Wall Street Greek: Prognosticators Universally Bearish

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By Markos N. Kaminis - Economy & Markets:

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With stocks on the rise, investors are asking the inevitable question, have we finally reached the end of capital decimation, or is our own end yet before us. More importantly to those who still have a few bucks in the game, is it time to buy stocks? All too well aware of this common question, popular media sprouts scores of expert opinion in search of the true path.

What we find as a result is that economists are almost universally negative. It's disgusting! What's more interesting is that they have grown akin to doomsayers in their negativity. I can't distinguish between Nostradamus and Nouriel Roubini at this point. I'm even finding the most stubborn of bulls has become the CEO of the bear club (careful). This raises the brow of your favorite Greek contrarian. Don't get me wrong! I'm not ready to halt ark construction just yet, since I'm the one sounding the war siren regarding Iran. However, I have an irresistible urge to survey the equity market skies for breaks, for the very reason that all too many experts are running for cover.

(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK)

It's an inevitable component of human character. It's embedded in the survival gene of our DNA. We rely on what we know to survive. This is what was behind most economists wake up call of the last few years, as they were blindsided by the depth of the economic trough now before us. That happened because this time varied vastly from the average cyclical downturn. It was your Greek friend here who advised you to abandon your historical trends this time around; we said we were entering a new era. Remember?

At the same time, common characteristics drive every economic recovery, and they've not floated away to Mars. They're still here, however deep they may be buried. Population growth, human progress and national emergence and development drive inevitable economic recovery... eventually. According to the World Bank anyway, developing nations should maintain GDP growth next year.

"Unfortunately for investors, economist expertise rarely overlaps geopolitical. That leaves you bare naked with regard to global affairs related risk."

It's taking so long this time around, and the injuries have cut so deeply, that economists are frighteningly apocalyptic, even for my taste. What scares me most is that very few of these gurus incorporate the scenario of a Persian Gulf war meaningfully into their forecasts. I'm talking about a real Persian Gulf war, one involving Iran. That's the kind of war that would place the oil interests of too many thirsty superpowers at the fore. This is what keeps me busy stockpiling canned beans and bottled water (actually coffee, ouzo and cigars) and opposed to equities post the holidays. But, unfortunately for investors, economist expertise rarely overlaps geopolitical. That leaves you bare naked with regard to global affairs related risk. Still, returning to the point, economists are apocalyptic nonetheless.

Today, MarketWatch published an article entitled, "Worst of Recession is Upon Us, Forecasters Say." The publisher queried two talking heads of intellect, Brian Bethune and Nigel Gault, of IHS Global Insight. In the process, MarketWatch also declared them "Forecasters of the Month." Contrary to our hopes, that doesn't come with a regular jello treat.

The bad news continues, because as we read through the piece, we found what was implied in the title was not realized in the meat of the interview. We thought this dynamic duo was saying the worst was upon us, and so brighter days might lie ahead. Nope though, there was not a scent of optimism in the piece. Get back to the hanging-tree then, or keep reading... what the heck, there's not much more to lose.

Nigel and Brian indicated December job losses would continue heavy, though not likely as heavy as November. I'm guessing that view has something to do with the great degree of horror found in the November tally of 533K net layoffs. In fact, the two economists were quoted talking about ongoing consolidation in several already hard hit sectors. So, the basic message was that things are bad and getting worse. The insightful gurus advised the Fed to pull out all stops with regards to liquidity creation, including rate cuts (to zero we assume) and buying up treasuries (yields to zero, and 4.5% on the long bond we assume).

World Bank Finds Beauty in the Beast

The World Bank, which is rarely the optimist though always good natured, found a positive in this economic downturn. World Bank economists believe the softening of commodity demand that has coincided with GDP growth deceleration offers hope that a balance is within reach. In other words, the World Bank implies the limited resources issue may not be as dire as this past July's pricing indicated. Clarifying, the group sees opportunity, and a little time now, to manage towards long-term supply/demand balance. For that to happen though, men will have to give up greed. Word is that SUV sales are picking up again now that gas prices have fallen; so here's to idealogical dreams, and why I drink.

World Bank economists forecast 2008 global GDP growth of 2.5% will moderate to a pace of 0.9% in 2009, kept afloat by developing economies. The developed world is recessing, while developing nations are expected to decelerate from a still stellar 7.9% growth rate in 2008, to 4.5% in 2009. Still, there's concern this drop-off may be understated, since 1/3 of GDP growth is attributed to investment growth. Clearly some of this fuel has been lost, and some will come back with less kick as risk tolerance moderates and lending restraints abound.

Even though commodity prices have retraced, the World Bank notes prices are still much higher than they were at the start of the five-year boom. The group's forecast is not one of further moderation either. The Bank sees oil prices averaging $75 a barrel next year. That's about 75% above today's price, so it's quite a statement to make. However, with the volatility of recent prices, a forecaster can comfortably range a broad span without question from superiors. Unfortunately, this and self-doubt play roles too often in forecasts, from what I've witnessed among some weak excuses for analysts and men.

While we catch a short-term breather with regard to commodity price pressure, the report notes, the longer term depends on us. The report's lead author, Andrew Burns, stated that resource supply/demand balance will be greatly kept or lost by mankind's efforts to find solutions. He believes the decisions we make could stave off the great imbalances that recent prices reflected concern for.

The King of Dire

Contrary to any fantasy novel the title may have inspired, Dire is not some far off place in some lost corner of the United Kingdom. In fact, it's right here and also there were you are we suspect. One particular prognosticator is no doubt, the King of Dire, wherever that may be. What's scary is that he's a well respected economist who is employing a Nobel-Prize winning tool.

We're sure you've heard of Tobin's Q. Even though it sounds like a Harry Potter novel, it's actually a financial ratio. James Tobin developed the ratio in 1969, and it measures the market value of companies to the cost of their constituent parts (or replacement cost). According to Tobin, a value above 1.0 signals a bloated stock price, while a level short of that point illustrates value.

Well known economist Russell Napier, of CLSA Ltd., noted the path of the ratio over past economic declines. In tracing it to fit our times, he warns that it implies another 55% drop in the S&P 500 by 2014. Our own Michael Douville points toward that end as well. Helping you catch your breath, Napier also says current Fed efforts will drive a 2-year bear market rally first. However, he notes the inflation that Fed efforts generate will eventually lead to the inevitable devaluing of assets. That sounds an awful lot like an "Economic Fishtail" to me.

History shows Tobin's Q ratio dropped to 0.3 or lower in the economic declines of 1921, 1932, 1949 and 1982. The current economic decline is increasingly being compared to that of the early eighties. After peaking at 2.9 in 1999, Napier notes the Q ratio was recently approximating 0.7. Solidifying his theory for capital destruction, Napier also employed the 10-year price-to-earnings ratio, which seems to agree with his thesis.

"Too often, the herd is fooled by their own comfort and company."

The Force of Consensus

The thing that bothers me though, is to see so many people so universally aligned. Too often, the herd is fooled by their own comfort and company. It happened during the bull frenzy, when strategists and economists became stubbornly insistent the market would hold up. I recall watching Larry Kudlow on TV, and hearing him jest about "where's the bear market" and "the Goldilocks economy". I think you'll recall my article, "Goldilocks is a Hooker" that came in response. Seems her secret is out now. Unfortunately, I've also now reminded you of my flawed prediction for the Republican presidential nominee.

I recall CNBC's lovely Erin Burnett over a year ago, still a novice at the time, calling stock sellers lemmings for so blindly selling stocks to their own panicked demise. I forgave Erin for breaking my heart with those words long ago. After all, who could stay mad at Erin (call me okay?). Finally, I remember the oft-interviewed Michael Darda, pre-beard, stubbornly resisting the bear call. I knew something was wrong in the universe, because he resembled Grizzly Adams at the time. By the way, "The Greek" is sporting a full beard these days to elude the paparazzi (not to mention the landlord), so we're cool with the facial hair Mike. Darda is now a full-blown bear, looking toward the end of 2009 for economic recovery! Seems we've come full circle then. Even while I can't disagree, this just makes me less comfortable with the apocalyptic consensus.

What's important is that our in-house technical strategist and genius, Steven Ferguson, tells me we're in a bear market rally up to around Christmas, but we'll move lower thereafter. I've got an article pending to tell you why I am also confident we will eventually go lower, and maybe as soon as January, inflation or no inflation.

For now, I have to agree the market seems partial to appreciation. "Seems partial" is not very scientific, but I've fed my mind enough information to process things well enough toward correct solution (let's pray). Obama has an opportunity to give the nation and the world much hope in January, but words alone will not be enough for lasting financial progress. I also have hope that a solid plan is in store, and maybe we'll discuss that opportunity in a future article as well.

What bothers me most is that the consensus of economists might be right this time, if not due to the inflation our Federal Reserve is fueling (perhaps by necessity), then for the reason they've left out.....Iran. I hate being part of the herd though!