"I'm not sure I want popular opinion on my side — I've noticed those with the most opinions often have the fewest facts."
~ Bethania McKenstry
Opinions are like noses: everyone has one. But a strange thing happened on the way to Dow 12,000 — the overwhelming majority of financial pundits sound like a broken record:
“I think we should put on another 100 points in the S&P 500 by next February and another 1000 points on the Dow.”
~ Peter Canelo, Canelo & Associates, 10/13/06
“Our feeling is that the economy is slowing and this is good news for investors.”
~ Abby Cohen, Goldman Sachs, 10/17/06
"The upside still outweighs the downside in our view… People forget — this isn't like the late 1990s. This is like the mid-1990s."
~ Tony Dwyer, FTN Midwest Securities, 10/18/06
“I don’t think the economy’s ‘landing.’ I think the economy’s doing great… It’s better than Goldilocks quite honestly. This is the greatest global boom of all time.”
~ Ed Yardeni, Oak Investments, 10/18/06
“Count me somewhere between bullish and very bullish. The U.S. stock market remains undervalued, in my opinion."
~ Bill Miller, Legg Mason, 10/21/06
"It simply is not remarked upon enough how unbelievably powerful, how unbelievably bullish this rally is."
~ James Cramer, CNBC's "Mad Money," 10/27/06
Optimism is pervasive on Wall Street, yet some bulls, well aware of the laws of contrary opinion, claim too much pessimism as a reason to own stocks:
“The fact is we can’t find enough to worry about, and that’s usually a good time to find value in the stock market… Any red ink between now and the end of the year is an opportunity and not something for investors to run from.”
~ Mike Williams, Tocqueville Asset Management, 10/13/06
"… I think bravado and optimism begets bad times and chronic cautiousness paints a beautiful picture for the future. [This] is a low-risk, high-return situation created by cautious players."
~ James Paulsen, Wells Capital Management, 10/20/06
"Could we have a big bear market? I don't think so. Bear markets come from a combination of positive sentiment with bad surprises virtually no one anticipates… Today too many gloomsters and not that many big-time boomsters (like me) are around for this combination to occur."
~ Kenneth L. Fisher, Fisher Investments, 10/30/06
The bulls can't possibly be running confidently and running scared at the same time. What are the "facts" regarding investor sentiment?
- Guest commentary on CNBC (a.k.a. "Bubblevision") is universally upbeat, bordering on giddy.
- Over the last 420 weeks the Investors Intelligence poll of investment newsletter editors has recorded more bears than bulls just 6 times.
- The Hulbert Stock Newsletter Sentiment Index shows its sampling of short-term market timers with a 67.0% exposure to the stock market. According to Mark Hulbert, "the HSNSI’s average reading since the bull market began on Oct. 9, 2002, has been just 29.5%, or less than half the current sentiment reading. In other words, the wall of worry that has on average existed during this more than four-year bull market has now evaporated."
- Institutional investors have not deviated from their fully invested course. Mutual fund cash levels remain at a paltry 4.3%.
- Short sellers are nearly extinct. An estimated $4 billion resides in bear fund assets against $5.5 trillion in stock fund assets. The Strunk Short Index used to follow 25 short bias hedge funds; that number has dwindled to 8 or 9 (there were over 9,200 hedge funds at last count).
- In a twist of irony, many in the bear camp have resigned themselves to owning stocks (primarily energy and commodity-related) as a hedge against hyperinflation.
- The investing public is all in. Equities account for 35.6% of household financial assets compared to the long-term average of 26.5% (since 1952). Money market fund balances are near an all-time low 21.3% of mutual fund assets (see graph).
Ten of our favorite sentiment indicators are, on average, in the 73rd percentile of bullishness versus readings over the past ten years (see table). Overall, 1996 to 2006 was a period of stock market ebullience, making the current level of enthusiasm all the more extreme.
Sentiment Indicator Percentiles (data sample 19962006)
Investors Intelligence, Bulls — Bears
Market Vane, Bulls
CBOE Volatility Index (VIX)
MMF / Mutual Fund + ETF Assets
Equity Mutual Fund Cash Levels
Initial Public Offerings
NYSE Insider Buys/ Total Transactions
Speculative OTC Volume
S&P 500 Speculative Position
96,700 contracts long
118,100 contracts long
37,400 contracts short
Call Option Complacency
Meanwhile, the Soft Landing crowd continues to turn a blind eye to a credit bubble about to go into an uncontrolled spin. Median existing home prices dropped 2.5% year-over-year, their worst showing in nearly four decades. Foreclosures in California have doubled in the past year and are up tenfold in Boston since 2004. Default rates on subprime loans were 7.35% in July from 5.51% a year earlier, according to Friedman Billings Ramsey. Michael Perry, CEO of Indymac Bank (one of the nation's largest home lenders), thinks 4% of America’s mortgaged homeowners might lose their homes to foreclosure in coming months, four times worse than the historical average. Subprime lender Accredited Home Lending, Washington Mutual (with a large exposure to subprime) and mortgage insurer Radian Group all witnessed sharp stock drops on disappointing 3rd quarter earnings releases. Since this rally began in mid-July, the Philadelphia Bank Index (BKX) looks exhausted, capturing just 54% of the gain of the S&P 500.
Never confuse a stampeding herd with the facts. Only in a bubble can the majority — utterly intolerant of dissent — delude itself into believing it is in the dissenting minority. We're not sure whether such behavior is disingenuous or simply dysfunctional. Perhaps the old saw applies: "When everyone is thinking alike, no one is really thinking."
November 4, 2006