One thing that old hands have a hard time with is how easy it is for so many investors to forget - or ignore - the painful lessons of the past:
They fail to heed the powerfully seductive but often savagely destructive sway of the crowd. They are oblivious to the impact that emotions such as fear, and greed can have on their actions, and thought processes. They lose sight of the fact that markets invariably revert to the mean, often by way of an extreme pendulum swing in the opposite direction. They dismiss the ultimately unbreakable connection between Main Street and Wall Street, as well as the dangerously double-sided nature of leverage.
Eventually, though, they discover the truth, often in a way that is not particularly pleasant. And suddenly they realize why battle-hardened pros like MSN columnist Bill Fleckenstein were able to stand back, like the spoil-sports they were, and say: "Dow 14,000: I'm Skipping the Party."
Big threats are being ignored as investors celebrate the stock market's latest milestone. We haven't seen such arrogance since the heady days of 1999 and 2000.
"Behind Dow 12,000, an economy at risk."
That was the headline of my column on Oct. 30. Today, the risks have grown appreciably against the backdrop of a Dow Jones Industrial Average that's 2,000 points higher. Considering that this environment teeters on a massive edifice of leverage, illiquid concocted securities and derivatives, I cannot imagine a more dangerous time to be bullish.
To me, it has the worst elements of all the biggest inflection points in stock market history. There is the economic and stock market similarity to 1929. There is the derivative and leveraged-buyout component we experienced in 1987, coupled with the extreme lunacy of 1989's LBO craze. Then there is the investor arrogance on display that we last saw in 1999 and 2000.
To state the obvious, the equity market is in some sort of blowoff. Leading the charge have been what I call price-action junkies. They know the price of everything but the value of nothing, which is an attitude that we always see at peaks.
On Tuesday, for instance, this crowd fixated on every tick of the Dow's advance to 14,000. The party mood was captured on Bubblevision, which I tuned into (muted) to watch the tape, as I was working from home that day. In breathless anticipation of the Dow trading at 14,000, Bubblevision, otherwise known as CNBC, must have spent a good hour fixated on a screen that monitored the last quote of the Dow, as though the number 14,000 has any ramifications for anything.
As for something that does -- problems in the credit arena -- the network naturally offered no coverage. Of course, without the lunacy in creditland over the past few years, none of these asset markets would have levitated to where they are. But the price-action junkies featured on Bubblevision are unaware of (or unconcerned about) that, as knowing the price of everything but the value of nothing has not been an impediment to success in the past year or so.
Meanwhile, someone at the network must have telepathically tuned in to how I was feeling -- because as soon as I walked into the office that day, he was on the phone asking me to come on the "Fast Money" show.
I was so annoyed that I told him I had no interest in being involved in anything associated with the silliness of Dow 14,000. I then gave him an earful about the absurdity of what Bubblevision was doing. He pleaded with me to come on the air to discuss my viewpoint.
In a moment of weakness, I agreed to do so, just this once, after having refused all of the network's previous requests. In any case, folks can watch a replay on CNBC.com. Registration is required, but it's free.
A pas de deux starring Mr. Market and you
Lastly, as a foil to what passes for investment knowledge on the airwaves, I'd like to make a comment about analysis versus opinion. In the investment business, there are two components of an outcome you expect to see in the marketplace. The first is your analysis of the phenomenon or security you are scrutinizing. The second is your opinion (educated guess) about how other people will greet (price) the outcome that you expect.
For some time now, I have been chronicling the problems in the subprime-mortgage market and what they mean. It was possible to look at what had been occurring in subprime and know that a large number of these loans shouldn't have been made, as they weren't going to be paid back. In addition, it was possible to know that the people who owned the loans were levered up, as were the people on the hook for them. Thus, it was logical to conclude that many of these mortgages would be defaulted on, creating ramifications throughout the financing and economic food chain.
Those of us who believed in that analysis have been correct, and I believe we continue to be correct. However, those people (like me) who thought that analysis would matter to the stock market (the opinion part) have been incorrect, as thus far it hasn't mattered.
Nonetheless, I am more convinced than ever that the outcome I envision is unavoidable, even as the timing remains unpredictable.
In the final analysis, analysis is best
Why do I bring this up? Because folks at home trying to determine whom they'd like to listen to and what information to consider -- versus what to ignore -- need to be aware of those two components. I say that because if somebody continually gets the analysis part wrong, even if he gets the guess part right -- i.e., temporarily makes money buying stocks because he says that subprime either doesn't matter or is contained -- that incorrect analysis ultimately will see him get carried out. In the long term, correct analysis is more important than your guess about how people will react to it.
Today's bulls have all been right about their belief that stocks should go up every day, but many have been wrong in their analyses. One of these days, Mr. Market is going to exact a penalty for the guessers who've guessed right for the wrong reason. I believe that day is coming sooner rather than later and will cause far more damage than anyone expects.
Here's to the market's old fogey party-poopers.