Why Magazine Covers Are Historically Great Contrarian Indicators

Back to the future?

I’m not referring to the movie, Back to the Future, about a plutonium-powered DeLorean time machine that finds Marty McFly (played by Michael J. Fox) traveling back in time. Rather, I am shining the light on the uncanny ability of media outlets (specifically magazines) to mark key turning points in financial markets – both market bottoms and market tops. This will be the first in a three part series, providing a few examples of how magazines have captured critical periods of maximum fear (buying opportunities) and greed (selling signals).

People tend to have short memories, especially when it comes to the emotional rollercoaster ride we call the stock market. Thanks to globalization, the internet, and the 24/7 news cycle, we are bombarded with some fear factor to worry about every day. Although I might forget what I had for breakfast, I have been a student of financial market history and have experienced enough cycles to realize as Mark Twain famously stated, “History never repeats itself, but it often rhymes” (read previous market history article). In that vein, let us take a look at a few covers from the 1970s: (Click to enlarge)

Newsweek’s “The Big Bad Bear” issue came out on September 9, 1974 when the collapse of the so-called “Nifty Fifty” (the concentrated set of glamor stocks or “Blue Chips”) was in full swing. This group of stocks, like Avon (AVP), McDonalds (MCD), Polaroid, Xerox (XRX), IBM (IBM) and Disney (DIS), were considered “one-decision” stocks investors could buy and hold forever. Unfortunately, numerous of these hefty priced stocks (many above a 50 P/E) came crashing down about 90% during the1973-74 period.

Why the glum sentiment? Here are a few reasons:

• Exiting Vietnam War
• Undergoing a Recession
• 9% Unemployment
• Arab Oil Embargo
• Watergate: Presidential Resignation
• Franklin National Failure

A cartoon from the same bearish 1974 cover article.

Not a rosy backdrop, but was this scary and horrific phase the ideal time to sell, as the magazine cover may imply? No, actually this was a shockingly excellent time to purchase equities. The Dow Jones Industrial Average, priced at 627 when the magazine was released, is now trading around 10,247…not too shabby a return considering the situation looked pretty darn bleak at the time.

Reports of the Market’s Death Greatly Exaggerated (Click to enlarge)

Sticking with the Mark Twain theme, the reports of the market’s demise were greatly exaggerated too – much the same way we experienced the overstated reaction to the financial crisis early in 2009. BusinessWeek’s August 13, 1979 magazine captured the essence of the bearish mood in the article titled, “The Death of Equities.” This article came out, of course, about 18 months before a multi-decade upward explosion in prices that ended in the “Dot-com” crash of 2000.

In the late 1970s, inflation reached double digit levels; gold and oil had more than doubled in price; Paul Volcker became the Federal Reserve Chairman and put on the economic brakes via a tough, anti-inflationary interest rate program; and President Jimmy Carter was dealing with a full-swing Iranian Revolution that led to the capture of 63 U.S. hostages. Like other bear market crashes in our history, this period also served as a tremendous time to buy stocks. As you can see from the chart above, the Dow was at 833 at the time of the magazine printing – in the year 2000, the Dow peaked at over 14,000.

The walk down memory lane is not over yet. Conveniently, the Back to the Future story was designed as a trilogy (just like my three-part magazine review), so stay tuned for “Part II” – coming soon to your future.

Disclosure: Sidoxia Capital Management (SCM) has a short position in MCD at the time this article was originally posted. SCM owns certain exchange traded funds, but currently has no direct position in Avon, Polaroid, Xerox, IBM or Disney. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision.

Comments

[Plan B Economics]

Some of the headlines from the early 1930s are amazing. Depressing but amazing.

“The economy is showing unquestionable signs of life,” says Labor Secretary Davis on September 12, 1930.

www.planbeconomics.com.../

2009 Nov 11 07:15 AM

[GotLife]

Interesting contrarian indicator theory but you would need significantly more data to prove correlation and interest me for a return for Parts 2 and 3.

2009 Nov 11 08:04 AM

[mbkelly75]

I bought more MCD after that crash - had been a long-term holder before it and was not scared out of it. The dividend never blinked and neither did I. I have never used headlines as an indicator but I got a chuckle from this article and look forward to parts 2 & 3. Thank you for your work on this.

2009 Nov 11 08:20 AM

[Joyful Alternative]

You have to look up the Saturday Review of Literature issue lauding the president of Penn Central as businessman of the year, which was briskly followed by Penn Central's collapse and the invention of Conrail.

2009 Nov 11 08:26 AM

[Anthony B]

Hindsight bias? As bleak as those example covers are, at the time how would you know the next month's cover will not be bleaker. I'd like to see a timeline of magazine covers during each of these crashes, bet they get progressively worse as the market gets worse.

Then this great indicator becomes a function of how bleak the magazine covers can get. Just as valuable as how low market prices can get.

2009 Nov 11 08:37 AM

[somecatchyphrase]

Hyperbole and exaggeration are stock in trade for the media.

The good times are never as good as portrayed in the media. Likewise, the bad times are never as bad as portrayed in the media.

Always remember that the media exist for one purpose: to attract eyeballs and generate advertising revenue. Fear, greed, and anger are all useful tools toward this end.

2009 Nov 11 08:47 AM

[MDLGTO]

Obviously, the article is not scientific. But, I think the phenomenon that the author points out belongs to the ilk of the Bernard Baruch shoeshine boy - stock tip story. When investing memes hit the popular culture, they are overplayed. Ditto with the popular business media.

2009 Nov 11 08:49 AM

[woollyB]

Also note that mainstream, i.e., non-financial, magazines don't usually put a financial trend on the cover until it is nearly exhausted.

On Nov 11 08:37 AM Anthony B wrote:

> Hindsight bias? As bleak as those example covers are, at the time
> how would you know the next month's cover will not be bleaker. I'd
> like to see a timeline of magazine covers during each of these crashes,
> bet they get progressively worse as the market gets worse.
>
> Then this great indicator becomes a function of how bleak the magazine
> covers can get. Just as valuable as how low market prices can get.

2009 Nov 11 08:51 AM

[Karldean]

AAAAAAAA poooo! That's what I thought about the headline on this story when I saw it, but I read it anyway, insightful, reminds me of Frank and Ernest cartoon stuff, laugh in ernest or snicker at frank. If the wing of a plane doesn't flex, it breaks and the crash is coming.
The markets are flexing if it makes you nervous don't stare at it, you might see a loose fastener that can't tolerate the flex. Listen for the clunk as the gear locks in place, have a safe flight.

2009 Nov 11 11:38 AM

[Windsun33]

Mainstream media has always been a fair indicator - but "fair" does not mean perfect. When the vast majority are hyping the collapse, or the never ending rise - then it is time to watch things very carefully.

But that does not mean a total selloff or a total buyin. And right now the "mass media signals" are still mixed, but trending towards the "buy now or lose out forever" scenario for the general audience.

When you see "how to get rich on the stock market" articles start to appear in Vanity Fair & People, then it is REALLY time to sell.

2009 Nov 11 12:35 PM

[user396040]

The greatest contrarian indicator is brokerage cold calls. In February this year(right before the bottom), I got a cold call wanting me to open a new account with a short position; the only other cold call I got like that was in the summer of 2002 - not long before the bottom. I got lots of cold calls from commodity brokers near the top of the oil market; recently I got a cold call from a precious metals broker. I think cold calls are a great contrarian indicator because the brokers develop pitches based upon what they think the unsophisticated public is primed to believe. My wife wants us to get on the FCC Do Not Call List, but I have resisted because of the invaluable information I get from broker cold calls.

2009 Nov 11 02:09 PM

[Denis Gould]

Markets are discounting mechanisms. By the time a story is clear enough for the media to write about it, it is already discounted by the market.

That doesn't mean the market has to go in the opposite direction, that depends on what gets discounted next. It just means that the story you see on the front page is already reflected in the price.

2009 Nov 11 08:19 PM

[Windsun33]

Even after years of watching the media hype in both directions - up and down - I am still not sure if the hype factor is a leading or lagging indicator :)

2009 Nov 11 10:19 PM

[Mayer Amschel Rothschild]

I think we should remember that the point of this is that when this kind of opinion permeates all of a potential market, even the least informed (as is evidenced by the kind of person to get their financial information from Newsweek), then we know that all the bears/bulls that there can possibly be have already taken their position. So the only way for the market to go is in reversal because the bears/bulls have been exhausted.
The problem is defining when the point of saturation is. For example, some liberals have scoffed at buying gold because Glenn Becks' followers have done so, and those who take financial advice from Glenn Beck certainly don't seem to be sophisticated investors, so they think gold must be bound to trend downward. On the other hand, Beck definitely is not geared for a general audience, only a very specific section of the population. How many media outlets, and how financially oblivious their audience, must tell you to do something before it becomes truly "mainstream"?

2009 Nov 11 10:35 PM

[ozcutty]

Mail order Gold, must be a good indication gold is toppingout.

2009 Nov 12 06:41 AM

[rcadvisors]

My all-time favorite contrarian magazine cover came in June or July of 1999 when Business Week (iirc) had a cover picture looking over the shoulder of a chimpanzee with his feet up on a desk, reading the stock quotes of the WSJ, and looking back at the camera with that classic chimp show-their-teeth smirk/smile.

And the headline?

"Who Needs a Broker?!"

2009 Nov 16 03:52 PM

[H.J. Huneycutt]

There's probably some truth in this. My theory is that the mainstream media is always the last to catch on to things in the business/financial world. Hence, once they start writing huge stories about some major event, it's already at its end stages.

2009 Nov 19 09:10 AM

[Finance Answers]

This reminds me of what Jim Cramer wrote in his book Real Money:

Finding Market Bottoms
1. Wait for it to be on the front page of the New York Times. Don’t jump the gun.

If you think about it, it makes perfect sense. When a bottom is formed, there are no sellers left. All the last standing bulls have given up. Usually about this same time, everyone feels like its the end of the world and guess what, the story makes it to the front page of a national newspaper. It's such a simple concept, but remember dollar cost averaging is always the best strategy. Don't try to exactly time the bottom. Hope this is helpful.

2009 Nov 22 11:56 PM