Moving the Market: The Week of Superstar Bears

On Monday, we noted that famed bank analyst Meredith Whitney single-handedly boosted the market 2.5% simply by her firm’s first “buy” rating on Goldman Sachs Group (GS). There was very little in the way of important macroeconomic data or earnings releases, the move was almost entirely prompted by uncharacteristically bullish remarks of Whitney (The Whitney Whiplash). Now, we know that Mrs. Whitney was in fact correct, but it was interesting to note that her bullish opinion was enough to propel the market to strong gains. A similar thing happened on Thursday as the market had traded traded just about even through most of the day, and then it became decidedly more positive after what was considered a bullish statement from perhaps the biggest bear of all, Nouriel Roubini. Roubini’s comments were interpreted to be a change of direction, but after the markets had taken off, Roubini disputed the fact that his viewpoint had changed at all.

This is an interesting phenomenon, especially since their are two definite examples of it in just one week. It signals the fact that the market is highly emotional right now, as investors search for which direction the market will head over the coming weeks. These respected analysts’ remarks are of course of interest to us, but they do not represent a change in the underlying fundamentals of the market. The volatile reactions to these opinions, moving the entire market, is something that has not been seen in quite some time. It is as if traders are allowing a handful of “superstars” determine the sentiment of the entire market. This phenomenon is a self-perpetuating cycle, as the more weight the opinions carry, the more they move the market, and the analysts gain a higher profile as a result. However, we think this cycle should be largely ignored by long term investors.

This situation reminds me of one of my favorite sayings of Ben Graham, one of the original superstar analysts, “In the short run the market is a voting machine. In the long run it’s a weighing machine.” The volatility in the market surrounding the assessments of Whitney and Roubini may be swaying more “votes” to the bulls side, but in the end it is fundamentals such as earnings, cash flow, and revenue will determine what the appropriate price level for the market will be. While we are enjoying seeing the market’s renewed strength we remain skeptical of the sustainability of this week’s gains. Whitney was correct to be bullish on Goldman, but that is just one bank in a larger financial system that she still refuses to recommend buying. Furthermore, Roubini seemed taken aback at the reaction to his statements that he said were taken out of context. In a statement released after the comments had been positively received by the market, he said his opinion remains that this will be a deep recession lasting about 24 months (we are 19 months in), and that economic growth will not resume until 2010.

We are at a crossroads right now with the market having risen 37% since the low on March 9th, and investors rightly want to be ahead of the curve on what is next. The market seemed to be searching for reasons for optimism, even though in Roubini’s case they weren’t there. My advice would be to stay informed on what matters, and analyst opinion is just one piece of the overall puzzle that includes valuation, sentiment and current market earnings reports/ macroeconomic news. Our goal at Ockham is to keep clients informed on all of these spheres of influence in order to make informed investment decisions. Recently, the sentiments of two superstar analysts has taken center stage, which makes us skeptical of this week’s strong performance.

A Week of Superstar Bears Moving the Market

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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