"A compounding investment of $10,000 in the Standard & Poor's 500 Index from November through April, starting Nov. 1, 1950, and ending April 30, 2000, yielded a whopping $363,353 gain over almost 50 years. From May through October over that same period, the investment returned a "puny" $11,574 gain." Yale Hirsch, Stock Trader's Almanac Investors hoping to ride the seasonal wave in valuation increases are sure to conjure up visions of sugarplums after reading what Mr. Hirsch and countless others have pointed out. Nevertheless, if seasonal fund flow trends are not enough of a bull factor, then there is always the election: "There have been 25 election years since 1900. The stock market was up in 18 of them, or 72% of the time." Sy Harding, Elections And The Stock Market Mr. Harding expands on this somewhat misleading statement to include, "If this year turns out to be a down year the percentage will drop to 69%. Forgetting about election years, the market was up in 65 years out of the last 100, or 65% of the time, anyway." Well, perhaps election mania is not as infectious as the market pundits have claimed. Perhaps also it is selective past performance observations and self interests which guide most analysts' thoughts… Abby Cohen, Joe Battipaglia, and James Cramer, are three leading pundits for the seasonal waterfall hypothesis. What has been a horrendous April-October for the Nasdaq need not cause any concern -- the bottom has been hit, the mutual funds are done selling, and the election is right now. You will notice how the word 'earnings', if it is mentioned at all, is an afterthought in most bullish predictions. Take note also that when the basis behind previous arguments crumble, a set of new criteria can contradict the old… 
"My earnings forecast remains for 14% growth in S&P 500 operating profits next year. My year-end index targets remain 12,500 on the Dow Jones Industrial Average, 1,625 on the
S&P 500, and 4,300 on the NASDAQ composite." Joe Battipaglia - October 30Besides being an extreme optimist insofar as next years' corporate earnings are concerned, Mr. Battipaglia is also making the optimistic assumption that investors will continue to pay higher premiums for stocks in the near-term. Is this type of prophet thinking better left to the psychic network than a serious investment strategist? Forgetting about the common statistical indicators for one minute (PE, EPS, R, PEG), take a look at this tidbit: Since July 1, 2000 earnings growth estimates on the S&P 500 for the fourth quarter of 2000 have declined from 16.8% to 12.6%. The only sector with a rising forecast over the same time period is energy stocks. Nevertheless, our analyst extrodinare, Mr. Battipaglia, has maintained an underweight position in this area while maintaining an overweight position in two of the hardest hit sectors, technology and basic materials. So why should investors listen to Mr. Battipaglia's earnings predictions for 2001?  Sachs' Abby Cohen is perhaps the most respected analyst today. She has achieved
this reputation by being right very often and over a long period of time. In 1996, when others were touting a correction, she remained super-bullish. The reasons she gave at
the time included low inflation and rising corporate earnings. Yet even though these conditions are no longer prevalent (earnings are in decline as the economy slows, and
inflation is biting upwards), Abby has not changed her bullish stance. Why?Perhaps she is drunk on success or simply disregarding the contrary analysis she made in 1996. Nevertheless, she still expects valuations to climb as earnings growth drops: "Our estimated 'fair value' level of the [Standard & Poor's 500] at year-end 2000 has been 1575 since the beginning of the year. To date, we see no compelling reason to adjust the model inputs." Abby Cohen – October 13, 2000 Cohen has said that stock valuations are more attractive as prices fall (a common theme in her 2000 campaign), but she rarely mentions market wide valuation processes. As a result, even as corporate earnings estimates have smashed lower since the beginning of 2000 (by all accounts) her targets have remained unchanged. The only justification which could be offered for her maintaining her target level would be that she expects investors to pay higher premiums now than they were in early 2000. S&P 500 Jan 3: 1455.22 S&P 500 Jul 1: 1448.81 S&P 500 Nov 3: 1426.69 Abby's 'fair value' estimates during this entire period: 1575 How does the S&P 500 remain undervalued by the same amount if earnings estimates, as mentioned above, continue to decline? Also from October 13: "Importantly, our economic outlook still calls for real GDP growth averaging 3 percent to 4 percent in coming quarters". On October 27 third quarter GDP came in at 2.7% (not including inflation). With no word from Abbyville concerning this number, I guess she is waiting for another bottom to tell us valuations look attractive, and her targets remain in place.  Finally there is James Cramer, the near psychopathic investor greasing the wheels at TheStreet.com. At first Mr. Cramer was testy when his company's stock price got hit. He
went on television shows with a burnt-in smile on his face. But now he is actually coming up with some interesting considerations:"As the year winds down, the bad news in corporate bonds just keeps getting worse. The market, far from coming back, continues to deteriorate. No volume. Lots of pending defaults. Lots of bad paper out there. Lots of mutual fund redemptions. The bond bleeding spurts, with no tourniquets in sight. And the layoffs in that end of the business threatens to be monumental." James Cramer – October 30, 2000 This type of dramatic analysis is Cramer's trademark. He is quite good at hyperbole. On the other hand, he has not been so adept at intelligently placing capital during the markets recent demise (Aug-Oct). A sound argument he posed back in August began "don't fight the fed", but concluded "buy now because the Fed is done tightening": "So you have to be more bullish at the end of a series of rate hikes. Already, we are seeing the jump in the financials. My biggest fear is that I have missed the easy money. But there is much more ahead. Same with retail and with cyclicals. It is time to move into those sectors, even as they look terrible -- both in the charts and in the estimates -- because things are about to get better, not worse." James Cramer – August 9, 2000 Things have indeed gotten worse for the vast majority of companies inside of Cramer's sector picks. Perhaps looking for a culprit to explain the weakness, Cramer concluded at the end of his "dying bond market" article: "That's what the stock market is saying. It is finally beginning to listen to the bond market. It doesn't like what it hears." It is a shame Mr. Cramer did not have the fortitude to listen the bond market back in August when he was bullish. Why should we listen to him now? Is he a cameleon -- changing his colors inside of a short period of time to disguise prior missteps? While investors may very well buy stocks and send the averages higher, the rationalization for any upward movement, at least from the three analysts mentioned above, is blurry at best. You have Joe mentioning earnings growth and saying the markets will outpace this growth by years end, Abby telling us that her targets from January 2000 will be met despite a severe earnings decline, and Cramer playing hop-scotch between bear and bull. If you care to read one analyst who solely covers earnings, Chuck Hill from First Call is the one. This man used to be bullish (so far as the data is concerned) but has since been spilling out bearish rhetoric like there was no tomorrow. He even kept the bold on for his October 30 report. "THE FREE FALL IN EARNINGS ESTIMATE REVISIONS FOR 4Q00 CONTINUES APACE WITH NO END IN SIGHT. As we have been saying for some time, THE PROBLEM WILL NOT BE AGGREGATE EARNINGS FOR 3Q00, BUT FOR 4Q00. All that can be said at this point is that the risks of something less than a soft landing have gone up considerably." So what about those seasonal statistical indicators? The opening quote from Mr. Hirsch makes a powerful point, doesn't it? All you need to do is buy at the right time of the year and you will outpace the market. But one need only look at the 1970s to realize that the real point is not all years achieve the same pattern. On January 11, 1973 the Dow peaked at 1051.70 and did not stop falling until it hit 577.60 on Dec 6, 1974 , and on September 21, 1976 the Dow was at 1014.79 and did not firmly bottom until February 28, 1978 at 742.12. Investors waiting for their seasonal fix during these years went though a long period of rehab, and had to wait until the 1980s to become financial healthy again. The kicker, is that looking at 50 years of data contradicts the fact that the majority of Wall Street and investors today rarely, if ever, look this far into the future. So why use this data as a guide? We have declining earnings, slowing economic growth, and increasing inflation: is this environment indicative of future valuation increases? "Investors have to keep in mind that if they've done the fundamental homework properly, things will ultimately come their way." Sound advice from Abby Cohen, despite her bullish blinders. |