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How to Beat the Stock Market Mania of Pessimism

Stock-Markets / Stock Markets 2011 Sep 13, 2011 - 10:38 AM GMT

By: Investment_U

Two weeks ago, I opined that the biggest obstacle a stock market investor faces today is “headline risk.”

That is, relentless media negativity.

The idea seems to be gaining traction. On last week’s “This Week” on ABC Pulitzer-Prize Winning columnist George Will said, “The very least the media should do right now is not detract from the nation’s understanding or add to the synthetic hysteria.”

In the September 17 USA Today, James Paulson, chief investment strategist at Wells Capital Management said, “We are in the middle of a mania of pessimism. The nation is suffering from ‘Armageddon hypochondria.’”

Again and again, the media reminds us about the weak dollar, high unemployment, the soft housing market, problems in the Euro Zone, political dysfunction in Washington, trouble in the banking sector and the down and out consumer.After a few hours of this, you’d expect to walk outside and see bread lines and angry mobs.

That’s not what you see, however. What you see instead are ordinary people going about their everyday business – and getting bombed periodically with media sensationalism calculated to attract viewers and sell advertising.

It works, too.In fact, it works so well that few people see all the positives that exist today.

“Positives?” a friend asked me the other day, genuinely perplexed.”What positives?”

Exactly. We’ve gotten to the point where people have had so much downbeat news dripped on them for so long that they can’t even imagine there is a positive side to recent events or that any logical case can be made for owning stocks to meet their financial goals.

So let me take a stab at it now.

For starters, realize that it is not possible for anyone to accurately and consistently predict economic growth or stock market performance. But here’s an insight you can take to the bank:share prices follow earnings.(Earnings, of course, are the net profits of a business.)

In the third quarter of last year, the companies that make up the S&P 500 reported all-time record earnings. In the fourth quarter, those record earnings were exceeded, as they were again in the first quarter of this year and yet again in the recently reported second quarter.

If you didn’t hear that we are in a period of all-time record corporate profits, you really ought to think twice about who is delivering your newsworthy information. Or at least who is providing your investment guidance.

As investment legend Peter Lynch once noted, “People have all this data and yet they look at all the wrong things… It’s about earnings.They need to follow the earnings.”

Of course, just because corporate earnings have hit an all-time record four quarters in a row, it doesn’t mean they will continue. And, conversely, it doesn’t mean that they won’t.

If you can’t imagine why stocks would rally from here, just imagine what will happen if the much ballyhooed double-dip doesn’t appear.

• There are plenty of good reasons to be bullish on stocks right now. But if you are developing your investment perspective from gloom-and-doom media reports, you may not recognize the positive factors.So I’ll tick off four big ones for you now:

• Interest rates are at historic lows and inflation is negligible. That isn’t likely to change any time soon.

• Energy and food prices are moving lower and Bernanke has pledged to hold short-term rates at zero for two more years.

• Valuations are cheap. When the S&P 500 traded at these levels eleven years ago, it sold for 44 times earnings.But because profits have hit new records lately, the S&P 500 today sells for just 13 times trailing earnings, well below the long-term average of 16.4.

• Investors are anxious and afraid. This may seem like a negative but it’s not. Investor sentiment is an excellent contrarian indicator, especially when accompanied by low valuations. Think back to the market low of March 2008, when the consensus was that the world was coming to an end and the Dow briefly traded below 6,500. From that point the market put on an impressive rally, essentially doubling in 2 ½ years.As investment pioneer John Templeton rightly said, “Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.” Do you know anyone who’s feeling euphoric right now? Not me.

• Mutual fund investors have yanked money out of stocks over the past six weeks. It may seem counterintuitive but that is yet another positive. A 25-year study published last year in the Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills. In other words, it pays to buck the consensus.

Don’t get me wrong. More bad news from the Euro Zone and political wrangling here at home will still push stocks around from day to day. That’s not important. What is important is whether you’re confident – as The Oxford Club is – that the companies you own are set to report dramatically higher profits in the weeks ahead.

You may be reluctant to invest in stocks. I understand. It takes nerve and resolve to go against the trend and invest in times like these. But you should.

FDR was wrong about some things. But he got one big thing right. The only thing you have to fear… is fear itself.

Good investing,

Source : http://www.investmentu.com/2011/September/how-to-beat-the-mania-of-pessimism.html

by Alexander Green , Oxford Club Investment Director Chairman, Investment

http://www.investmentu.com

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Comments

Bill S 13 Sep 11, 16:53

Pessimism “Relentless media negativity” Are you kidding me? Seriously? 99.99% of all media coverage of our corrupt fiat Ponzi scheme market (a.k.a. the stock market) is nothing more than positive propaganda pieces. Sure, alternative media sites are better at telling the truth (what you call negativity), but mainstream media sites that the lemmings and sheeple listen to twist every negative story positive, so you are just dead wrong on that. But that is no surprise, as reviewing your profile reveals quite a lot about you---you are nothing more than a propaganda marketing shill for the corrupt fiat Ponzi scheme. You “claim” that pessimism is the root cause of our problems and that the market is a good value. The reality is regardless of ANY VALUATION metric, the market is 100% overvalued because the market is corrupt. It amazes me how white shoe “boyz” like you never reveal the truth about the U.S. fiat Ponzi scheme markets. You claim that people should invest in the corruption in order to be a “shareholder” in a company. You further substantiate this claim by stating that companies are seeing record profits. However, what you fail to talk about is that what profits (if any) public companies make always flow to the executives and other insiders who usually do not even own a single share of the company. Between execs paying themselves all of the profits and the printing of shares via stock options, all investors ever see is constant dilution and the promise of “growth”. Companies can quintuple earnings, but if the execs pay out all of those earnings to themselves and their friends via “printing” of stock options, in the end, the dilutive effects become a zero sum game. I will never understand how people like you can spew propaganda when you have to know you are lying. In researching your profile, it is clear you have studied the markets for a while, so certainly you must know that virtually all profit and “growth” goes to the executives via excessive compensation and dilutive printing of stock options. Because of this, the market has become nothing more than a corrupt Fiat Ponzi scheme comprised of deception and corruption. Even organizations that are supposed to set standards like FASB (accounting standards board) are in on the corruption, changing the rules to help companies who have debased their stock or made bad investments defraud investors via corrupt balance sheet accounting (e.g. market o market). The bottom line is I could go on and on. While the market is grossly overvalued, even if GDP were to grow 100% per year for the next 10 years it would not matter because executives that run U.S. corporations will print stock options for themselves and other executive compensation to account for all growth the company achieves. Sure, if you want to gamble, stocks will go up and down, but the only “value” the market creates is for the corrupt executives and other insiders and their propaganda ministers in the media. So, please spare us the “pessimism” garbage----most readers here are much more enlightened about how the corrupt fiat Ponzi scheme U.S. stock market works. Besides, why are you so concerned about what we invest in unless you have something to gain from it? The only question I have for you is given that you must know how corrupt the markets are, how do you sleep at night knowing that so many unenlightened “suckers” fall for your cheerleading propaganda and become victims of the fiat Ponzi scheme fraud that is the U.S. market? Do you understand and realize that there are real people behind those trades whose lives are destroyed so that you and your buddies can sail around the Hamptons?

g kaiser 13 Sep 11, 21:40

How to Beat the Stock Market Mania of Pessimism Yeah right. I prefer to beat it by buying gold. The market is a circus, run by the "in the know" run to attract and keep the money of the masses. It is, in short, more and more becoming a Ponzi scheme, where the last in the queue can expect to loose. Big. I prefer gold. That is one thing that can't be faked, copied, printed, QEed or whatever other devious scheme they have in mind. Don't forget that to get out of this jam they have got themselves in, they really need someone else to take the fall. They have skinned most investors, and to get to the rest, they have to skin the savers too. These are the idiots that will not play by the game, and have not yet lost their cash. They will be deflated to oblivion by new money creation. The only ones they can't do that to are the owners of physical assets. Chief amongst these, gold and silver. So, yes, beat the blues in shares. Leave them to sink.