Interpreting Market Worries: The Year in Review

When looking ahead, it is often helpful to know where you have been.  The calendar provides an arbitrary dividing line.  It is better to do a constant process of re-evaluation and review.  Since most people need a nudge, we all take a special look at the start of a new year.

As I work on my forecast, I have already reached two important conclusions about 2010:

  1. Many of the market worries were resolved — some quite decisively — as the year progressed.
  2. The overall level of concern was undiminished.

This is quite remarkable.

The single most important thing for the investor to understand — right now — is the value of worries.  If you are looking for good investment returns, you need a time when others are worried.

The concept of the "wall of worry" is difficult for the average investor.  They seem to think it is bad when there are many worries.  In fact, the lack of worry is a sign of a market top.  Let me simplify.

Here is the image of the market top:  "What?  Me Worry?"

Alfred E

When there are plenty of things to worry about, we are not yet at a market top.  If all of the worries were resolved we would be at Dow 20K.  (At the end of May, with the Dow at 10K, I wrote that it would double rather than getting cut in half, despite all of the doomsday predictions.  We are now 15% of the way there.)

The Worries of 2010

I am working on an article that will review the "Worries of 2010."  My starting idea for classification includes the following:

  • Valid concerns that are still with us;
  • Valid concerns that declined during the year;
  • Concerns that were mostly political — better ignored by investors;
  • Totally bogus concerns that got a lot of publicity.

I am open to the suggestion of new categories.

Here is a list of worries that I have noted, in no particular order:

  • ETF liquidation doomsday scenario
  • Flash crash — and overall worries about market manipulation
  • Bush-era tax cut expiration
  • Collapse of the euro and/or European Union
  • The Hindenburg Omen
  • Increase in US budget deficits
  • Ominous head-and-shoulders pattern in market averages
  • Dow 5000
  • Dow 2000
  • Dow 1000
  • The collapse of the US consumer
  • The double-dip recession
  • Sell in May
  • Sell in October
  • Sell, Mortimer, Sell  (OK, I sneaked that one in for those who know).
  • The BP spill
  • Fear of Obama
  • Obamacare
  • Weakness in the dollar
  • Strength in the dollar
  • Weakness in China's economy
  • Strength in China, leading to higher rates
  • Korea
  • Iran
  • Initial claims spiking to over 500K
  • Initial claims falling, but results skewed by seasonality
  • Shadow housing inventory
  • Foreclosure robo signing
  • Overstated and exaggerated corporate earnings
  • Fed blunders — QE II
  • High frequency trading
  • Worldwide collapse and deflation
  • Worldwide hyperinflation

Please help me in adding to this list.  Comments very welcome.

Help in getting started

Some of the worries have proven to be either false or dramatically overstated.  Without arguing about the data, let us just look at the Google Trend on "double dip recession."  While a recession is always possible through an expected shock, anyone making this as his base case scenario has lost touch with the data.  Google Trends is a nice "wisdom of crowds" sort of indicator.

Double dip

Here is another good case, the big scare about the Hindenburg Omen.

Hindenburg omen

This was another case where many people were scared out of their investments because of a contrived indicator that I exposed in August, near the peak of the bogus fear.  (The Dow closed at 9985 that day.)


My working conclusion is that many worries have been resolved, but new ones are created at an equal pace.  As long as there is so much to fear, we are not close to a market top.

I am going to follow up on this, but I hope to stimulate comments and suggestions as part of my framework.

A Word about Risk

Worries imply risk.  Each investor is different.  During 2010 I have frequently cited the need for each investor to analyze his own needs and risk tolerance.  Too many investors missed out on 2010 because of a feeling that they needed to guess the market — all in or all out.  This is weak.  An investment program is a carefully designed mixture of approaches.

Investors need to understand whether they are protecting assests, or growing assets.  Wealth preservation or wealth creation.  Then they need to analyze risk.

Investors spend too much time thinking about the market, and too little time thinking about their own needs.




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  • Brett Alexander December 23, 2010  

    This was brilliant. Some of my favorites: “There is no volume.” “The retail investor is dead, probably for a whole generation.” Also, the on again, off again love affair with the Baltic Dry Index depending on what point of view it supports at the time.
    The real highlight of the year, for me, was David Rosenberg essentially telling the ECRI guys that they don’t know how to interpret their own proprietary indicator.
    We now have Meredith Whitney trying so very hard to stay relevant predicting the Muni-Apocalypse.

  • oldprof December 23, 2010  

    Thanks, Brett. Good additions to the list!

  • Paul Nunes December 23, 2010  

    The Bond Vigilantes in General;
    Collapse of Euro
    jeff; well done

  • scm0330 December 23, 2010  

    Jeff, I think in presenting a more-or-less undifferentiated list of “worries,” you end up trivializing legitimiate risks to the economy, and to the market. With that preamble, I’d add “developed world sovereign debt,” “municipal finances,” and
    “public sector pensions” to the worry list. All trace back to the same root condition — namely, unaffordable debt obligations, and promises. If they prove affordable, it’s because we’ve chosen to honor them at the cost of other destinations for our economy’s human and financial capital. Choices count, and there’s not much escaping this reality. In the meantime, I guess we’ll (you’ll) regard them as the functional equivalent of the Hindenburg Omen and the BP spill as threats to the system.

  • oldprof December 23, 2010  

    scm0330 — I am sure that you want to be fair in your observations. If you look again, I think you will see that I do indeed have four categories and invited people to suggest more. I write about the real economic risks nearly every week, emphasizing employment and housing. I have written several articles on the deficit issue, with a link at the top of the page.
    Thanks for pointing out three threats you take seriously. One challenge is to try to quantify the worries and translate them into future earnings of the companies we might buy. Or to figure out where else to look for investments.
    Let’s take your public pension example. How should that affect a decision about buying stocks? Do we wait for some kind of “all clear”? Until more states imitate NJ? How would we measure progress?
    Thanks again for your suggestions.

  • Paul Nunes December 23, 2010  

    Jeff; Tom Graff over at Real MOney has an outstanding post regarding Muni issues this afternoon. For those who don’t know; Tom also wrote the blog Accrued Interest; Tom has many well written pieces describing how various facets of the fixed income markets operate; Have a great holiday weekend!

  • scm0330 December 24, 2010  

    Hi Jeff,
    Yes, not to quibble, but in the outset of the article you indeed offered four categories of “worry.” You also offered an undifferentiated list of worries immediately following, lots of them falling toward the bogus category just by inspection. Your graphs following the list also illustrated the bogus form of worry. I’m only a casual reader, I can’t read your mind, and I probably get all your intended nuances, but I read the article on a holistic basis as one pointing out the typical folly of undue investment worry.
    The debt-related concerns that I noted are tough to quantify to a stock-specific level. But then, lots and lots of analysis is tough to quantify to that level, due to the data lacking robustness. Modern markets haven’t been around long enough, and they’ve morphed a lot, so durable data samples are elusive. A lot of what we get left with are probabilities, distributions, and tails — or at least our estimates of all three and more, presented as educated guesses.
    WRT to quantifying the risk that surrounds the debt problem, I think we’re seeing it, somewhat, in real time — it’s in the diminished market multiple. Investors are cautious on the secular future, beyond whatever cyclical expansion we’re having. The yoke of debt, whether it’s preserving the claim of existing creditors to current sovereign deadbeats, or paying for further bailouts and stimulus, is a claim on future growth potential, and I think investors are discounting a slower-growth future. (How can they not, when the government of the world’s largest economy is spending $3 for every $2 it takes in, its central bank is buying a large portion of the resulting deficit, and is the largest holder of governmental debt, and there is almost zero political will to stop the madness?)
    The real interesting part will be when the true crisis phase of developed-world debt, ours and Japan’s and Europe’s, dawns on us. Right now, we’re just warming up before the game — I’m not sure we’ve even thrown out the first pitch. Maybe the teams are just now taking the field. (And yes, in the meantime I think investors can still make money, in a variety of assets.)
    I am most fond of the quote attributed to Hemingway — that a man goes broke slowly, then all at once.

  • Muckdog . December 26, 2010  

    I think you missed a few Wall Street Worries from 2010.
    * Sandra Bullock being cheated on… ( and Eva Longoria).
    * Miami Dolphins 1-6 at home, but 6-1 on the road.
    * Lohan in jail!
    * Lady GaGa’s meat dress
    * Bristol Palin – top 3 in Dancing with the Stars.
    And the market went up anyway!

  • oldprof December 26, 2010  

    scm wrote:
    “You also offered an undifferentiated list of worries immediately following, lots of them falling toward the bogus category just by inspection. Your graphs following the list also illustrated the bogus form of worry.”
    You are welcome to your viewpoint about debt and the markets. I am trying to help, but you and other readers are certainly free to ignore if you wish.
    Meanwhile, the quoted comment about my graphs is another matter. I cannot allow your inaccurate assertion to stand. If you have not been following the markets, so be it. Other casual readers should be informed about the difference.
    The two graphs — the double dip recession was the big market story for most of the year. Following the wrong interpretations of the ECRI promulgated by David Rosenberg and others was an expensive mistake for thousands of investors.
    The Hindenburg Omen went viral after a feature by Zero Hedge. The story was picked up on CNBC in a feature, discussed by Art Cashin, and circulated everywhere by email. People who know nothing about how to do research found this compelling, just as they do the current Hussman piece which uses a similar methodology.
    The only way you can see these as “bogus” is because you now know how it played out.
    Meanwhile, at the time the stories were happening, when people were going wrong, I was explaining the problems. You might try going back to check out the links in my original story.
    SCM — you seem like a smart guy, but you need to check your facts a bit. Also, you are making one of the big mistakes I have warned about — confusing your political opinions with your investment decisions.
    I hope you will consider these ideas and keep reading.

  • oldprof December 26, 2010  

    Muckdog — How could I have possibly missed these crucial market worries?

  • scm0330 December 27, 2010  

    Hi Jeff,
    Thanks for your further reply. We’ve just about beaten this to death, but allow me a couple thoughts, and I’ll look forward to your reply, if you have time:
    1) You are mis-characterizing something I said, by implying that my investing decision making is clouded by my politics. That’s not the case — as I indicated, I do believe we have an untenable fiscal and monetary policy (do you disagree, and believe they are?). I think these policies are, in their aggregate, creating a favorable short-term environment for risk assets, but mostly for the wrong reasons — e.g., liquidity, and credit reserve creation — and not because sufficient numbers of people are going back to work and producing things of value. Fortunately for investors, companies are producing to meet overseas demand, and their lean cost structures are helping to maintain earnings growth. (I know you’re a stickler for the data, and I realize that my broad-brush statements are just that, but this is the big picture as I understand it.) Longer-term, our debt profligacy will hurt us. At best, it’s a headwind against future growth, since so much of the spend is transfer payments and consumption, vs. investment in productive, long-lived assets. At worst, it’s barreling us toward a debt crisis. Throw a couple of trillion at the economy, and you’ll get some action. And we’re getting it. But debt matters, more than short-term deficits.
    2) At an even further risk of mis-characterizing what you do, here’s something I noticed. You seem to have a bone to pick with Rosenberg and Hussman, judging from how often you call them out. Let me take Rosie for a moment. Yes, it sure looks like he got the double dip call wrong, and yes, (maybe) he took a mild liberty with over-interpreting the ECRI index. But you get real personal with that, implying that Rosie had cost investors money if they’d been listening to him back in the summer. If Rosie were the only data point, I’d agree more, but I recall ISMs that were softening, no real letup in new jobless claims (and not much yet, still), and a precipitously falling stock market. In fact, Jeff, market averages were in the red as of 8/31. After the spring highs and subsequent retreat, all the market’s gains have come in the last four months — coincident, I might add, with the first signals from Bernanke that there’d be a QE2. So, big picture, you seem to want to hang a blown call onto Rosie, but he wasn’t the only “indicator” out there at the time signaling caution. Is it possible that QE2 was a stick save for the market, I wonder…?
    One more thing, then I’ll shut up…not sure how intentionally you do this, but let’s go back to the charts in your article. Ok, in my world, the double dip risk was very real (and the market action was telling us this. Unless the market has no anticipatory power, if it’s not going up…) The Hindenburg omen was not real, though. I mean, c’mon, no one had ever heard of the thing, and a person who spent literally one minute reading underneath a headline would’ve arrived at that same conclusion. But in teaching with examples, you present the two cases as similar in nature. You unconsciously suggest their equivalency to a reader. That has the effect of trivializing the first discussion, that of the double dip (and of Rosie), by mentioning it in the same breath as a bogus item, that of the H.O. I’m not sure how consciously you do this, but I’ve observed this technique elsewhere in your work.
    Sorry for all the rambling. Quiet day at the office!

  • oldprof December 27, 2010  

    scm — I am delighted that you are separating your long-term policy concerns from your investing, and that you saw through the Hindenburg Omen. Because I interact with individual investors all of the time, I know that many were spooked by the HO, the head-and-shoulders pattern, the Aunt Minnie, and the Titanic. Very few people disagreed with the HO authors, and none of us got on CNBC! Teaching about methodology is not as interesting as a feature on a blind physicist turned market analyst.
    Meanwhile, what if I told you that Hussman’s “bad times to invest” had the same methodological flaws as the Hindenburg Omen? Meanwhile, it was the most popular article for weeks on Advisor Perspectives. It was picked up everywhere, including the current Mauldin piece. People who have not had a good course in research design, even very intelligent people, cannot see the error. It seems compelling.
    There is a lot of this type of research in the financial community. I write about it all of the time. I use the Hindenburg Omen as an example because it is the easiest for people to understand, and it has a relatively short time frame. I have a category about reviewing research and pundits. So that is what I THINK I am doing. To check, I searched my site for Rosenberg. I mention him once or twice a year over the five-year history of the blog. Hussman is more like two or three times per year in the search. That is more natural, since I write about forward earnings and he uses some form of trailing earnings.
    I plead Not Guilty:) I am an equal opportunity critic of flawed methods.
    If things are still slow, feel free to fire away. And I agree with much of what you write…