Posts tagged ‘Abby Cohen’

Extrapolation: Dangers of Mixing Cyclical & Secular

One of the toughest jobs in making investment decisions is determining whether changes in profit growth rates are due to cyclical trends or secular trends. The growth of technology and the advent of the internet have not only accelerated the pace of information exchange, but these advancements have also led to the explosion of information (read more).

Drowning in too much information can make the most basic decisions confusing. One of the dreaded by-products of “information overload” is extrapolation. When faced with making a difficult or time consuming decision, many investors choose the path of least resistance, which is to fall back on our good friend…extrapolation.

Rather than taking the time of gathering the appropriate data, exploring both sides of an argument, and having objective information guide educated decisions, many investors open their drawers and grab their trusty ruler. The magic ruler is a wonderful straight-edged tool that can coherently connect any two data points. The beauty of the wooden instrument is the never-ending ability to bolt on a simple convenient story on why a short-term trend will persist forever (upwards or downwards).

We saw it firsthand as the world got sucked down the drain of the global financial crisis. Throughout 2008 bearish pundits like Nouriel Roubini, Peter Schiff, Meredith Whitney, and Jimmy Rogers came out of the woodwork (read more about Pessimism Porn) comparing the environment to the Great Depression and calling for economic collapse. Needless to say, equity markets rebounded significantly in 2009. The vicious rally was not strong enough, nor has the economic data turned adequately rosy for the bears to pack up their bags and hibernate. To be fair, the panicked moods have subsided for “Happy Abby” (Abby Joseph Cohen – Goldman Sachs strategist) to make a few short cameos on CNBC (read more), but we are far from the euphoric heights of the late ‘90s.

I think recent comments by John Authers, columnist at The Financial Times, captures the essence of the current sour mood despite the economic and equity market rebounds:

“Last year’s rebound was, most likely, a bear market bounce. The central hypothesis remains intact. On balance of probabilities, the rally since March has been a (very big) rally within a bear market, and the downward move is a (not so big) correction to that rally. There is no new reason to fear we will revisit the lows of 2009, but every reason to believe that stocks are still fundamentally mired in a bear market.”

 

Just as overly pessimistic bearishness can cloud judgment, so too can rose colored glasses. Chief economist at the National Association of Realtors, David Lereah, is an example of how biased bullishness can cloud reasoning too. Among the many comments that made Lereah a lightning rod, in July 2006 he noted the real estate “market is stabilizing” and followed up six months later by claiming, “It appears we have established a bottom.”

Extrapolation is a fun, easy tool, but at some point the simple laws of economics must kick into gear. Supply and demand generally do not rise and fall in a linear fashion in perpetuity. As the saying goes, “The herd is often led to the slaughterhouse.” Rather, I argue mean- reversion is a much more powerful tool than extrapolation for investors (read more).  

The country faces many critical problems that cannot be ignored and politicians need to show leadership in addressing them. I encourage and remind people that we have survived through multiple  wars, assassinations, currency crises, banking crises, SARS, mad cow, swine flu, widening deficits, recessions, and even political gridlock. So next time someone tells you the world is coming to the end, or a stock is going to the moon, do yourself a favor by putting away the ruler and aggregating the relevant data on both sides of an argument before jumping to hasty conclusions.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in LM, or GS. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

February 5, 2010 at 12:01 am Leave a comment

“Bye Bye Roubini, Hello Abby”

Perma-Bull with Perma-Grin

Perma-Bull with Perma-Grin

Bye-bye” Dr. Doom” and hello “Happy Abby.”  Abby Joseph Cohen is back in the spotlight with the recent market resurgence and is calling for a sustained bull market rally. The death-like sentiment spread by NYU professor Nouriel Roubini has now swung – it’s time for CNBC to call in the bulls, much like a baseball coach calls in a fresh reliever after a starter has exhausted his strength.

Watch CNBC Interview of Cohen

Over the last year, we’ve gone from full-fledged panic, into a healthy level of fear – the decline in the CBOE Volatility Index (VIX) supports this claim. But with cash still piled to the ceiling and broad indices still  are about -35% below 2007 peaks, I wouldn’t say sentiment is wildly ebullient quite yet. The low-hanging fruit has been picked and now we need to tread lightly and delay the victory lap for a little longer. Market timing has never been my gig, so gag me any time I attempt a market prediction. Having said that, sentiment comprises the softer art aspects of investing, and therefore it can swing the markets wildly in the short-run. Ultimately in the long-run, profits and cash flows are what drive stock prices higher, and that’s what I pay attention to. Profits and cash flows are currently depressed and unemployment remains high by historical standards, but there are signs of recovery. Cohen highlights easy profit comparisons in the second half of 2009 (versus 2008), coupled with inventory replenishment, as significant factors that can lead to larger than anticipated surges in early economic cycle recoveries.  Whether the pending economic advance is sustainable is a question that Cohen would not address.

Investors are emotional creatures, and CNBC realizes this fact. Before investing in that 30-1 leveraged, long-only hedge fund, prudence should reign supreme as we start to see some of the previously bullish strategists begin crawling out of their caves – including perma-bull Abby Joseph Cohen.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 12, 2009 at 4:00 am 1 comment


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