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Bear Cult

Daily Speculations chronicles the pessimistic cult, that strange group of people who are never ever bullish about the market. Our much-maligned book, Practical Speculation, studies their habits and record via a 10-year content analysis of the leading financial weekly's star columnist, as well as analysis through the lenses of ecology and propaganda studies. For our sins, neither of the big Dow Jones publications--The Wall Street Journal and  Barron's--deigned to review the book. Nevertheless, we cannot resist continuing to highlight and systematically record the ululations, modes, patterns and resentments of the bearish clique.

4/26/2004 Barron's: After what looked like one or two columns where Abelson mercifully for the first time in 40 years did not have a preponderantly bearish forecast of the market, he's back to his old tricks. 

Iraq and China as well as profits (a la a certain regular "expert." You see, on April 26, Iraq "is such an awful mess. .. the shivery potential persists that it will be the skeleton at the feast casting a pall over the national mood .... Popular sentiment, the economy and the financial markets could be hostage to events there. That's a worry that has been shunted aside in Wall Street for sure, but it's not one of those worries, alas, that conveniently disappear if ignored."

After that's it back to the normal. It's bearish and there's inflation because the average salary of 827 players in Major League Baseball is $2.5 million, but that's down 3%. Yet "the bounce (after Mr.
Greenspan's remarks) "proved just another of those one-day wonders that the market has been in for quite a spell now. It's as if the bulls can't get it together to keep an advance going." You see, "real wage growth has turned negative for the first time in nine years, which doesn't exactly bode well for consumers' purchasing power." The recent bang-up earnings comparisons are artificially inflated, and the gains will be a heap less impressive in the second half sentiment has stayed at a high pitch; new issues are pouring into the market; insiders continue to "buy stingily and sell as if there's no tomorrow"; and by no means let us neglect the most obvious drag: "[S]tocks are anything but cheap and too-good-to-resist values are few and far between stocks are anything but cheap and too good to resist values." (Buffett is still bearish?)

What these 12 or 15 bearish reasons add up to: "At best, the market will have a tough time pushing higher. And it might just go down, further and longer than anyone, apart from the few bedraggled bears still standing  from the bedraggled bears still imagine [note the self-aggrandizing self-belittling]."

What brings this to mind is that on April 19, Abelson's reason to worry was that Steve Roach is boggled that China uses one-third of the world's coal and 40% of its cement. Not only that: China is a command economy, so the official data are massaged to keep foreign investors from getting spooked about the torrid growth. "Should the Chinese economy overheat, the consequences could be ugly and the fall-out felt big-time in the rest of Asia, in Europe and, of course, right here in the good U.S.A."

China cut investment spending to slow a similar boom 10 years ago, causing a hard landing in 1994. Steve expects a similar move in the second half of this year, with a resulting sharp slowdown, "all of which casts a long shadow over the global economy and over our own. Needless to say, but we'll say it anyway, that's not a prospect that looms large in the reckonings of Washington or Wall Street. Which to us, anyway, makes China an ever great wall of worry."

Abelson devotes the remainder of his April 19 column to bursting the bubble of Jim Cramer, based on an anonymous letter published on Bill Fleckenstein's Web site that notes that 10 stocks Mr. Cramer recommended in February 2000 with an average price of more than $150 a share are now selling for less than $5. -- Vic

 

March 2, 2004: It is good to see so many real profits from commodity funds emerging at recent local highs in commodities, so reminiscent of the hydra that grew seven heads whenever one was cut off. The total returns from commodities, as the Specs have calculated, was about 1.5% a year during the last century, coming to some 1/100th as much as stocks during that period. Julian Simon, in State of Humanity, has the reasons and the Specs in their articles provided the CRB statistics to put it in perspective. The dynamics of hateful-of-capitalism types like Gross, who have been predicting Dow 500 for so many years, is an interesting psychology study as they move like magnetic balls of similar poles from one failed hypothesis and money-making promotion gone awry to another, similar to the Keech cult described by Festinger and the Specs. (Vic, 03/01/2004 10:25:45)

Feb. 9, 2004: Michael Buchsbaum, Bear of the Day. We are recognizing Michael, a repeat honoree, for his contribution of the story appearing below:

Reality of Financial Trouble Hits Hard for Employees, According to ComPsych

  Calls For Financial Help Are up 69 Percent; 27 Percent of Polled Employees
        Report Being 'One Major Setback Away From Financial Disaster'

    CHICAGO, Feb. 9 /PRNewswire/ -- Employees' financial picture has
worsened significantly since last year, according to ComPsych Corporation, the
pioneer and worldwide leader in GuidanceResources(R) (employee assistance programs,
managed behavioral health, work-life and crisis intervention services).
Calls for financial help have risen 69 percent from 2002 to 2003, with the
majority of calls related to debt, refinancing and failed investments.
    In a Tell It Now(SM) survey, employees also reported a general lack of
health in their financial picture. When asked how they would describe their
financial situation, employees replied:

     27 percent - I am one major setback away from financial disaster.
     22 percent - I am worse off than last year, with less savings/income
and more debt than before.
     23 percent - I am about the same as last year, with no change in
                  savings/income or debt.
     22 percent - I am better off than last year, with more savings/income
and less debt than before.
     6 percent -  I am in the best financial shape ever, with bountiful
                  reserves and very little debt.

    "Unfortunately, employees are grappling with the reality of unchecked
spending," said Dr. Richard A. Chaifetz, chairman and CEO of ComPsych.
"Couples in particular are dealing with exploding debt as they try to
maintain two-income lifestyles, even after one partner is laid off, or is working but
underemployed.
    "Many of these employees have been hit hard with the reality of their
financial situation, and have called ComPsych's FinancialConnect(SM) service
for help. Through a combination of financial, legal and even marital
counseling, we focus on providing unbiased information for getting
individuals on the right financial track, so that their financial problems will not
follow them to work."
    The survey was conducted from Jan. 12 to 26, 2004, receiving responses
from employees of more than 700 ComPsych client companies nationwide.
 

Feb. 6, 2004: Bud Conrad, Bear of the Day
I looked at the establishment data for nonfarm employed.
This morning the headline says it grew 112,000, a little less than the 150,000
or so hoped for. It is in the report at

http://www.bls.gov/news.release/empsit.nr0.htm

So I compared to the number reported last month December which was then reported
as 130,124. So last month was revised down by 81,000. That would mean that the
increase from the original December number was only 31,000.

The December report is here:
ftp://ftp.bls.gov/pub/news.release/History/empsit.01092004.news

Even more goofy is that the establishment data seems inconsistent in the report,
apparently for benchmark revisions. They say employment rose by 496,000, but the
January number is 138,566 and December number they show is 138,479 which is
87,000 growth. They report growth of 496,000 as whish is far different from the
difference of these two numbers. A footnote says "1 Changes in household
data levels reflect an adjustment to remove the effect of updated population
controls."

I'm now looking through the footnotes for explanation, but wonder why I bother
as the ground under these government numbers is always shifting and leaves me
with no confidence that they are reflective of reality. That aside, neither the
headline or my corrected 31,000 is showing enough growth to keep up with normal
growth of population.

Feb. 5, 2004: Bill Gross, Bear of the Day
From Bill Gross's investment outlook. " But so-called vigilantes countered by pointing to consumerism and the ongoing cycle of buying ephemeral
things." They would suggest that we have hardly invested wisely -- witness the millions of miles of still-unutilized fiber-optic cables and the farcical parade of the dot coms as recent as few years past. They would then top it off with an observation that President Bush with his Republican Congress seem to observe no limits whatsoever in the budget .... If the slope of the trend line (total credit market debt as % of U.S. GDP ) then our economy will slow down, stagnate or worse. Who could argue that debt as a % of GDP were still at 1980s levels as shown in the chart, that our consumption of things, our purchases of homes, our investment in technology, our current government deficits, would not be much smaller and our economic growth much lower. We are hooked on debt; we are a finance-based economy."

When can we hope that retired gamblers and touts will learn to think of the economy in terms of choice, incentives, and substitution
the way all economics students are taught? -- Vic

Oct. 29, 2003: Michael Buschbaum, Bear of the Day 
From Fed statement on Oct. 29, 2003: "The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal."

Buschbaum comments: I don't believe the current market for equities, as a whole, is priced to perfection. Rather, I believe it is fraught with pricing imperfection resting hopes on sustainable growth in the current and following quarters. Hope springs eternal but it's an irrational basis for purchasing equities.  (Oct. 29, 2003)

Vic's Bear Book of the Day: Round-Up, by Ring Lardner. "Frank X. Farrel, and I guess the X stood for "excuse me," because he never pulled a play, good or bad, on or off the field without apologizing for it." Alibi Ike was the name Carey wished on him. ... His first day out he stood u p there so good and took such a reef at the old pill that he had everyone looking.  He looks like he could hit. but he can't hit near as good as he can apologize. He dropped the first fly ball that was hit to him and told Carey his glove want broke in good yet, and Carey says the glove could easy of been Kid Gleason's Grandfather. He made a whale of a catch out of the the next. But Ike says he could of caught the ball with his back turned only he slipped when he started after it, and besides, that air current fooled him. "What did you hit last year?" "Oh, I had malaria most of the season," says Ike, "but I wound up with .356." 

It took him half an hour to eat because he had to excuse himself every time he lifted his fork. "Doctor told me I needed starch," he'd say, and then toss a shovelful of potato in into him. "Nothing like onions for a cold," he added. "There ain't  much meat on those chops," he'd tell us, and grab another one.

But this ain't sent in humorous vein. I give a grand to the best short story written with our friend's reasons for maintaining the bearish mien, e.g., his "I don't believe the current market for equities is priced for perfection; rather, I believe it is fraught with pricing imperfection resting hopes on sustainable growth." And his conclusion that the Fed's perception that downside and upside risks are roughly equal is bearish. – Vic (Oct. 29, 2003)

Bears on the couch: Fanatics, faced with facts that disprove their beliefs, often respond by redoubling their efforts to convince others. This strange tendency was noted in the 1950s by Leon Festinger, a social psychologist. Festinger’s students infiltrated the Keech cult, which believed the end of the world would come on a certain date. Until then, the cult had shunned publicity; but when the date passed without incident, the cult’s leader announced that the group’s purity and devotion had saved the world, and those in the cult who had not given up the ship suddenly began prosyletizing and seeking media coverage. 

Dr. Brett Steenbarger, author of The Psychology of Trading, recently forwarded us a passage from a well-known bearish newsletter that, he says: “perfectly illustrates the dynamic. The general argument is:  1) We're in a bubble; 2) The market has moved sharply higher since March; 3) It is quite possible that it will move higher still, which means 4) That we're in an even greater bubble, and things will collapse in the not-to-be-defined future.” (10/9/3)

Amazingly, the corrective phase we are looking for STILL seems to be nowhere in sight!  Despite a 4.4% decline to SPX 990 in seven trading sessions from our last issue, the “correction” brought none of what we could remotely describe as caution, only the obligatory nod that a small pullback HAD to be in the cards.  As we said in our last issue, the rally from March has been so consistent that buyers become more emboldened. It feels to us more like February 2000 every day! What is truly spooky is how many observers now believe the  correction has ended and are once again in tune with their forecasts of SPX 1100 or higher.  Unfortunately, we have to afford a wide berth to the mechanical factors that have been driving prices higher for months.  Active managers can only beat indexers by taking on riskier investments and the effect is obvious; placing Nasdaq valuations again in extremis and maintaining same. This becomes even more ludicrous when you realize that the 11 Qrazy issues illustrated in our front page chart comprise one-sixteenth of the entire S&P 500 capitalization!  Ironically and incredibly, when active managers attempt to compete by driving up the prices of these insanely valued issues, they only pump up the S&P that much more, and the cycle continues and it will continue until it bursts again like it did in 2000.  Only this time, we expect it will implode with much more dire consequences.

We believe that Festinger would have jumped at the chance to study the bearish cult. Laboring under a set of fanatical beliefs no less mystical than those of the Keech cult, today's chronic pessimists exert a far wider and more harmful real-world influence.  How many people have been too frightened to make even an initial investment in stocks because of the permanently sour outlook of these writers? How many people have been scared out of the market for good at just the wrong time? How much lost wealth are these writers responsible for? How many worthy enterprises have been starved for capital because of their rigid distrust of business?

The king of the pessimists, of course, is Alan Abelson. Not only is he the most engaging in style, but he has been at it for the longest time. In fact, he has been continuously bearish for more than than 40 years. If you doubt us, his columns are all available on microfilm and on the Internet. We chronicled and analyzed this amazing record of cynicism in the fourth chapter of our book, Practical Speculation. In the spirit of Festinger, we will continue to read Abelson's columns, painful as this duty is, and will catalog his arguments according to a system we developed.

The same reasoning also showed up in the Oct. 6 runoff of the leading financial weekly's star columnist, whose 40 years of  bearish effluxions are chronicled and analyzed in the fourth chapter of our book, Practical Speculation:

As a matter of fact, on Friday, our sister publication, The Wall Street Journal, was prompted to essay a compressed (it took up most of the first page and a large part of page 4 of the second section) rundown-subtly dubbed "Scandal Scorecard"-on how fine and swift the mills of justice were grinding in 14 prominent cases of outstandingly uncouth corporate behavior.

 

Such scandals always take root and thrive during financial manias and always burst into public consciousness when the fever breaks. Since we were privileged to witness and enjoy the biggest stock-market bubble in all of recorded history, it's no wonder that its aftermath has yielded an unprecedented bounty of scandals. Never have so many been fleeced of so much before. But scale and reach and damage wrought aside, it's still the same old story.

 

WHAT IS DIFFERENT IS that with the revelations still fresh and the perps being brought to book, often in handcuffs, their visages a staple on the tube and in the dailies, when, that is, the shattered bubble's sordid legacy is exposed in full public view, why a new bubble suddenly pops up and one that's fast gaining altitude and size. Amazing!

 

Normally (and maybe that's the wrong word to use when talking about manias), there's a decent spell-five, six years, anyway -- between bubbles, if only to give amnesia time to set in. And you'd think, after a $7 trillion hit, investors might need a little extra time for the wounds to heal, emotional and, of course, financial, fear to recede, and greed to revive. Instead, a few scant years after the decline and fall of the great bull market and the coming of a savage bear market, it's as if we're all back in La-La land.

 

Yet, beyond fantasy-ridden Wall Street, as that never-ending scandal parade tells you loud and clear, the aftershocks of the exploding of the bubble are still very much with us. Ending the eight-month drought in job creation was nice, but it doesn't alter the fact that the job market remains in sorry shape, that industries beyond count continue to suffer from far too much capacity and are anything but keen on taking on new hands, or, in truly meaningful measure, new plant and equipment. (One striking example of how much slack exists out there, cited by Merrill Lynch's Richard Bernstein, is that computer and electronics companies are operating at less than 65% of capacity.) The recovery, in short, still has shaky legs.

 

The disconnect between the increasingly euphoric mood among investors and the gritty facts on the ground in the real world is not all that hard to explain. It means, simply, as we've suspected for quite a while, the bear market failed to thoroughly clean out the speculative excesses that grew and sprouted so profusely during the late 'Nineties. The greatest bubble ever may be gone, but the bubble mentality never truly left.

 

Until we bid it a firm goodbye, this giddy market is an accident waiting to happen, and the giddier it gets and the longer the wait, the worse the accident. (Alan Abelson, 10/6/3)

 

A particularly fine example of chronic bearishness and its unhappy comeuppance was forwarded to us by our friend James Altucher:

Unemployment and The End of the World

(James Altucher, Subway Capital, 10/4/3)

"Much of the American wealth is an illusion which is being secretly gnawed away and much of it will be completely wiped out in the near future. . So what is the rest of your future? A grisly list of unpleasant events - exploding inflation, price controls, erosion of your savings (eventually to nothing) , a collapse of private as well as government pension programs, and eventually an international monetary holocaust which will sweep all paper currencies down the drain and turn the world upside down."

This was written by Howard Ruff in 1979 in the book "How to Prosper During the Coming Bad Years." One of the insightful blurbs on the cover was "Sound advice to help an inflation-weary investor and an eloquent plea for fiscal sanity." - George Bush

So what happened to Mr. Ruff? From a recent talk he gave:

"I lost my subscribers at the rate of 25% a year, by far the lowest attrition rate in the industry, but the sure road to failure, given the inexorable math and the nature of time, while some of my tougher and more savvy competitors are still in business with varying degrees of success, and some of them are very rich now. My wealth became barely a shadow of what it once was. As the list of followers shrank, so did the sales of the other products and services I offered them that I was counting on, until in the year 2002, my list had shrunk to only about 3000 faithful followers. And how about my glorious Mapleton mansion? I lost it to foreclosure, as I became unable to pay the $8,000 a month mortgage and the $2,000-a-month maintenance and utilities costs. Yielding to my fears had destroyed my business and my personal finances. As I relate this story, I can't even begin to tell you how stupid I feel."

So now for some counting on unemployment. Since 1950:

For each month, buy the S&P 500 index at the close of the month if the unemployment rate that month crosses over from the 5s to the 6s. Sell one year later.

Result: 17 occurrences, 17 successful trades. The first in Feb, 1958 and the two most recent in Dec 02 and Apr 03. Average return per trade: 16.16%

Next test: For each month, buy S&P 500 index at the close of the month if that month was the fourth consecutive month with the unemployment rate going higher. Sell one year later.

Result: 33 occurrences, 28 successful trades, average return 20.76%.

Can one conclude from this that the more people are unemployed, the more stocks one should buy? Maybe. But unless this time things are different it does suggest that the US usually makes a good comeback when things appear at their worst. Unless you follow the advice of Mr. Ruff and his friends.

Vic adds:

The above post by Mr. Altucher concerning the ever-promotional activities of Mr. ruff and the other doomsdayers like Prechter who can always be counted on to make a contribution of trillions to the market after a down year thereby encouraging the market neutrals and short sellers at just the wrong time, thereby paying the cost of the market infrastructure, and replacing the vast costs of keeping it going. one if reminded of Phillip Carrett and Alan Greenspan in his bathtub. Their favorite indicator of when to buy stocks being the blast furnace usages at iron mills. a regression at the introduction to Carrett's book (my own) shows that the worse the blast furnace usage, the greater the expected gain of the market thereby confirming Altucher's post-iron age analysis with the kinds of stats that wrongfully lead "Doc" Greenspan and all the value followers to always be out of synch with the coming market.