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Tuesday, March 19, 2013

Dollar Based Reasons Why the Judgment of Market Forecasting "Pros" Shouldn't Be Trusted (or Paid) by Us

Market "experts" are always at the ready with constant advice as to whether we mere amateur individual investing mortals should be buying or selling stocks. And since transactions are how they get paid, as long as we're doing something on either the buy or sell side, they're making money off the trades.

The various financial firms' gurus speak with apparent knowledge and authority, and often make sounds that must seem like something akin to speaking in tongues to the average person. By so doing, they make every effort to appear as people in the know. But that's not true.

I hate to burst your bubble, but the pros and CNBC talking heads generally aren't any more in the know about the market's near term direction than you and I. The difference is that we can admit to our ignorance about near term market moves, and they can't.

Still, they make a pitch to get our money for their firms to manage. Sadly, and to our financial detriment, all too often we proceed to pay them for the privilege of listening to the knowledge they don't have but the advice that they offer up for our consumpton anyway.

So is the market going up or down from here? Well, the answer to that question always depends not only on who we ask but also on when we ask them the question.

For why I'm not a faithful follower of market pundits, please read on.

Stock Bulls Get New Member of Club has the story:

"One of Wall Street's more notable bears has joined the ranks of bullish stock-market strategists with a call that the rally in U.S. stocks has plenty of room to run.

Morgan Stanley's Adam Parker, who has been among the gloomiest of the major brokerage house stock strategists, planted his flag Monday in the bullish camp, though not without caveats.

Mr. Parker unveiled a year-end target of 1600 for the Standard & Poor's 500-stock index, which would mean a 3.1% gain in the benchmark from Monday's close of 1552.10 and a 12% advance for the S&P for the year. Behind the more upbeat forecasts, Mr. Parker said, are expectations among Morgan Stanley's economists that the U.S. economy will pick up steam in the second half even as the Federal Reserve continues its easy money policies.

Mr. Parker's sunnier outlook joined more optimistic forecasts also released Monday by Deutsche Bank . . . and Goldman Sachs Group, both of whom lifted their S&P 500 price targets for the year. Another former bear, Meredith Whitney, founder and chief executive of Meredith Whitney Advisory Group, also has changed her tune on U.S. stocks.

"I have not been this constructive, this bullish on the U.S., on equities in my career," she said in an interview on CNBC on Monday.

The rosier views came with the S&P 500 already up 8.8% this year, even with a slight retreat in Monday's trading amid the latest flare-up of Europe's debt crisis. As of Monday's close, the S&P 500 stood just 0.8% away from its all-time high of 1565.15 hit in October 2007.

The rally, which already has pushed the Dow Jones Industrial Average to a record, has left investors debating whether stocks have run too far, too fast. Some are trimming their stockholdings on expectation of a pullback, citing the steep tilt of the latest run and widespread investor optimism.

But with stocks grinding higher, bears are on the defensive and, increasingly, throwing in the towel. For the first time since he was named Morgan Stanley's chief U.S. stocks strategist in 2010, Mr. Parker is a member of the bullish crowd.

"Given our economics team's view of improving U.S. growth and ample liquidity still being provided by the Fed, it is hard to see what causes a major market correction," Mr. Parker wrote in his "Spring Cleaning" note.

But in an interview, Mr. Parker said his call comes with some reservations. "We've been saying for some time that the market's ahead of itself by any historical measure," he said.

In making his forecast, Mr. Parker stressed that he thinks investors and analysts are too optimistic about corporate earnings.

Although he raised his forecast for 2013 earnings, he left his call for 2014 flat. For him, the driver for higher stock prices will be a willingness among investors to pay more for earnings thanks to the Fed's efforts to keep interest rates low, rather than an improvement in corporate profits.

Still, Mr. Parker's latest forecast marks a big change from his 2013 predictions unveiled in November, when he called for the S&P 500 to finish 2013 at 1434. From where the S&P 500 finished in 2012, that target would have meant a gain of just 0.5% over a year. From current levels, it would require stocks to fall 7.6% over the remainder of this year.

For Mr. Parker, even his previous forecast was something of a departure. It marked the first time he called for stocks to move higher in any year in his tenure as Morgan Stanley's strategist.

"We wish we didn't have to set a year-end target," he wrote in that note, published Nov. 26, 2012. "We felt little joy in 2011 and lots of pain in 2012 related to the target, and find few credible investors really care where we think the market is going to be on a particular day one year in the future."

At Deutsche Bank, Mr. Bianco now expects the S&P 500 to hit 1625 this year, up from an earlier forecast of 1600. That would take the S&P up 14% for 2013. Mr. Kostin also raised his S&P 500 target to 1625, but from a previous goal of 1575. Both are now among the most bullish of the major bank strategists, who expect, on average, a rise to 1558 by the end of 2013, according to Birinyi Associates.

"We expect the S&P 500 to…boldly go where it has never gone before," Mr. Bianco wrote in a note to clients. Messrs. Kostin and Bianco are expecting gains to be led by stronger earnings.

Mr. Kostin lifted his 2013 earnings forecast for the companies in the S&P 500 to $108 a share from $107.

He pointed to better-than-expected economic reports as providing a lift to earnings but added profit margins "will remain static."

He tempered his bullish call, however, saying U.S. stocks "currently trade near fair value based on various metrics.""

Summing Up

For what it's worth, readers of this blog will note that I've been predicting increased stock prices for the past few years now.

Other than the fact that the concept of reversion to the mean is real, the economy was then at rock bottom, and the market had fallen dramatically.

Thus, unless the world was in fact coming to an end (and if it was, our money wouldn't have been worth anything to us or anyone else at that point), it seemed like an almost sure bet that better days were ahead for the market as well as our U.S. economy.

Thus, there was no magic involved with that simple and historical grounded prediction of mine.

In fact, no particular expertise is required for successful individual stock investing except a general understanding of how markets work and why stock prices tend to go higher over time.

So then, other than for entertainment purposes, why should we listen to the so-called 'market pros' and pay to have them tell us either (1) what they have absolutely no way of knowing or (2) what they know but what we can easily teach ourselves?  Beats me.

That's why I recommend investing the DIY way.

But what a job the paid investing 'pros' have. And it comes with no responsibility for their predictions ever being right either. In fact, they can and often do change their minds as their earlier predictions prove to be wrong.

And sometimes, as described in the article above, the "experts" simply wait until the market goes up and then predict that the market will continue to go up. What is called expertise sounds like a simple matter of extrapolation to me.

It also sounds a lot like a weather forecaster telling the viewers about yesterday's rainfall or sunshine and why today's weather has a high probability of being similar to yesterday's.

Oh well, the market will either go up or down each day, so the pundits always have a 50/50 chance of being right.

Here's the bottom line for individual investors. In my view, since nobody knows the market's near term direction (up, down or sideways) and everybody knows the market's long term direction (up), why bother paying somebody for expertise that he doesn't possess?

Save your money and let it work for you over the long run by investing in solid companies.

That's my take.

Thanks. Bob.

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