Pessimism: The New Optimism

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Oct 15, 2008 10:28 pm


Is the stock market about to see a huge rally?

I know, I know. It just plummeted again. Am I crazy?

More importantly, only a sucker tries to predict short-term moves.

But the mood is so utterly bearish across the board right now that I am fighting the urge to turn into a raging bull.

Look at Merrill Lynch's latest fund manager survey. Every month,
Merrill surveys the biggest money managers around the world to find out
what they think about markets and what they are doing with their own

Right now they hate almost everything except cash. Merrill calls the
new survey, out Wednesday, "one of the most pessimistic" ever. "Over
the past month, fund managers have lost faith in global growth,
commodities, China's economy and emerging markets," the firm reports.

Sound bearish? That isn't. Quite the reverse: When the big money
managers are very bearish, that's often positive. It means they are
already out of the market. "Three factors are coming together that have
tended to be associated with market rallies," reports Merrill. Fund
managers say they have a low appetite with risk, they are holding very
high amounts of cash, and yet a lot of them admit that equities are now
undervalued. In fact the percentage of fund managers around the world
who told Merrill that shares are now below fair value is the highest in
a decade.

(Aside: Even Jeremy Grantham, the super-bear who anticipated this
crisis better than anyone, now thinks stock markets are below fair
value, although, as so often, he fears they may get even worse.)

The Merrill survey sometimes is an incredibly useful handbook for
individual investors. It tells you what the big money crowd is
thinking, and feeling, and where they have placed their chips. At
market extremes, it is a wonderful contrarian indicator, or "magnetic
south," pointing in exactly the wrong direction.

Thus fund managers were hugely bullish on European equities 16
months ago, just before those markets collapsed, and hugely bearish on
Japan back in the spring of 2003, just as it hit rock bottom.

A staggering 93% today are blowing Bronx cheers at analysts'
earnings forecasts. They think corporate earnings will disappoint in
the year ahead. Indeed 51% believe forecasts are "far too high."

Of course this may leave more room for positive surprises than for disappointments.

And it isn't just the Merrill survey that's making me itch to be bullish.

Look at the market: It has so far failed to follow up on Monday's
rebound. Everywhere you go, there huge skepticism about any rally.
Worldwide share prices are worth 30% less than they were at the start
of September, and nearly a fifth less than they were at the start of
October, but unlike in 2001, or 2006, no one is calling this "a great
buying opportunity." No one is jumping in.

The Wall Street Journal on Tuesday reported that a number of big
hedge fund managers have also been moving heavily into cash in recent
days. Some of them are frightened about the market chaos. It makes you
wonder why they're hedge fund managers.

Maybe it doesn't mean a thing. Maybe the market is about to fall another 2,000 points.

But some old stock market hands sometimes talk about the "golf
course" test: Be wary of any asset that fund managers are bragging
about on the golf course. In 1999, they were all boasting to each other
about all the dotcom stocks in their portfolios. Last year, it was all
their emerging markets stocks.

Right now, it seems, everyone is bragging about how much they are holding in cash.

Oct 15, 2008 11:26 pm

I thought pessimism was good at Dow 10000.  Then I thought it was good at 9000.  So I guess I love pessimism at Dow 8000. 

Oct 16, 2008 12:49 am

More importantly, only a sucker tries to predict short-term moves.

Oct 16, 2008 10:28 am

Don’t know where the next 1000 point move will be, but I do know where the next 10,000 point move will be, and that’s obviously more important.

  Thank you Nick Murray.   Stok
Oct 16, 2008 11:00 am

[quote=stokwiz]Don’t know where the next 1000 point move will be, but I do know where the next 10,000 point move will be, and that’s obviously more important.

  Thank you Nick Murray.   Stok[/quote]   Well yeah Stok, 10000 more points to the downside and we'd be at -2000!  I can't wait for Pepsi to pay me to take their stock!
Oct 16, 2008 11:16 am

It may sound obvious, but there’s a lot of wisdom in that statement.