Ya, the surge in unemployment to 5.5% was an aberration. Mish Shedlock over at his blog even called him out at the time in his post "aberration in clear thinking by JP Morgan". So what was Thomas Lee's projection given this "aberration"?
"The strategist said the Dow industrials posted a 30 percent average gain in the 12 months following a jump in the unemployment rate by half a point or more since 1950. A rise in joblessness of that magnitude has occurred 16 times during that period, he said."
"Lee expects the Standard & Poor's 500 Index to climb to 1,450 by the end of this year, according to a Bloomberg News survey on June 2."
The market eventually bottomed 54% below his target. But on the bright side, his target is now less than 50 points away........almost 4 years later.

The reality is it's "ridiculous" to not realize that valuations are NOT cheap EXPENSIVE based on measures that actually have a correlation to longer-term returns. As illustrated in this chart from Doug Short.

I think this is a better representation of expected longer-term returns (chart represents "real" inflation adjusted returns)

Or possibly this, as shown by John Hussman in "Warning: A New Who's Who of Awful Times to Invest"

Can markets go higher? Of course, they always can. But bull markets don't start at a PE10 ratio of 22 (but many losses have resulted from these levels). And the only thing that would be "ridiculous" would be taking this guy seriously. Clearly, his target will always be "higher".

Thursday, March 8, 2012

A Few Crazy Predictions in Global CFO Survey

Duke University and CFO magazine recently released their quarterly Global Business Outlook Survey for the first quarter of 2012. In the survey about 450 CFOs gave their best predictions for the S&P 500. Here are some of their predictions (based on the median response)

- Expected return over next 10 years = 6%/yr
- 10% chance return will be less than 2%/yr over the next 10 years
- 10% chance return will be greater than 10%/yr over the next 10 years
- Expected return over the next year (from 2/17) = 6%
- 10% chance return will be negative over the next year (from 2/17)
- 10% chance return will be greater than 10% over the next year (from 2/17)

Now none of those may seem too crazy. Except I think it is borderline delusional to believe there is only a 10% chance of a negative return over the next year considering current valuations. But if you want to see some truly wacko predictions, take a look at the extreme answers given in the "minimum" and "maximum" response column for each question.

A few of my favorites

- Someone thinks there is only a 10% chance the return over the next year will be LESS than 70%!?!
- Someone thinks the average annual return over the next 10 years will be 60%/yr!?!
- Someone thinks there is only a 10% chance the average annual return over the next 10 years will be LESS than 70%/yr!?!

So what we have there is either some truly crazy CFOs or some CFOs that need to take classes in reading comprehension before completing the next survey.