The Economic Roots Of Beta Climates

May 30, 2009


Big Corporate Bias (Wrong Macro View) Hampers Asset Allocation Results

It is what it is! The quote below is from Yves Smith of Naked Capitalism on July 7, 2008. It comes from her article titled: "Lehman, Deutsche Bank Strategists Predict Best 6 Months for S&P Since 1982."

"Since I seldom am the bearer of upbeat news, I thought I'd pass along the cheery forecast from market strategists at Lehman and Deutsche Bank, namely, that the Standard & Poor's 500 Index will have its best six months since the second half on 1982 in the second half of 2008."

Little commentary is needed to show how the Street was too sanguine just as we began to fall into the abyss on August 7, 2008, which was exactly one month after the above call. The rest is history, as is Lehman Brothers! In 2008, stocks experienced their worst half of any year since 1931. Sometimes we need bad news.

Figure 6 presents more 2008 folly. Here are the equity year-end forecasts of Wall Street strategists presented in Business Week on December 20, 2007, in "Where to Put Your Cash in 2008." The average forecast was for the Dow Jones Industrial Average and the S&P 500 to close 2008 at 14,569 and 1,612. They closed at 8776.39 and 903.25. Rob Arnott of Research Affiliates at 12,500 and 1,350 came closest to actual results. Tom McManus of Banc of America won the prize in 2007 by forecasting the S&P at 1,465 (yellow highlight). His wide miss in 2008 makes it likely that he was betting on serial correlation and not fundamentals when making his forecast.


Figure 6. Business Week's Wall Street Strategists Survey For 2008


The consensus failed miserably in 2008! Here is more folly from Where to Put Your Cash in 2008. Tobias Levkovich, Chief U.S. Equity Strategist at Citigroup (C) expected S&P 500 reported earnings to rise 5.2%. They fell by a whopping 58.3% and are down 83% from their 2007 peak. David Bianco, Chief U.S. Equity Strategist at UBS Investment Research (UBS) made this brilliant observation: "2008 will bring clarity on U.S. economic health and the sustainability of robust earnings growth that the S&P 500 has generated in recent years." How can they miss the worst financial crisis since the Great Depression? In December 2007, could they have not at least suspected a typical recession where earnings fall by 15%-20% and equity prices decline 25%- 35%? The handwriting was on the wall for all who chose to read it.

Street Pros make the big bucks to get it right. You would think that with all of their resources and contacts that they could have heard the train wreck coming. I can excuse their blindness but not their deafness too. My views in December 2007 were bearish. I was only looking for a 25% to 35% recessionary decline off the October 2007 highs sometime in 2008. I only got more bearish as the crisis accelerated.



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