Those Damn Yankees - 11/05/09

Those Damn Yankees
11/5/2009 8:18 AM EST

 

 

  •  A dogmatic, inflexible market view -- either bullish or bearish -- is no great asset.
  •  But looking around me now, I see plenty of reasons to be cautious.
  •  Above all else, be skeptical in your approach.

 

 

 

Meg Boyd: "Is Washington winning, dear?"
Joe Boyd: "Noooo. Those damn Yankees."
-- Damn Yankees

We have all come to expect three things to be true:

  • Equities have a tendency to rise: U.S. stocks have typically risen (at an average annual rate of between 8% and 9% over the course of the last century).

     

  • The New York Yankees have a tendency to win championships: The New York Yankees baseball team often win the World Series (as they did for the 27th time in history last evening).

     

  • Whatever Lola wants, Lola gets!

That said, stocks don't always rise (as we witnessed in 2008 and early 2009), and the New York Yankees don't always win the World Series. Often, though not the majority of the time, stocks stumble. Stocks can drop for many reasons -- business conditions may weaken, credit sometimes tightens up, cost pressures can rise and profits can dip. Stocks can even drop during prosperity and expansion because the market occasionally runs ahead of the fundamentals.

And the New York Yankees don't always win the World Series. Often (though fortunately not too often!) injuries plague the team, the coaches make poor decisions on the field and the general manager makes ineffective personnel decisions.

So what the heck's the use of cryin'?
Why should we curse?
We've gotta get better, 'cause we can't get worse!
-- Damn Yankees, "Heart"

Which gets me to last night's "Mad Money" show, which began with a rant by Jim "El Capitan" Cramer against the bears and their negative market script. Jim contends that bears "always think the world is coming to an end, but all they really do is cause you to miss out. ... Listening to these bears is a great way not to make money."

While I recognize that Jim was being hyperbolic in making his point, there are times to be overweighted, underweighted or neutrally weighted in stocks. My experience is that both permabulls and permabears tend to be headline makers, not money makers. Well constructed and rigorous views (whether bullish or bearish) should always stand on their strength of argument, not on the attention they can grab. So I agree, in part, with Jim -- the Cassandras are useless ... but so are the many Sunshine Boys and Talking Heads who have a highly visible profile and platform in the business media who never saw a stock, a market or an economy they disliked. From my perch, the investment scene is far more populated by the optimism projected by the permabull cabal than by the bears.

Unlike Jim, when the markets drop, I see no conspiracy perpetrated by the short-selling of permabears -- rather, the market's price is a collective view of an auction market at any one point in time. And when the markets rise (in opposition to the contentions of the bears), there is no conspiracy perpetrated by the long buyers, or permabulls -- again, it is a collective view of price by market participants.

Ugh!
Who's got the pain when they do the mambo?
Who's got the pain when they go "Ugh"?
Who's got the pain when they do the mambo?
I dunno who -- do you?
-- Damn Yankees, "Who's Got the Pain?"

In the defense of the short-term bear case, I and others on the site (like Dr. Bobby Marcin) have recently argued that the world's equity markets face numerous intermediate-term and structural challenges and that expectations for corporate profit growth, personal consumption expenditures and economic activity still remain elevated. (Until those expectations are brought lower, we argue, further upward market progress may be difficult). And I and others (like Rev Shark and Helene Meisler on RealMoolah have also identified signs of deteriorating technicals that probably shouldn't be ignored either.

Critical analysis and skepticism are the lifeblood to successful investing. My experience, as I made the case in a 2008 Financial Times editorial, has been that, bears sometimes have some important things to say -- especially into economic inflection points!

Regardless, the key to delivering superior investment returns is being permanently flexible -- in weighing the assets and liabilities of Mr. Market's health and well being.

I am sensitive to this issue of being a permabear. Ever since I wrote a critical cover story in Barron's in 1992 on Marvel Entertainment (the company went bankrupt within two years (and again and again over the next three years!)) and after The Wall Street Journal's "Heard on the Street" column gave me the moniker of "The Bear of Boca" back in 1994, I have followed up with a number of Barron's interviews (with my favorite financial writer of all time, Mr. Alan Abelson) and wrote some additional stories and editorials in Barron's (mostly all bearish on companies, industries and economies!). Since then, many (such as Sir Larry Kudlow) consider me a permabear. While over the years I have enthusiastically taken the role as one of the Dark Side's standardbearers, in reality I am an opportunistic investor who recognizes that money can be made on both sides of the pew.

You gotta know just what to say and how to say it
You gotta know what game to play and how to play it
You gotta stack those decks with a couple-a extra aces
And this queen has her aces
In all the right places!
-- Damn Yankees, "A Little Brains, A Little Talent"

I am a hedge fund manager -- in the game to make money for my investors. I am not in the game to be steadfast, dogmatic and inflexible.

This morning's advice is, above all, to stay committed to your decisions, be rigorous in your analysis, stay flexible and be skeptical in your approach.