Equity Analyst Siren Songs

By: Satyajit Das

According to George Will: "The future has a way of arriving unannounced". That was before equity analysts.

In dense, jargon-infected prose splattered with spurious statistics, many analysts are trumpeting that the worst of the credit problems are behind us. Major equity markets have recovered a substantial portion of their losses; even bubonic plague stricken financial stocks have rallied. It is time to buy for the new equity "bull market".

The following guide to the calls of equity markets seers may be helpful:

 

Market	Analyst Call
Weak data	Fed eases, stocks rally.
Strong data	Strong economy, stocks rally.
Consensus data	Lower volatility, stocks rally.
Bank loses US$ 8 billion	Bad news all out of the way, stocks rally.
Oil price up	Good for energy producers, stocks rally.
Oil price down	Good for consumers, stocks rally.
US$ down	Good for exporters, stocks rally.
US$ up	Lower inflation, stocks rally.
Inflation up	Good for commodities and asset prices, stocks rally.
Inflation down	Fed eases, stocks rally.
Climate change	Soft commodities up, stocks rally.
World ends	Good for disaster recovery companies, stocks rally.

Most analysts, it seems, share Eleanor Roosevelt’s view that: "The future belongs to those who believe in the beauty of their dreams."

There are reasons to believe that the outlook for equities is less optimistic. There is the small matter of global economic slowdown and the resulting reduction in corporate earnings growth. There is also the small matter of global de-leveraging that reduces the debt funded financial bid that has helped support stock prices. There is also the rising supply of equity issues especially from financial institutions seeking to reduce leverage and re-capitalise.

"Dips" do not always represent buying opportunities. Few tech stocks have recovered the heady price levels that were reached at the height of the tech bubble.

Stocks also do not give high returns over medium to long periods. Between January 1960 and December 1974, the Dow remained substantially unchanged. This period included the famed "go-go" years when stocks surged significantly but retraced. The Japanese stock and property markets have still not recovered the highs reached in 1989. Perhaps as Yogi Berra knew: "The future ain't what it used to be."

If the past is any guide, the seers may change their tune:

 

Market	Analyst Call
Weak data	Poor earnings outlook, stocks fall.
Strong data	Fed will tighten, stocks fall.
Consensus data	Already priced in, stocks fall.
Bank loses US$ 8 billion	More bad news on the way, stocks fall.
Oil price up	Bad for consumers, stocks fall.
Oil price down	Bad for producers, stocks fall.
US$ down	Bad for consumers, stocks fall.
US$ up	Bad for exporters, stocks fall.
Inflation up	Fed will tighten, stocks fall.
Inflation down	Weak economy, stocks fall.
Climate change	Higher inflation, fed will tighten, stocks fall.
World ends	Bad for insurers, stocks fall.

That may well be the turning point. As Hegel, the German philosopher noted, thinkers understand a concept just as it ceases to be relevant.

If all else fails, the investors should take comfort from former US vice president Dan Quayle’s advice: "The future will be better tomorrow."

 

 

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).

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