Barry Ritholtz, der KEIN Perma-Bär ist, sondern bis letzten Herbst noch bullisch war, vertritt in der folgenden Artikelserie (Cult of the Bear, Teil 1 - 3) die These, dass die Aktienmärkte nach der Mega-Blase im Jahr 2000 in einen 15-jährigen zyklischen Bärenmarkt eingetreten sind - ähnlich wie im Zeitraum von 1966 bis 1982 (siehe Chart unten). In diesen 16 Jahren lief die Börse zwar per Saldo seitwärts, machte aber im Trendkanal große Sprünge.
Ritholtz' These ist, dass die derzeitige "technische Erholung" der Aktien-Indizes ab März 2003 (Beginn des Irakkriegs) sich nun ihrem Ende nähert - vergleichbar dem 32-monatigen Anstieg von Mai 1970 bis November 1973 (schwarzer Pfeil) in der Grafik unten (zweite grüne Linie). Nun soll, nach Ritholtz, die Abwärtsbewegung folgen, die den DOW auf 7000 runter bringt (rot, darauf folgend).
Cult of the Bear, Part IBy Barry Ritholtz
RealMoney.com Contributor
1/5/2006 7:18 AM EST
As 2006 begins, I'm at the bottom of the barrel, bringing up the rear, and the proverbial low man on the totem pole ... and I'm not talking about being in the doghouse with the Mrs. for excessive partying on New Year's Eve.
Rather, I refer to having the very lowest market prediction -- and by more than 2,000 Dow points (!) -- in the 2006 Business Week market forecasts.
In this column and one to follow, I'll describe my top down, macroeconomic process, and how I derived my improbable forecast. I'll also review some market history and explain how, after all the arguments have been made, these long-term charts reveal the most compelling reason to be cautious on U.S. equities into 2006.
If I were a weatherman, my forecast would be 50% chance of heavy showers --- despite the "sunshine" that greeted investors on the first trading day of 2006.
War Games
As part of their strategic planning, the Pentagon plays out various military scenarios: A land war in Europe, a U.S. invasion of Iraq, a revolution in South America. During the Cold War, Strategic Analysis Simulation was the mother of all war games, modeling nuclear confrontation between the U.S. and U.S.S.R.
These exercises allow for multiple variables and outcomes: Winning was less important than teasing out how different scenarios could unfold. Strategic planners wanted to learn how decisions were made in the field, where surprises may develop, how unforeseen events could cause a "domino effect."
I used similar war-gaming techniques to consider what might happen next year. Only instead of nuclear conflagration, I think about consumer spending, corporate expenditures and hiring. What might happen to real estate prices, and how will that impact other elements? Will the demand for commodities continue to increase? Will Asian growth stay strong? What will Congress do: taxes, spending, deficits, politics? What are the political wild cards? I wonder how inflation will impact all of it, and what the Federal Reserve might do, including the expected -- and the unexpected.
While doing all this war-gaming, one scenario kept coming up repeatedly: The slow-motion slowdown. It starts with the consumer, who after years of spending, finally tires. Soon, it infects corporate revenue and profits. Slowly, it cascades its way across different sectors: housing, durable goods, discretionary spending, entertainment. Eventually, the decay spooks the markets.
The Crowd Is Bullish
There is a lot of anecdotal chatter about sentiment , but I prefer to stick with quantitative data. I hear too many people say, "All my colleagues/friends/brother-in-laws are (fill in the blank)." That's meaningless.
The Business Week survey reveals one group of bullishness. When I made my guess, I never figured I would be the outlier to the downside. Silly me.
One alternative to conjuring up various scenarios would be to simply extrapolate this year into next. I suspect that's why so many forecasters cluster around the same numbers. Most of the surveyed group is clustered between 11,000 and 2,000 (about plus 5%-10%) on the Dow, while advising a 40% to 75% U.S. equity exposure.
But its not just the Pros: Other surveys reveal a similar bullishness. A WSJ.com poll of more than 5,000 people taken on Dec. 30 shows 46% expect the same thing in 2006 as the market gurus: between Dow 11,000-12,000. Another 12% think we end up at more that 12,000. About 22% expect to end 2006 unchanged. Only 9% expect we will see the Dow between 10,000 and 10,500 -- a mild correction of less than 10%. Just 11% believe the Dow will drop below 10,000.
This means 89% of these WSJ readers do not believe 2006 will be a substantially down year.
Note that the crowd isn't extremely bullish, however. It will take one more rally toward 11,000 to get investors to breathlessly embrace the market. Then the trap door gets sprung.
I understand why the crowd is so bullish. The past few years have seen terrific data points: S&P 500 earnings have grown by double digits for 14 consecutive quarters. Companies are awash in cash; they have been buying back shares at the most rapid rate we've seen since the late 1990s; more than $456 billion worth in 2005, according to TrimTabs Investment Research. Since the dividend tax rate was slashed to 15%, the number of companies issuing dividends has increased, and pre-existing yield-payers have upped their dividends significantly. That's before we get to the record-setting M&A activity last year.
Despite all of these elements, the markets are essentially unchanged. Look at any U.S. index for the past one or two-year period -- or even four or five -- and there's been very little progress made. Except for the pre-Iraq war selloff and subsequent snapback, and the rally from the October 2005 lows, there hasn't been much of a market gain. Aren't you curious as to why that is?
Cult of the Bear, Part 2
By Barry Ritholtz
RealMoney.com Contributor
1/9/2006 7:12 AM EST
In part 1, we reviewed my forecasting process, and considered some reasons why -- despite its bullish start -- 2006 might be rocky for U.S. equities. Today, we go to the charts.
The 100-Year Dow
Humans are particularly bad at thinking about long periods of time. We have evolved with much shorter cycles: A daily sunrise, a monthly full moon, annual seasonal changes. Longer periods of time are outside of our personal experience. They create an analytical blind spot.
When we look at the "long term," we discover interesting things. Consider each "market" period in this 100-year chart.
Regardless of how each one ends, every bull market over the past century has been followed by a significant refractory period. As the chart shows, it takes quite a while to recover from a crash. Some of this is due to the destruction of capital. At the end of bull markets, many indutries end up with excess capacity (think optical fiber or telecom.) But do not overlook the large psychological component of the pain incurred by investors. The damage gets repaired when investors finally forget about the pain they suffered -- or when a new crop of investors (without scars) finally appears.
Today, market junkies have a new mistress: homes. Their former passion for stocks has been replaced. As we have seen, their equity wounds -- plus 46-year low interest rates -- has made real estate the new hottie. My guess is that nothing short of a large and sustained move upward (e.g. several quarters) will rekindle their love affair with equities.
How likely is that? Is it possible that an 18-year bull market (1982-2000) could be followed by a two-and-a-half-year bear (March 2000 peak to October 2002 low), then followed by another multidecade (2003-2018) bull? Sure, anything is possible. But as the chart above shows, it would be historically unprecedented.
16-Year Trading Range
On the 100-year chart, take a close look at the bear market prior to the most recent bull. It's the 1966-82 trading range. On the long-term chart, it looks like a fairly benign flat range. In reality, it was a volatile, dangerous period.
Assuming we are, in fact, in a long, post-bull trading range, than this is year five (give or take) of what could be a 10- to-15 year secular bear market. As the 1966-82 experiences shows, we may be in for violent moves down and rapid blastoffs.
The 1966-82 experience says we may be in for violent moves down and rapid blastoffs
If we are repeating the 1966-82 experience, I'd say we are somewhere around 1972-73. The similarities are imperfect -- especially regarding interest rates -- but an unpopular war, a potentially scandal-ridden second-term president with low poll numbers, and the end of a 20-year bull run five years prior are too similar to ignore. Compare the numbers: the Dow is up 45% from its October 2002 low and the S&P by about 60%. That parallels the Dow's 67% gain from the 1970 low to the 1973 peak .
The next chart reveals what is known as the four-year, or presidential, cycle. The theory behind this is that U.S. markets have a tendency to make a low in the second year of a president's term and a high in the fourth year. It has held up quite well historically, with the notable omission of 1986. Recall, however, what happened in 1987.
The chart suggests that cyclicality is at play. Given the upward bias of markets over time, regular corrections of 20% or greater may be inevitable.
What is truly astonishing is the very human propensity to downplay or even ignore these periodic dislocations. The classic example is the tendency of humans to build homes in earthquake zones, in flood plains, where tsunamis have previously hit -- even near volcanoes (!). Investors have similar blind spots.
P/E Ratios Are Not Cheap
The chart below covers the S&P 500 and its P/E ratio over the course of 1982-2000 bull market. Note that the P/Es started at 7 and rose to nearly 50. The median P/E went as high as 32.
There are those who claim that P/E expansion isn't all that significant to market performance; they argue it is a function of falling interest rates. A better explanation is psychology: Something shifted in investor sentiment that made them willing to pay more than $7 for a $1 of earnings -- in fact, almost $50 per. That change is best explained by a sentiment shift related to perceived relative value.
Most investors do not think about P/E expansion as the lion's share of the market's gains. Instead, they credit a robust economy, technological advances, productivity gains, and (of course!) earnings improvement.
All those elements did have an obvious impact . By my calculations, they were responsible for about 25% of the gains.
But the biggest contribution of these elements was not to the bottom line; rather, it was to investor sentiment. This "fantastic four" allowed investors to rationalize higher prices: Aren't stocks worth more if the economy is doing well? Doesn't technology make companies more efficient? If workers are more productive, then earnings will be all the more better.
While rational, these are hardly easily quantifiable data points.
Multiple Expansion and Mean Reversion
So what does this have to do with this year's market performance? Nearly everything.
Do not forget that the process works in reverse, as well. Post-crash, there is an increasing unwillingness to pay more for a dollar of earnings. Indeed, that's why we are seeing the market making so little progress, despite all the "good data." Investors are unwilling to pay more for earnings. The machinery is spinning furiously simply to stay in place. Without share buybacks and dividend increases, market performance would be much worse.
This is the psychological issue referenced above. Why worry about corporate malfeasance, earnings misses and bad management? Instead, fix up your home and watch it appreciate! And, it won't get marked to market every day (less stress), and, unless you live near a toxic waste dump, it won't go to zero.
This explains how sentiment affects multiple compression. But does this process have a mathematical explanation?
Yes: Mean reversion is the process by which earnings ratios oscillate above and below its long-term average. And markets do not seem to stop on their means. Instead, they swing wildly above and below.
The accompanying chart shows we have been way above the historical averages for P/E ratios. From 1955 to 2005, the median P/E was 17. Stocks may not be terribly expensive at present, but they are hardly cheap by historical measures. An even more discouraging analysis comes from Clifford Asness of AQR Capital Management. He calculated the P/E ratios for the entire market from 1871 to 2003 at about 11. That suggests stocks are even less cheap (or more expensive) than is implied by our measure of "only" the past 50.
Whether you take the 50- or the 132-year perspective, the theory of reversion to the mean implies that stocks likely will become even cheaper as P/Es revert to the mean -- and then overshoot.
P.S.: I know "P/E mean reversion" has been the mantra of the permabears since the bubble burst (if not prior), causing most to miss the rally from the October 2002 lows. But that doesn't mean they're entirely wrong or that the theory should be dismissed.
Over the long term, I do believe P/Es will ultimately revert back to average levels, after falling below for a period. But there certainly are going to be short-term opportunities within the longer-term reversion cycle and, unlike the permabears, I've made various bull/bear calls such as here and here.
Despite accusations from critics and inflammatory headline writers, I am not part of the "Cult of the Bear."
In part 3, I'll tie together the top-down approach from part 1 and the technical factors discussed above to show how I got to my 2006 forecast of Dow 6800 and S&P 880.
Cult of the Bear III: Getting to Dow 6800
By Barry Ritholtz
RealMoney.com Contributor
1/18/2006 7:24 AM EST
Part I of this series reviewed our stimulus driven, real estate-reliant, post-bubble economy. Part II looked at the cycles of bull and bear markets, and how history suggests trouble ahead for U.S. stocks -- despite the strong start to 2006.
Today we focus on how it could all come together or, as the case may be, come apart. I'll detail how to get to my 2006 target of Dow 6800 -- the lowest (by far) in the Business Week survey -- and lay out a scenario for how the S&P 500 could take a 30% haircut this year.
Before the Fall
With everyone so focused on the bearish year-end forecast, many have overlooked my expectations for early 2006. As the Business Week survey shows, my first half Nasdaq prediction of 2620 was the single most bullish in the group, while my mid-year S&P call of 1350 was in the top 10 of nearly 80 forecasters. I also forecast Dow 11,800 by mid-year. (For the record, the survey was conducted in early December.)
Why the bull call before the fall? Because that's how market tops get made: In the 12 months leading up to the October 1987 highs, the Dow ran from 1800 to 2700 (a 50% gain), while the S&P 500 sprinted from under 240 to about 340 (about 42%). From October 1999 to March 2000, the Nasdaq nearly doubled. Although I don't expect anywhere near those gains in the first half of 2006, the pattern could be quite similar: A leap to new highs on some widely held assumption, which subsequently turns out to be false.
In the present case, several suppositions potentially fit the bill: The widespread expectations that the Federal Reserve will halt tightening sooner rather than later and that the U.S. consumer will keep spending. And do you know anyone who doesn't believe earnings will remain robust?
The Case of the Overdue Correction
One oddity of the move off of the prewar lows in 2003 is that the S&P 500 has yet to have a 10% correction. During the bull market period from 1996-2000, there were six corrections of 10% or more. Since the bottom on March 5, 2003, the S&P has sustained only three corrections of more than 6% and none greater than 9%.
Regular corrections serve a purpose for healthy markets: They cleanse the excesses that tend to develop, allowing further gains to proceed.
The lack of a 10% correction reveals high levels of complacency -- something the CBOE Market Volatility Index (VIX) has been implying for quite some time. This creates "air pockets" -- soft spots in the base of support that can potentially become more vulnerable to selling in the event of a test. As the 1966-1982 chart shows [gezeigt in Posting 4 dieses Threads, A.L.], broad trading ranges typically experience much greater than 10% corrections. Considering how regularly markets pull back and test support, the longer we go without that 10% correction, the greater the possibility of a steeper and deeper downturn.
The suggestion of a 30% fall in the S&P 500 has engendered widespread disbelief; investors broadly discount the mere possibility of such a correction. But as the nearby chart shows, there were five corrections that ranged in strength from 25% to 45% from 1966 to 1982. That averages out to one major correction every 38 months or so. The S&P's last major correction was a 33% drop from March to July 2002. That was 42 months ago -- implying we are overdue for another steep decline.
Structural Imbalances Create Vulnerability
Past crises such as the Asian currency crisis and the Long-Term Capital Management meltdown were able to be managed because of economic strength. When they occurred, markets were in the midst of a bull run and the economy was growing organically. The Fed had lots of room to add liquidity. The economy shuddered a bit, but handled these shocks well.
Ups and Downs
Today, the economy has far greater structural imbalances. As the markets get further extended, they become increasingly less able to absorb what has become euphemistically described as "an externality." As the current account deficit rises and the U.S. fiscal deficit worsens, so too does our ability to shake off an economic disturbance. Nouriel Roubini, professor of economics at New York University's Stern School of Business, calls this an "increased probability of a systemic risk episode."
Getting to 6800
What would have to occur for 2006 to be the strong year for the Dow many are expecting? Forget Goldilocks, we would need a Cinderella scenario, where nothing goes wrong, and many things go precisely right: Earnings must stay robust, while energy prices and inflation moderate. The consumer would have to keep spending, despite signs of tiring. Businesses would need to build on third-quarter capex spending, and begin to hire in earnest. All of the vulnerable Dow stocks would have to avoid their major issues, or even a minor hiccup.
None of the negative "externalities" currently contemplated -- from a major bird flu outbreak to protectionist legislation or other policy mistake to an energy shock to a dollar crash to a geopolitical crisis over Iran's nuclear ambitions -- can come to pass, much less something currently not on the radar. Finally, equities would somehow manage to avoid the regular corrections so common in secular bear markets.
If Cinderella fails to show, how might the Dow work its way down toward 6800?
The momentum from the beginning of the year should carry stocks higher into February. But a series of earnings disappointments and a few negative surprises from select names -- think DuPont (DD:NYSE) and Alcoa (AA:NYSE) -- creates a wobbly market. Disappointments after the close Tuesday from IBM (IBM:NYSE) , Intel (INTC:Nasdaq) and Yahoo! (YHOO:Nasdaq) won't help matters and may prevent the early 2006 momentum from carrying as far as I originally thought.
Investors start to gradually recognize that all is not well in the economy. The P/E multiple compression discussed in part II only adds pressure to stock prices, as does options-expensing. Companies on calendar years are required to expense options, starting this quarter. The effects of expensing options will be seen in first-quarter and full-year guidance.
This scenario won't collapse the market, but makes it vulnerable.
Perhaps the first-quarter rally has trouble gaining traction in the second. A modest downslide starts, as first-quarter earnings are reported. The bulls declare it a mere retracement and buying opportunity. But it turns out not to be; by the second quarter, the cyclical high for 2006 already has been put in.
How does this possibly get us to 6800? The Dow is calculated via a divisor, currently 0.12493117.
A point [= 1 Dollar, A.L.] of each Dow stock's movement is equal to a little over 8 points on the index. It's not too hard to imagine that as earnings slow, stocks begin to soften. A loss of 5 points on each component adds up to a Dow drop of 1,200 points (40 points times 30 stocks = 1200) -- that brings us to Dow 9800. And that's only 5 points; a 10-point-per-Dow-stock drop would drive the average to 8600.
All it will take will be a modest earnings slowdown, and the Dow slips below 10,000. That happens, and apprehension levels rise in earnest. Dip-buyers who bought stocks 1,000 points higher are upside-down.
Now imagine what happens if any of the highfliers -- say Google (GOOG:Nasdaq) or Apple (AAPL:Nasdaq) has a miss, or simply lowers guidance to reflect the slowing consumer. Or perhaps Home Depot (HD:NYSE) and Lowe's (LOW:NYSE) feel the pinch of slowing housing and refinancing activity.
Given the heavily promotional holiday-price cuts, I expect that many retailers -- Wal-Mart (WMT:NYSE) , Target (TGT:NYSE) on the low end, Tiffany (TIF:NYSE) and Nordstrom (JWN:NYSE) on the high end -- will see the margin pressure impact earnings.
The spillover effect will be substantial. And if the same happens in any one of the pricier Dow components -- Boeing (BA:NYSE) , United Technologies (UTX:NYSE) and 3M (MMM:NYSE) are all vulnerable -- we can easily see a day when the Dow is down 300 points.
In Japan, an investigation into Livedoor -- hardly a premier Internet company -- was a convenient excuse to whack the Nikkei 225 stock index down 462.08.
If breaking 10,000 will make traders nervous, below 9000 the fear levels will be palpable. At that point, any one of our laundry list of negative catalysts might come into play. In my war-gamed scenarios, the dollar doesn't have to go into crisis, and the avian pandemic need not kill millions; instead, the investing public need only become alarmed that something nasty might occur to take fear levels up toward panic.
The move from Dow 8800 to 6800 won't be a rational, calmly contemplated affair. No one will be quietly wondering about option-expensing or multiple compression. Instead, it will be a severe overreaction to some external event.
If and when that happens, it likely will be the best buying opportunity in the markets since the October 2002 cyclical lows.
Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally.
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