Overwrought Bearishness = Stock Opportunities

Includes: DIA, FB, FXE, JPM, SPY
by: John Tobey, CFA

Reading the recent news pieces, you'd think the world economies and stock markets are plummeting with no hope in sight. Even Bernanke and the Federal Reserve are issuing "dire" (aka low growth) forecasts. Yesterday came this piece: "We Are Living in a 'Modern Day Depression.'"

This bearish interpretation is not supported by the data. Rather, it's a return to the overwrought mega-fears from mid-2010 and mid-2011. They were wrong then, and they're wrong now. The best approach is to treat this year's familiarity with contempt.

Here's what is being said and what the picture really looks like:

"Europe and the euro are in serious trouble." Actually, the euro, while declining versus the US $, is tracking its previous 2010 and 2011 paths. Its current level is one that has been often seen going back to 2004.

"Oil is plummeting to new lows and headed lower," implying economic growth is doing likewise. In reality, oil (quoted in US $) is being affected by the euro's decline (i.e., the US $ is more valuable) and (once again) speculative activity. Also, remember that users of oil benefit from these lower prices, improving their outlook (e.g., proving those springtime forecasts of very high, summertime gasoline prices to be wrong).

Oil price and exchange rates
(Click to enlarge)

"U.S. growth will be low and is at risk." Remember all that great economic data that came out beginning late last year? Well, it hasn't reversed. Moreover it continues to improve, even including employment and housing.

"Don't count on the consumer to bail out the economy." What a silly statement, especially when put forward by the head of the Federal Reserve Board. Consumer spending is doing well and it represents about 70% of the U.S. economy, so you can count on it. Secondly, the consumer is doing fine and confidence has returned. Unemployment? It's better than it was in 2009, 2010 and 2011. Why should it now cause consumer spending to stall or reverse?

"The financial system is in trouble again." No, it's not. JP Morgan (NYSE:JPM) screwed up, but their flub is not detrimental to their health, much less that of the financial system. Moreover, the new, higher capital requirements and Moody's recent downgrades of banks engaging in risky trading are not negatives -- they are actions that better ensure banking stays healthy.

"The stock market is indicating troubles ahead." No, the stock market is undergoing a change - from a rebound/recovery period, benefiting large leading companies, to a more normal period in which "real" growth (i.e., company-specific earnings gains) is the driver. (I discussed this changeover beginning in February with "As The Stock Market Shifts Gears, So Should We". My latest piece about the subject was "It's Time To Adopt A Non-Intuitive, Irreverent View Of The Market.")

"The Facebook (NASDAQ:FB) IPO problems killed investor interest in the stock market." Well, maybe for a few weeks. However, we always can count on Wall Street and investors having short-term memories when there is money to be made. Already plans are afoot for new IPOs - and Facebook has rebounded back to its "do-over" IPO price of $32 (see "Facebook's IPO Do-Over, This Time At $32").

Facebook stock chart
(Click to enlarge)

Facebook's IPO will become a footnote when stocks start rising again.

The bottom line

Take advantage of this 2012 version of mega-fears. Like 2010 and 2011, they are producing stock opportunities that will likely produce superior returns later in the year. Could the stock market drop further from here? Of course - the market always carries that possibility. However, the reasons being put forth are based more on fear than fact, so a bear market looks to be of low probability.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Positions held: Long U.S. stocks