Analyse This! Analysing Equity Analysts
According to George Will: "The future has a way of arriving unannounced". That was before equity analysts.
In dense, jargon-infected prose splattered with spurious statistics, many analysts are trumpeting that the worst of the credit problems are behind us. Major equity markets have recovered a substantial portion of their losses; even bubonic plague stricken financial stocks have rallied. It is time to buy for the new equity "bull market".
The following guide to the calls of equity markets seers may be helpful:
Weak data - Fed eases, stocks rally.
Strong data - Strong economy, stocks rally.
Consensus data - Lower volatility, stocks rally.
Bank loses $8bn - Bad news all out of the way,stocks rally.
Oil price up -Good for energy producers, stocks rally.
Oil price down - Good for consumers, stocks rally.
$US down - Good for exporters, stocks rally.
$US up - Lower inflation, stocks rally.
Inflation up - Good for commodities, stocks rally.
Inflation down -Fed eases, stocks rally.
Climate change -Soft commodities up, stocks rally.
World ends - Good for disaster recovery companies, stocks rally.
Most analysts, it seems, share Eleanor Roosevelt’s view that: "The future belongs to those who believe in the beauty of their dreams."
There are reasons to believe that the outlook for equities is less optimistic. There is the small matter of global economic slowdown and the resulting reduction in corporate earnings growth. There is also the small matter of global de-leveraging that reduces the debt funded financial bid that has helped support stock prices. There is also the rising supply of equity issues especially from financial institutions seeking to reduce leverage and re-capitalise.
"Dips" do not always represent buying opportunities. Few tech stocks have recovered the heady price levels that were reached at the height of the tech bubble.
Stocks also do not give high returns over medium to long periods. Between January 1960 and December 1974, the Dow remained substantially unchanged. This period included the famed "go-go" years when stocks surged significantly but retraced. The Japanese stock and property markets have still not recovered the highs reached in 1989. Perhaps as Yogi Berra knew: "The future ain't what it used to be."
If the past is any guide, the seers may change their tune:
Weak data - Poor earnings outlook, stocks fall.
Strong data - Fed will tighten, stocks fall.
Consensus data - Already priced in, stocks fall.
Bank loses $US8bn - More bad news on the way, stocks fall.
Oil price up - Bad for consumers, stocks fall.
Oil price down - Bad for producers, stocks fall.
$US down - Bad for consumers, stocks fall.
$US up - Bad for exporters, stocks fall.
Inflation up - Fed will tighten, stocks fall.
Inflation down - Weak economy, stocks fall.
Climate change - Higher inflation, fed will tighten, stocks fall.
World ends - Bad for insurers, stocks fall.
That may well be the turning point. As Hegel, the German philosopher noted, thinkers understand a concept just as it ceases to be relevant.
If all else fails, the investors should take comfort from former US vice president Dan Quayle’s advice: "The future will be better tomorrow." _________________________________________
© 2008 Satyajit Das All Rights reserved.
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
