Jeff Saut: The Absurdity of Predictions
Better to be generally correct than precisely wrong.
"It's tough to make predictions, especially about the future." So said Yogi Berra in an era gone by. Yet, every year, during the week of the Epiphany, we make predictions about the year ahead, write them down, and lock them up in our safety deposit box to be read the following year. This year was no exception. Accordingly, last week I opened the lockbox and placed this year's predictions in it and retrieved last year's list. Interestingly, a number of last year's "guesses" were smack on the mark. To share but a few:
1. Roman Polanski will finally be arrested.
2. Illinois Governor Rod Blagojevich will be impeached.
3. A plane will crash into the Hudson River and everyone will survive.
4. President Obama will conduct a "beer summit."
5. General Motors' CEO Rick Wagoner will resign.
Of course I jest, yet I find it just as silly that Wall Street indulges in a similar charade as pundits pontificate on what's going to happen in the new year. Indeed, every December the media trots out the same "seers" to predict where the various markets will be 12 months later.
Take Barron's as an example. For as long as I can remember, Barron's has polled the same Wall Street strategists as to what they were forecasting for the year ahead. And, when the equity markets were in a secular bull market (1982-1999), those forecasts were generally correct. However, beginning in December 1999, those forecasts have been pretty wide of the mark. The most glaring "misses" were scribed in the December 2007 Barron's edition when, despite the Dow Theory "sell signal" that had been registered in November of that year, they said pundits were unanimously bullish. That same "crowd" correctly remained bullish in December 2008, albeit after losing another ~30% into the March "lows," before the second strongest rally in history (as measured by price and time) vindicated those predictions.
This year's Barron's panel, while containing some new faces, also has many of the same folks from yesteryear. As in the past,they're bullish, but much less so than I can ever recall. As for my firm, we refrain from engaging in such shenanigans, adhering to our mantra: I'd rather be generally correct than precisely wrong! Verily, to state that the S&P 500 (SPX) will be at 1350 and profits will total to $80, as the most bullish panelists suggest, is sophistry in our opinion. They might as well say those metrics will be achieved on December 27, 2010 at 3:27 p.m. Or as one savvy seer exclaimed, "They might as well flip a lucky penny." To be sure, getting "things" directionally correct is far more important than attempting to be precise.
To that "generally correct rather than precisely wrong" point; while it's true that a number of serious problems lie ahead for the economy and the various markets, monetary policy typically trumps everything else. And, when interest rates are low and money is cheap, asset prices tend to rise. This was the observation we made when the powers that be made it crystal clear they wouldn't permit any more "Lehman Brothers" type of bankruptcies in October 2008. They subsequently instituted the aforementioned low interest rate, massive liquidity monetary policy. Recall that was when we wrote that the bottoming process was beginning. It was also when on October 10, 2008 93% of the stocks traded on the NYSE made new annual "lows," a ratio not seen in a generation! While the equity markets traded marginally lower into their ultimate March 2009 "lows," we never gave up on the belief that the bottoming process began in October of 2008.
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