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The Chairman
Victor Niederhoffer


12/12/04
Bear Watch, by Victor Niederhoffer

One of the market constants over the past 40 years has been the consistently bearish view of the lead writer for the major financial weekly. The aging commentator’s current arguments for a bearish case, in his latest “Up and Down” column, are at once so typical and so off the wall that they deserve to be memorialized. You see, the market “has been trying to puzzle out mixed vibes from the economy, oil, the dollar, the Fed and the mood of the consumer.” One might hope that the 23% decline in oil over the last six weeks and the 2.5% decline this week, together with a 2.5 % rise in the dollar, might be cited as bullish factors given that their converse moves were presented as the main pillars of the bearish argument over the previous several month. But such symmetry and consistency is not expected from a commentator who has not found the bullish case predominating in 2,000 columns. In a review of his oeuvre presented in our worst-selling 2003 book, “Practical Speculation,” which by an oversight was never reviewed by any Dow Jones & Co. publication, we presented the results of a content analysis and graphed the quadrupling of the Dow Jones Industrial Average during the 1990s, highlighting representatively bearish quotes taken from the from his 500 bearish columns during the period.

One might wonder whether this selective reporting is a perfect example of card stacking of the kind that high school students are hopefully still educated to spot as one of the principal techniques of propaganda.

Here’s how the weekly writer explains himself this time: “Since we're unremittingly bearish on the economy, interest rates, the consumer and the dollar, the buck’s rally is just a reflexive rebound. It goes without saying we're also bearish on the market. But so far, obviously, the market hasn’t been very accommodating. (One notes that the S&P is at its highest since the second half of 2001).

The writer reports that his oft-quoted friend Fred Hickey, author of the High-Tech Strategist newsletter, see this his way.. Both are troubled by what they see as the excessive optimism that investors have in the face of negative technology news. They are particularly troubled by the recent strength in semiconductor stocks (although one would think this might be tempered by the fact that the S&P Semi index fell 5.6% last week, its second-worst decline in a year). After all, there has been some negative earnings guidance from companies lately, and Intel’s earnings were still 10% or so below analysts’ predictions in early September and will lag year-earlier totals; and “the PC market continues to soften and the pickup in IT spending remains conspicuous by its absence.”

The writer concludes: “What the sound and fury about Intel's revised estimate does reveal is how readily investors are willing to clutch at fantasy when the facts aren’t especially encouraging.”

And yet, investors actually found Intel and its pronouncements especially DISCOURAGING last week; its stock dropped 7% from 24.2 to 22.7, and the S&P Semiconductor Index was the worst-performing group in the S&P 500.

This case study in card stacking and testimonial is regrettably typical of what the public is exposed to week after week. But it also contains a good lesson. The market reacts to changes in expectations, not realizations. In general, the market is most favorable for purchase when realizations are worst and sentiment is negative.

As to whether a bullish case or bearish case seems more promising, that depends on such factors as how far prices have sunk or risen, what the likely future news is going to be relative to expectations, and the opportunity cost of such competing investments as long-term bonds, and the spectrum of other less risk-free assets.

(One of the columnist’s greatest virtues, in addition to his stylish wit and the skepticism he focuses on Wall street hype, is the total lack of any personal interest in the outcome, since according to the Collab’s interview with him, he doesn’t trade or invest in individual stocks.. I am not able to climb that high plane in this case (or any other), as I own Intel shares. At least I can say that my visceral reaction against this very special kind of bearish argumentation technique is not galvanized by a bullish view, as I am quite short the market at this moment.

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