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".

When Should Wall Street 'Investment Strategists' Be Fired? Calling Out "Dr. Bob" Froehlich

In most professions if you are consistently wrong you lose your job. If for some reason you do not lose your job, you will at least lose your credibility. Oddly, that is rarely the case with Wall Street Investment Strategists. In fact, regardless of how their calls turn out, many show up day after day on the media circuit merry-go-round (and investment conference merry-go-round).

What brings this up is a recent meeting I attended where Dr. Bob Froehlich was the main speaker. You have probably seen him on CNBC, Fox News and the like. Somehow I seem to cross paths with "Dr. Bob" a couple times a year. He currently is the "Chief Investment Strategist" for The Hartford. He used to have essentially the same job for DWS Investments. In fact, I remember a rep from the firm bringing him by our office in mid-2008. And yes, he was in full permabull mode. According to him, The Fed was gonna keep lowering rates and you don't want to fight the fed! It was worth a good chuckle (after all, he still thought housing was only a "subprime" problem).

If you ever wanted a shining example of a "permabull" this is him. In his own words from his Jan 3rd commentary he says "As a strategist who always sees the glass half full......" However, honestly, I'm not sure he ever sees the glass as anything but completely full. Now there is nothing wrong with being optimistic....But blind optimism does justice to no investor.

Just to illustrate how consistently bullish this guy is...........BussinessWeek April 2000 - Branding a Bull, Kemper-Style (yes folks, this is about a week after the market peak, when the S&P was around 1500).

"Undoubtedly another reason Scudder Kemper is "branding" itself by featuring Froehlich is that he's an unabashed bull. He has produced a series of audio tapes called From Wall Street to Main Street that extols the great benefits of investing in stocks. He has penned a recent book, The Three Bears are Dead!, which makes the case that the "three bears" of investing--inflation, interest rates, and government spending--all died in 1997. And Froehlich is a big believer in "Boomernomics"--that is, that baby boomers are just starting to drive the economy and stock market and that their impact will be much greater than anyone thought, prolonging the bull market well into the 2010s. The Chicago Tribune wrote about Froehlich, "There are [those] who have the eyes to see the dust in the distance, ears to hear the hoofbeats of the thundering herd, and noses to smell the money to be made. One of those is Robert Froehlich."

Dr. Bob couldn't smell money to be made if someone shoved it up his nose. That is, unless we are talking about how he really makes his money (because we know it's not by investing). He knows he makes his money as an "investment strategist" by selling blind optimism.

Yes "Boomernomics" would prolong the bull market well into the 2010s.......and nearly 12 years later here we are........

Despite his continued bad calls, mutual fund companies continue to employ this guy. Why? Because apparently they believe optimism sells! When DWS Investments finally got rid of the guy in late 2008 (after another market crash he was completely blindsided by), Hartford was quick to swoop up the hype machine.

Dr. Bob puts out his 10 investment themes yearly and they tend to always be good for a laugh. For example, the below was Dr Bob's Top 10 Investment Themes for 2011.

10: Investment Theme: “I WANT TO TAKE YOU HIGHER” (INTEREST RATES RISE)
Strategy: OVERWEIGHT PRODUCTS THAT HAVE A POSITIVE CORRELATION TO A RISING-RATE ENVIRONMENT 

Not Quite......

9) Strategy: OVERWEIGHT THE TECHNOLOGY SECTOR  

8) Strategy: OVERWEIGHT THE INDUSTRIAL SECTOR

7) Strategy: OVERWEIGHT GERMANY 

6) Strategy: OVERWEIGHT ENERGY SECTOR
5) Strategy: OVERWEIGHT THE MATERIAL SECTOR
4) Strategy: OVERWEIGHT CHINA
3) Strategy: UNDERWEIGHT THE U.S. DOLLAR
2) Strategy: OVERWEIGHT INTERNATIONAL STOCK
1) Strategy: OVERWEIGHT COMMODITIES

Well let's first look at how his sector bets turned out (I included commodities using the S&P GSCI). Dr. Bob's sector "overweights" are in red.

Gee, if he only would have picked financials he would have been perfect.........at picking all the WORST performing sectors. The story isn't really any different if we look at global sector performance either (except the negative numbers are much larger).

How about his country overweights? China and Germany were both down about 18%. That compares to the MSCI World index which was down just over 7%. Clearly not a good call. And it goes without saying that his call to overweight international stocks (with an emphasis on emerging markets) and underweighting the dollar were both bad calls.

Now anyone can get calls wrong, and everybody does. But the consistency with which he makes bad calls and the degree to which he misses every crisis is amazing.

So what are his themes for 2012?

10) STRATEGY: Overweight Large-Cap Stocks  

9) STRATEGY: Invest in Tax-Free Municipal Bonds 

8) STRATEGY: Overweight Dividend-Paying Stocks Over Non-Dividend-Paying Stocks.

7) STRATEGY: Invest in Japan

6) STRATEGY: Invest in International Bonds 

5) STRATEGY: Overweight the Energy Sector

4) STRATEGY: Overweight the Health Care Sector

3) STRATEGY: Invest in China

2) STRATEGY: Overweight the Media Industry

1) STRATEGY: Invest in Commodities 

It will be hard for him to do worse than 2011. Here are a few gems from the above letter. First in regards to China

"I believe the economy has a major reversal growing at 9.5% to 10% instead of the 7%-7.5% consensus the market is currently calling for in 2012."

He was also very adamant about the China story when I saw him speak. The funny thing is this part where he claims to be able to spot bubbles...

"Look, the one thing that I’ve learned in my 35-year career is what the chart looks like for an asset bubble. It looks just like gold where the chart simply goes higher, and higher, heading straight up with no end in sight"

So he has had a 35 year career but about 23 years or so into it he wasn't able to spot the tech bubble, and then he wasn't able to spot the real estate bubble. But NOW he has it down! Wait, what was that about China again? So he learned to spot bubbles but yet doesn't see one in Chinese Real Estate?

But the best is this one, and he repeated this many times also when he spoke.

"First of all, Europe won’t fall into a recession"

The above is a perfect reflection of how long Dr. Bob stays in denial. The reality is the Eurozone is already in a recession!

Again, the purpose of this post was not to point out individual bad calls (although I did that). The purpose was to point out how ridiculous it is that the financial industry pays so much attention to (and regurgitates) opinions without any regard to the credibility or supporting facts behind those opinions.

Let me leave you with Dr. Bob's most ironic comment from his most recent letter. This is from his theme #9: Invest in Tax-Free Municipal Bonds (where he tries to call out Meredith Whitney for her call on Muni's)

"It never ceases to amaze me how the doom and gloomers tend to get all of the media headlines and hype. I guess it’s true that “bad news” sells"

News for you Dr. Bob. If bad news sells, why do you still have a job? Furthermore if accuracy matters, why do you have a job? And while he doesn't say it in his letter, when I heard him speak, he actually spoke about how upset he was that Meredith Whitney "was not held accountable" for her call! Really Bob? Really?