I Probably Won't Be Dessert . . .

Justin here. Professor Jeremy Seigel recently pointed out the difference between the fear of unemployment vs the reality of unemployment here:

"The June unemployment rate touched 9.5%, and it is quite possible that that rate will eventually exceed the 10.8% rate reached in November 1982. But even if it does, unemployment will rise, at most, 2 percentage points, far less than the reported 30% to 40% of workers who fear they will be laid off. And as the economy mends, the fear of being unemployed will subside, and consumption will rise."

Professor Seigel has forgotten more than I'll ever know about economics, but I have to (very respectfully) disagree. I think it’s unrealistic to think that Joe Consumer could have 10-20% more friends, family, and co-workers lose their jobs and then somehow he'll then breathe a sign of relief and start spending because some economists think that unemployment is already far above normal. I think Joe is going to pretty scared for a pretty good while.

It’s like being in a pit of lions that, on average, will eat no more than one human in a sitting. I don’t know about you, but if I’m stuck in there and two of my buddies were just eaten (mind you that's 100% above the average), mean reversion and bell curves won’t make me any less likely to need a clean pair of underwear.

I lost the toss

Jonathan here. My February 3 post, Will the Dow Set a New low in 2009, is the most stupid post I've ever written. Not because my thesis was wrong (it was), but in our line of work, focusing on process over outcome is what it's all about, and in the clarity of hindsight, I was focusing on outcome not process. So now that I've had my whipping, eaten crow, and been avoided at the water cooler by my colleagues, I wanted to share just a bit about what we know and think about market sentiment, or more precisely, investor sentiment. Sage investors know investors become buyers when the consensus gets cheerful. Warren Buffett said "you pay a high price for a cheerful consensus." Ben Graham, Buffett's mentor and teacher, urged his apprentice to "buy when there's blood in the streets", or words to that effect.

Clearly, anybody who's followed that kind of advice has had his head handed to him on a platter. For going on a year now, it seems like the crowd has been right and buyers or holders of stocks have gotten it all wrong. "Will this persist?" (like it looks like it will) is the wrong question to be asking. "How long will it last?" is, I believe, the right question.

We've heard that history repeats itself. With all the focus on what's happening now in the stock market, it seems that investors have, once again, pretty much discounted what's happened long, long ago. But that's not unusual; we're all prone to a bout with Outcome Bias every now and again. "It's different this time," we hear, ad nauseam. Yes, events are different this time. But human nature hasn't changed one whit in the last 1,000 years, and I seriously doubt it will before 2009 rolls to a close.

To that end, we've poured a lot of time into studying bullish and bearish sentiment and investor pain. Believing that investors really are predictably irrational, we want to learn what happened when investors sold stocks when everything was dismal and when they bought stocks when everything was rosy. I'm far from ready to offer any conclusions, but I'm happy to share our initial findings here.

If these charts pique your interest, your comments are welcome. Similarly, if you drop us a line, we'd be happy to chat.

AAII Sentiment Index

View more presentations from Jonathan Smith. (tags: sentiment market)

Investor Pain Index And Dow Jones Industrials

View more presentations from Jonathan Smith. (tags: pain investor)

If these charts pique your interest, your comments are welcome.  Similarly, if you drop us a line, we'd be happy to chat.

Enemies in the financial markets are fierce warriors

Jonathan here. Having just talked with his friend in Manhattan, Dick Barron, business reporter at the Greensboro-News Record, writes, in his BizBytes newsletter (click here, follow instructions to subscribe to BizBytes)

• "As one of my friends in Manhattan wrote today on [his] Twitter [page]: "Just walked to Wall Street for a meeting and back. The mood on the street is weird. Everyone looks weak, frightened and angry, like on 9/11" [emphasis mine].

Sun Tzu wrote The Art of War in the 6th century BC. His military strategies are still being taught.

• “Draw them in with the prospect of gain. Take them by confusion. Use anger to throw them into disarray."

Understanding Sun Tzu's brilliant strategies puts the unprecedented economic events and (investors' unprecedented reactions) into perspective.

• Investors have been drawn in with the prospect of gain.
• Investors have been taken by confusion.
• Investors have been thrown into disarray.

You need allies in your war. When the News-Record called us during Monday's 504 point drop in the Dow, we said investors needed to "take a deep breath," and we explained why we didn't need to "stay glued to the TV for the latest headline." Click here to read the article.

Market sentiment and anxiety 07172008

The AAII sentiment survey (membership required) measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market short term; individuals are polled from the AAII Web site on a weekly basis. Only one vote per member is accepted in each weekly voting period.

For the week ending July 16, bullish sentiment rose to 25.00% from 22.17%, equal to 1.29 standard deviations below the mean. Bearish sentiment rose to 58.14%, equal to 2.9 standard deviations above the mean. Anxiety Index rose from -11.9% to -8.8%, equal to 0.47 standard deviations below the mean. Click chart to resize.

Market sentiment and anxiety 07102008

The AAII sentiment survey (membership required) measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market short term; individuals are polled from the AAII Web site on a weekly basis. Only one vote per member is accepted in each weekly voting period.

Sentiment data is displayed along with a proprietary anxiety index. The chart above includes something that the AAII version doesn’t. Click chart to resize.

At every date along the X Axis of this chart, you can see what the S&P500 did one year out from that date. For example, if you put your finger on the X axis on October 19, 1990, for example, and then moved your finger up to where the S&P500 intersects with that date, you’ll see that the S&P500, in the 12 months following, was up 26%. During the last 21 years there have been 14 or so occurrences where negative sentiment outweighed positive sentiment, and by a pretty big margin. (Resize chart by clicking and dragging handles.)

Couldn't help noticing Tuesday David Tice agreed to sell his David W. Tice & Associates investment management firm to Federated Investors Inc. for up to $142.5 million. Is this this pure coincidence or did Tice decide bearish sentiment was high enough (and bullish sentiment low enough) to sell out? Tice, who founded the Prudent Bear and Global Income Fund in 1995, will remain with Federated Investors. The purchase price, if certain conditions are met, could be 8.53% of assets under management. Is that a record? Guess Tice knows how to run a Bear fund, and a thing or two besides.