A Week of Superstar Bears Moving the Market

On Monday, we noted that famed bank analyst Meredith Whitney single-handedly boosted the market 2.5% simply by her firm’s first “buy” rating on Goldman Sachs (GS). There was very little in the way of important macroeconomic data or earnings releases, the move was almost entirely prompted by uncharacteristically bullish remarks of Whitney (The Whitney Whiplash). Now, we know that Mrs. Whitney was in fact correct, but it was interesting to note that her bullish opinion was enough to propel the market to strong gains. A similar thing happened on Thursday as the market had traded traded just about even through most of the day, and then it became decidedly more positive after what was considered a bullish statement from perhaps the biggest bear of all, Nouriel Roubini. Roubini’s comments were interpreted to be a change of direction, but after the markets had taken off, Roubini disputed the fact that his viewpoint had changed at all.

This is an interesting phenomenon, especially since their are two definite examples of it in just one week. It signals the fact that the market is highly emotional right now, as investors search for which direction the market will head over the coming weeks. These respected analysts’ remarks are of course of interest to us, but they do not represent a change in the underlying fundamentals of the market. The volatile reactions to these opinions, moving the entire market, is something that has not been seen in quite some time. It is as if traders are allowing a handful of “superstars” determine the sentiment of the entire market. This phenomenon is a self-perpetuating cycle, as the more weight the opinions carry, the more they move the market, and the analysts gain a higher profile as a result. However, we think this cycle should be largely ignored by long term investors.

This situation reminds me of one of my favorite sayings of Ben Graham, one of the original superstar analysts, “In the short run the market is a voting machine. In the long run it’s a weighing machine.” The volatility in the market surrounding the assessments of Whitney and Roubini may be swaying more “votes” to the bulls side, but in the end it is fundamentals such as earnings, cash flow, and revenue will determine what the appropriate price level for the market will be. While we are enjoying seeing the market’s renewed strength we remain skeptical of the sustainability of this week’s gains. Whitney was correct to be bullish on Goldman, but that is just one bank in a larger financial system that she still refuses to recommend buying. Furthermore, Roubini seemed taken aback at the reaction to his statements that he said were taken out of context. In a statement released after the comments had been positively received by the market, he said his opinion remains that this will be a deep recession lasting about 24 months (we are 19 months in), and that economic growth will not resume until 2010.

We are at a crossroads right now with the market having risen 37% since the low on March 9th, and investors rightly want to be ahead of the curve on what is next. The market seemed to be searching for reasons for optimism, even though in Roubini’s case they weren’t there. My advice would be to stay informed on what matters, and analyst opinion is just one piece of the overall puzzle that includes valuation, sentiment and current market earnings reports/ macroeconomic news. Recently, the sentiments of two superstar analysts has taken center stage, which makes us skeptical of this week’s strong performance.

Original post

Comments

[whidbey:]

We should not overlook the effects of sentiment on buyer behavior.

They want an excuse to be done with the recession, so they snatch at anything which is going their way, the bigger the name the better (Roubini owns this recession so to speak). It is a dangerous sentiment, one easily mislead and if experiencing any success in rally is likely to run up to 1000 S/P points or more. After that I am less sanguine. Two things at work here.

Jul 17 02:30 PM

[TheFounder:]

ts like the market is looking for reasons to rally - even if those reasons are weak or artifical. I wonder how long can this continue..

Jul 17 02:47 PM

[Larry House:]

I can't help but think the market climb is just stretching a spring farther and farther. It may be possible to stretch it more, but at some point the spring will recoil. The market always follows fundamentals OVER A LONG PERIOD, but it can totally lose its head over short periods of time.

Jul 17 03:05 PM

[Broward Horne:]

Roubini is desperately trying to salvage his sinking ship.

www.realmeme.com/rolle...

Jul 17 10:50 PM

[cameroni:]

Gotta agree Larry. The higher we go the harder we will fall. We have just put the day of reckoning off a little bit further into the future but the bill will still be paid in full in the end. If buyers are optimistic now though then the power is there for a reversal despite fundamental trends and we have to pay attention to the sentiment on the bullish side. But there are still those who monitor the numbers and retain a very strong sense of the future. They remain guarded and sensible while still taking advantage of this last big bounce.


On Jul 17 03:05 PM Larry House wrote:

> I can't help but think the market climb is just stretching a spring
> farther and farther. It may be possible to stretch it more, but
> at some point the spring will recoil. The market always follows
> fundamentals OVER A LONG PERIOD, but it can totally lose its head
> over short periods of time.

Jul 18 01:02 AM

[Bob'29:]

Comment on a Barron's article:
"Blind Jockey Goads Horse Off the Track" Mr. Vito fails to inform us that some of the "spectacular" earnings of the week were actually abysmal. Intel beat their results of the '08 melt down quarter. Not exactly great...in fact very poor. Goldman Sacs made money after billions of government AIG bailout were siphoned in their back door. Both Paulson and Geitner are good ol' Goldman boys. A new rule prevents disclosure of where big block trades come from (the ones that have caused the late day moves this week). Can you smell Goldman Sacs? Are we happy that the government can now directly manipulate stock prices so that today's pain is put off until tomorrow. Unemployment is over 10% in fifteen states. The author is correct. We are we dupes with wool over our eyes. We are sheep ready to be skewered for the poolside barbecue. We are lemmings jumping into toxic water.

Jul 18 11:26 AM

[Old Trader:]

I'm not quite sure how you came up with that sentiment, given what he had "predicted" in regards to this downturn. Its more a case of quotes being taken out of context in both cases (Whitney, as well as Roubini). If he was changing his call, why would he bother to restate his case, by way of rebuttal to MSM reports?

To a lesser extent, the same is true of Whitney's call. Taking into consideration the full extent of her remarks, she's hardly sounding the "all's clear" for the financial/banking sector.


On Jul 17 10:50 PM Broward Horne wrote:

> Roubini is desperately trying to salvage his sinking ship.
>
> www.realmeme.com/rolle...

Jul 18 01:00 PM

[Fighting Yoda:]

The 'market sentiment' is decidedly bullish despite the fact that economic fundamentals are clearly bearish. Market is predicting a V shaped recovery - with persistent job losses - there is no such possibility.

For market to go down - there has to be an event - it probably has to come from the left field. Market is able to take job losses, CIT etc in stride - I call that a bubble. After all hype springs eternal.

Jul 18 01:22 PM

[gotribe:]

Oh please. Whitney was so late to the game and Roubini is a kook getting fried on short positions. Market rally had nothing to do with technicals and fundamentals, eh? Sorry your short positions got killed.

Jul 18 06:49 PM

[Deehena:]

Whitney and Roubini were just some frosting on the rally. Earnings reports underpinned the move all week.

Jul 19 05:17 PM