Monday, November 16, 2009

Ignorance Is Bliss (Not Really)

The message from the markets and market pontificators and the like over the past few weeks has been, with increased confidence, that investors are getting “nice and comfy.” With a growing consensus forecast for a smooth and self-fulfilling recovery from the current recession in 2010 and beyond, they feel we are headed for smooth sailing ahead.
I am troubled that the herd has adopted the view that we are now at the start of a normal multiyear expansion that should resemble average expansionary phases in past business cycles.
Here is the sobering truth: In very short order, the experts that failed to see the recession coming then projected certain unrecoverable doom, then failed to see the coming +50% stock market blast off from the market bottom in March, now have a new forecast.
Next year's S&P 500 earnings forecasts are now moving toward $80 a share (as UBS estimated last week), a level that was unimaginable three to five months ago.
Also, while we are on the topic of forecasts you cannot trust, the latest craziness is the prediction that the Federal Reserve will not begin increasing interest rates until the fall of 2010. Forecasters can’t get what will happen next week right, let alone a year from now. I would put the odds of this forecast being correct at about 2%!
I don’t know about you, but I am not of the persuasion at this time to trust ANY of the consensus forecasts.
I have argued that a number of head winds coupled with a weakened consumer may likely result in a high degree of uncertainty and the potential for economic outcomes moving forward which are not market-friendly. I believe that market and economic challenges will rise as we enter 2010. Couple this with the eventual withdrawal of government stimulus and the threat of higher taxes and it “could get ugly.”
In bull markets, there is often no clear dividing line between fantasy and reality. Markets usually continue to advance, as “the crowd” and cash on the sidelines finally decides they are missing the party. Their confidence for entering is the fact that the market has rallied +50% so things must have turned around.
In a recent blog, I used the current example of how billion-dollar pension funds are now adding high yield bonds to their portfolios-AFTER high yield bonds have already advanced over 50%!
I believe that the market's potential to disappointment increases with each week that the world stock markets keep hitting new highs. There are many warning signs, for instance:
  1. A 17.5% (the real) underemployment rate,
  2. A steadily declining U.S. dollar,
  3. A weak consumer,
  4. Hurting small business owners,
  5. The continued increase in the price of gold and so forth.
These facts are simply being ignored as “likely to get better” as we enter 2010.
I will continue to monitor the economic landscape daily and make necessary and prudent adjustments to the portfolios managed by Wade Financial Group, Inc.

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