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Is There a Method to the Badness?

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Not all market strategists are created equal.

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In the aforementioned "Trading the Wrong Playbook Bubble," I addressed this role of sentiment in the post-crisis market, which has been dominated by an activist central bank that has distorted the pricing mechanism.
By manipulating the yield curve to generate negative interest rates, Fed policy has taken the discount out of the discount rate and thus removed the ability for markets to correctly price assets. Fed policy has essentially turned all assets into commodities subject not to valuation but simply the supply and demand for the securities.

At the same time that the Fed was taking the discount out of the discount rate, we saw an explosion of financial analysts, investment bankers, and so-called alpha-generating hedge fund managers all using the same playbook based on valuation models. So while the Fed was making valuation irrelevant, more and more investors were relying on and utilizing the same valuation models to make capital allocation decisions.

With Ben Bernanke having turned all assets into commodities, market price is not driven by valuation and growth based on models and forecasts, it's driven by positioning and sentiment based on speculation and fear.

Over time, earnings in aggregate are going to grow at some rate based on nominal GDP growth. Market returns don't come down to earnings growth -- they come down to the multiple. With the multiple a function of positioning and sentiment based on speculation and fear, it is virtually impossible to quantify. Yet the industry continues to rely on models and forecasts that purport to not only calculate the multiple, but predict what the market will pay 12 months in advance. These models are destined to fail by their inherent methodology.

Not all strategists are created equal; some like Jeff Saut (not among those sampled by Bloomberg) get it and understand how the market works. From last Monday's post on Minyanville citing sentiment and positioning:
Of course, the grind higher from the June 4 low has been accompanied by total disbelief among individual and professional investors. That is reflected not only in the flow of funds by individual investors out of equity-centric mutual funds, but in the latest Commitment of Traders report that shows the "pros" have been caught heavily on the short side into a rising equity market. So the fuse is burning and I think it is just a matter of time until the SPX travels above 1422.

Perhaps other Wall Street strategists need an input variable in their price target calculation for the Billy Ray Valentine effect. The fact is that year-end price targets are basically worthless, yet they are given far more attention than they deserve. These guys get carted around like they are omnipotent and can lead your portfolio to the Promised Land. However, the implied "alpha" in their collective track record is not only atrocious -- it's despicable. You constantly hear about how depressed the street is because of the lack of trading volumes and shrinking commissions. Maybe it's just that investors are no longer willing to pay them for a product that is subpar.

Twitter: @exantefactor
No positions in stocks mentioned.
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