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Kass: Fear Makes a Comeback

This blog post originally appeared on RealMoney Silver on July 6 at 8:30 a.m. EDT.

In contrast to the complacency that embodied the rally in the S&P 500 when it vaulted over 1,230 in April, fear has now been introduced into the market.

The Ranks of Cassandras Grow

For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people "from buying stocks for 100 years," he said. This time, he said, "If I'm right, it will be such a shock that people will be telling their grandkids many years from now, 'Don't touch stocks.'

-- New York Times interview with Bob Prechter
On cue, the New York Times Jeff Sommer prominently interviewed Bob Prechter in Sunday's Business section. The Elliott Wave devotee is forecasting a DJIA "well below 1,000 in the next five or six years."

Prechter's comments are a classic example of Roubini-like hyperbole. As I have often written, both perma-bulls and perma-bears are attention-getters, not money-makers. Avoid their views like plagues. I do. Those views might make for juicy headlines, but they are not typically substantiated by rigorous in analysis. Importantly, their views rarely prove accurate or value-added.

It is for these reasons and others that the reputations of Cassandras are not usually long-lived.

The World Grows More Realistic

Two months ago, things were not as good as they appeared, and now things are probably not as bad as they seem.

Two months ago, many strategists/hedge-hoggers were targeting a 1,300 level for the S&P 500, and now, in the face of what should have been an expected slowdown in the rate of growth, some of the same optimists have abruptly reversed their constructive views (e.g., Barton Biggs.

When the market was in an uptrend that seemed never-ending, I argued that economic expectations were too optimistic and that a zero-interest-rate policy would catalyze growth but would not likely lead to a self-sustaining economic cycle. I opined that it was different this time -- jobs growth would be lackluster (as we had entered the era of the temporary worker), housing's recovery would be tepid (despite historically low mortgage rates) -- and that these factors (among others) had produced a limited margin of safety for stock prices. A period of lumpy and inconsistent economic growth lied ahead, I opined -- one that would be difficult for investment and corporate managers to navigate.

As stocks corrected, slowly at first and then with greater tenacity, I have recently expressed the view that the equity market was beginning to take a path of fear rather than traversing the path of fundamentals. Many of my concerns have been now adopted in the consensus, and, in reaction, share prices are now overshooting lows that I had expected to be supported by conservative but elevated and reasonable profit estimates.
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