"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

10 December 2006

Market Complacency at levels not seen since '73 & '29

What? Me Worry?

Recent Market Commentary:
12/7/06 What? Me Worry?
11/30/06 Paulson Believes a Financial Crisis is Overdue
11/22/06 Happy Thanksgiving
11/16/06 Why the Market is Resting on Quicksand
11/9/06 The Death Spiral
11/2/06 Goodbye Goldilocks
10/26/06 The Fragile Assumptions Underlying the Market
10/19/06 Housing Stability? Don't Believe It
10/12/06 CEO Confidence and Housing Deterioration vs. Goldilocks
10/5/06 The Market is Still Significantly Overvalued

In a series of past comments (please see archives) we have spelled out our reasons why we think that a soft landing, while possible, is improbable in view of current conditions. In espousing this point of view we find ourselves in a distinct minority as a vast majority of investors, strategists and economists confidently believe that a soft landing is close to sure bet, and that the market will continue to advance at a solid pace. However, as the following quotes indicate, investors should be extremely cautious when majority opinion swings too far in one direction. In each of the following instances stocks declined substantially shortly thereafter.

July 3, 1929—“Moody’s says returns are in line with industrial activity.”

October 16, 1929—“Fisher sees stocks permanently high” (New York Times). Irving Fisher was the leading economist of the time.

November 2, 1968—“The Boom That Won’t Stop” (Business Week)

December 1, 1972—In 1973 Bulls Will Control the Market. (Business Week)

January 1, 1973—“Not a Bear Among Them” (Barron’s Annual Roundtable).

January 10, 1977—“Our Year-End Panel Sees a Further rise in Stocks.” (Barron’s)

October 26, 1987—Why Greenspan is Bullish” (Fortune) Edition was issued before the October 19 crash.

September 1999—“Dow 36,000: The Right Price For Stocks” (Atlantic Monthly)

April 27, 2000—“…relax, the over-all market probably won’t tank” (Business Week)

The stock market often undergoes a final solid rally prior to a cyclical peak as investors tell themselves that an economic slowdown is only temporary and will shortly reverse to the upside. They generally stick to this forecast until the signs of recession or hard landing become obvious to all. As former Fed Governor Edward Gramlich recalls the situation in late 2000, “everything was pointing up and, all of a sudden, everything started pointing down.” Of course, to those paying more attention to leading indicators than to coincident and lagging indicators, everything was not pointing up, and they are not pointing up today.


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