I like traditions. In Washington, D.C., there are some great holiday traditions. I like to visit the Christmas trees at the Capitol and White House with my kids every year. We follow that with hot chocolate at the Willard Hotel.
We have also added the really cool model train exhibit at the National Botanical Garden next to the Capitol to our traditions. New Year's at the Kennedy Center with my wife is a lot of fun and so is New Year's at Blues Alley in Georgetown. All great traditions.
There’s another tradition that I follow each year, but it’s not so great — and that is the beginning of the year forecasts by stock analysts.
It’s a pretty simple tradition. The prediction for the next year is that stocks are always poised for growth and gold has hit its peak.
So, again the tradition goes this year with the conventional wisdom indicating a 10 percent increase in the S&P and, of course, problems for gold. Now coincidentally, this year will finish almost completely in opposite direction — gold up 10 percent and problems for stocks (maybe a minimal increase in the S&P).
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But, that doesn’t doesn’t bother the analysts. They just keep making the same prediction every year. Of course, since 2000, the S&P has barely moved and the Nasdaq is down 50 percent. So, clearly there haven’t been very many years where the S&P has increased 10 percent and, on average, there have been none. Nasdaq’s story is much worse.
It’s a wonder that people even listen to analysts any more. With over 90 percent of all analyst recommendations being buy or hold, it’s pretty obvious they have a strong bias. That bias is so strong that it becomes laughable. American Airlines went bankrupt this year. A lot of people saw it coming and the company certainly mentioned the possibility.
Do you think that meant that stock analysts saw it? Hah!
Here’s how bad it got. Just one month before the actual filing, EVERY company that followed American had a buy or hold rating on it (got to maintain that 90 percent plus average right?). Even the week before American filed for bankruptcy, Barclay’s, Deutsche Bank and Morgan Stanley had buy ratings on it. That should make anyone who holds an account with Morgan Stanley feel a lot better knowing that they’re backed up by some of the finest stock research in the country. It takes a lot of high-paid talent and some really smart people from Ivy League schools to perform this kind of insightful and penetrating analysis. That’s right BUY, BUY, BANKRUPT! Who could have seen it coming?
The bond guys aren’t doing much better. Bonds in MF Global were rated investment grade just days before it went bankrupt. Maybe the MF Global bankruptcy was bit harder to see than American Airlines, but investment grade? Come on, there were clearly big problems with the Company in the week or two leading up to the bankruptcy that would indicate it’s not investment grade. Again, BUY, BUY, BANKRUPT!
The lack of foresight and insight by the pros that run Wall Street is just stunning. And it’s not only happening to individual stocks, this type of mentality permeates the stock market. Of course, that bias helps keep the stock market up in the face of big problems, but long term, it also means that when the mentality changes, it will change fast. Does that mean it will change this year? Unlikely. That strong bias plus some help from the Fed should be enough to keep the market from having huge problems this year.
In fact, the right tonic of stock market bias and printed money could push this market way past a 10 percent increase. But, it won’t last. Will it last to the end of the year? Possibly. There’s lots of psychology driving this market. So, the tradition keepers on Wall Street could be right. But, as in the past, and even more in the future, it will go back down and when it does, it could go quite quickly. If you’re not sure, just remember one of the increasingly popular traditions on Wall Street: BUY, BUY, BANKRUPT!
About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.
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