Posted on 12/03/2002 5:13:00 PM PST by rohry
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Garbage In - Garbage Out This weekends edition of Barrons featured a story on analysts reports. The gist of the article was why these reports stink in terms of accuracy. In too many cases analysts try to project a degree of certainty in a world that is uncertain. Flaws in fact gathering, assumptions, and personal biases enter into the equation and produce results that are less than certain much less accurate. The article warned of analysts trying to predict so many variables without the accompanying input. People who try to predict so many variables fall into a trap They think that more detail is actually going to clarify the picture, when sometimes the best picture is a very sketchy picture. Wharton finance professor, Simon Benninga, quoted in the article counsels his graduate students to keep their models simple so as not to miss the forest for the trees. The article goes on to tell of robust projections made by many Internet analysts and tech analysts over future growth of such companies like AOL Time Warner. The models forecasted growth rates, cash flow, and a myriad of other variables as much as 100 from inferences on past data. The forecasts, as detailed as they were, projected a degree of certainty when none existed. As if to be reminded of this fallacy, AOL Time Warner said today America Online, the biggest Internet service provider, might see advertising revenues plunge as much as half next year. The result is that profits from that division could be down by 15 percent. When Fools Rush In... Im reminded of what Graham wrote again as I have watched with amusement this latest collective leave of common sense rally since mid-October. It reminded me of late 1999 when the herd moved in mass and bid up the shares of companies beyond any measurable objective, reason, or expectation. The SOX Index -year chart illustrates this point. It was not unusual to see this index rise 8 percent a day as fund managers, playing with investors money, moved en masse and bid up these shares in a brief moment of lunacy. Their collective thinking helped to move this index up 66 percent on no major fundamental improvement in earnings prospects. In fact, the P/E multiple on the SOX is negative because most of the companies that make up the index have lost money. However, if you are going to speculate, and that is what they are doing, you need a large liquid sector to pour in billions of dollars. The question that should now be asked is what happens to prices when more bad news emerges from the sector or if the herd begins to move en masse out of these stocks? I have long contended that earnings expectations were far too high for the fourth quarter. The same applies to economic growth rates. Obviously a slowing economy would translate into lower profits. That is what we are now seeing in both the economic numbers and the earnings confession period that has now begun for the Q4 earnings season. Companies such as AOL Time Warner, Ford Motor, GM, Chrysler, Tenet Healthcare, and Nokia were all issuing Q4 and 2003 warnings today. The next couple of weeks should be a down period for the markets as many companies air out the dirty laundry in order to bring down analysts expectations. Wall Street firms will lower estimates to a point that when actual earnings are reported, the companies will be able to exceed expectations. Trading This Market Requires Multiple Skills and Finesse To move in this market without these skills is a dangerous sport. That is why I have advocated that an investor is better off staying with the primary trend of the markets or simply staying out. So much of what I see today is unintelligent investing. Graham cautioned investors of this misunderstanding of investing and speculation. He warned that, there are many ways in which speculation may be unintelligent. Of these the foremost are: 1) speculating when you think you are investing; 2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and 3) risking more money in speculation than you can afford to lose. To speculate successfully you most exert supreme emotional discipline. To invest you must also supply emotional discipline. However, there is one major difference between the two when investing: when it is applied intelligently as to price paid for an investment, time becomes an ally; when speculating, time becomes an adversary. Knowing the more manageable of the two is an important key to success. Market Mayhem with Money Madness in Spades Getting back to things, as long as the markets remain open, global money will gravitate to where it can find its highest return. With central banks hell-bent on providing ample supplies of the paper-stuff, a fully deflationary environment will not be possible. This issue will be addressed next year in the final epilogue to my Perfect Financial Storm Series and the third part of PowerShift (articles that have been delayed due to research). Suffice to say at the moment, there are plenty of examples throughout all of history when deflation and inflation existed simultaneously. The Feds recent speeches convince me that my Perfect Storm Thesis will happen when this process finally plays itself out. We Are in Transition 1) Precious Metals The following charts of cocoa, wheat, gold, oil, and natural gas are just a prelude of things to come. The US and Western Europe will be competing for all of these things with the worlds largest economic power, China, in this new century. At a time when Western oil production will go into serious decline, Chinas voracious appetite for energy will more than double, then triple. The only source available large enough to supply this demand will be the Middle East. Soon, in this next decade, China will become the largest consumer of energy in the world. For this very reason, Western and Eastern nations will all want a stake or say so in what happens in this region. The present war will be one of many to come to plague and disrupt the supply of energy around the globe. Any nation that is not self sufficient in energy will pay a terrible price in economic terms for this lack of self-sufficiency. We in the West must learn to become self sufficient in energy if we are to see our economies prosper in the next decade. Without a cheap supply of abundant energy, our economies will stagnate. Where The Wise Will Tread It may take a while for the rest of the market to wake up to these facts. But for those who can think beyond the next day, week or month, there are, IMO, going to be big profits made in these areas. There isnt time in daily missives to go into all of the particulars of why. That is the purpose of the Perspectives and Storm Updates. However, I can say this nowthat the supply of gold and silver on the exchanges arent large enough to cover short positions or handle any investment demand coming from the general public. Only the big boys have been buying and when they do, they cover their footprints. You can follow their footprints in chart patterns, but even they can be deceptive because a lot of trading in this market is done outside the market. I do believe, however, when the masses wake up to what has been done to their currency and what has become of the value of paper, there is going to be a giant scramble for the exit gates out of paper and a stampede through the narrow gate of precious metals. To deny this eventuality is to admit ignorance of monetary history. Very few give evidence of any paper currency that has been long lasting or enduring throughout the centuries. Today's Market Techs were hardest hit. Many companies such as Motorola and AOL Time Warner fell as much as 10 percent. Tech stocks were hemorrhaging across the board from networking, software, chips, and telecomm to Internet shares. Precious metals and energy stocks were todays big winners with the price of gold back over $321. Silver prices also jumped $0.11 to $4.552. Despite earnings warnings today, analysts are still forecasting pro forma profit growth of 15 percent this quarter. These numbers arent real, but heck, who pays attention to truth anymore? For a picture of real earnings please see last weeks Wednesday Wrap Up. Volume came in at 1.44 billion shares on the NYSE and 1.63 billion on the NASDAQ. Market breadth was negative by 19-12 on the NYSE and by 22-10 on the NASDAQ. The VIX rose 1.71 to 31.76 and the VXN by 1.83 to 51.99. |
Hear hear!!!
Yeah, they were falling all over themselves trying to get the bad news out early. Of course all the analysts will now lower expectation just enough so that when they do report, Maria can yell, "Ford Beat The Street!!"
Richard W.
Richard W.
I know this might well be off the subject, but have any of your "Pingees" been following this trial where J. P. Morgan-Chase is suing insurers for not paying off on surety bonds that J.P. Morgan-Chase used to back loans, when it's against the law for insurers to insure financing arrangements in such a manner?
J.P. Morgan-Chase lawyer admits circular deals with Enron
I would be interested in FReepers "take" on this. Maybe it should be it's own thread, but it has a bearing on scandals, the bubble, wrong-doing and the stuff that is driving this market into the toilet, much to Democrats and doomsayers delight.(misery loves company, right?)
Richard W.
Bingo. Of course, just about everyone (Puplava and most of the present company excluded) will forget that The Street previously said that AOLTimeWarner, Ford, GM, DaimlerChrysler, et al were going to do quite well and that the only thing that they beat was the worst-case scenario uttered by The Street just before the report.
We Are in TransitionOutside of Jim's fixation on precious metals, I'd have to agree with this assessment. The developing world (well, outside of Africa) is booming, and they'll need energy, water and the unquoted but later-mentioned foodstuffs. Also, the business of war is booming, though I'd personally stay away from high-tech war stocks and stick with guns, bullets, explosives and armor.As I wrote in "The Next Big Thing, when one bull market comes to an end, another emerges to take its place. It is seldom in the same asset class. Throughout history the markets swing back and forth like a pendulum between paper and things as shown from this graph taken from "Riders on The Storm." A growing population in the developing world and the environmental movement are two major factors that will bring about a rise in prices in most commodities. If I had to put investment priorities into perspective and rate them in terms of highest return over the next decades, they would be as follows:
1) Precious Metals
2) Energy: oil and especially natural gas
3) Water
4) War Stocks
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