It Is Almost Always Darkest at Dawn
By Doug Kass 06/06/12 - 12:00 PM EDT
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This column originally appeared on Real Money Pro at 8:03 a.m. EDT on June 6.
NEW YORK (Real Money) --
"When a cyclical investor hears that there are too many optimists in the market, he will begin to worry. After all, he may ask if everyone is already bullish, who is left to buy? Conversely, when there are too many pessimists and everyone is bearish, who is left to sell?" -- Jim Grant, Minding Mr. Market: Ten Years on Wall Street With Grant's Interest Rate ObserverI have often written that the (investment) crowd usually outsmarts the remnant, but the crowd (as was the case when the S&P 500 was at 1420 in April 2012 or at 666 in March 2009) is invariably wrong at extremes. Warren Buffett put it more eloquently, "Chains of habit are too light to be felt until they are too heavy to be broken." The root of our investment mistakes is often extrapolation and in disregarding the possibility that events might have changed, are different than suggested by the markets or have already been discounted in the marketplace. So, at times, it is truly almost always darkest before the dawn, especially in a market that has been increasingly dominated by high-frequency strategies and leveraged ETFs that rely on price momentum (not fundamentals) as their principal determinants for buying and selling. These strategies and investment vehicles tend to exaggerate market moves and serve to further alienate the individual investor, who has already been turned off by the May 2010 flash crash, two large drawdowns in U.S. stock prices, the Great Decession of 2008-2009 and a lost decade for equities since 2000. Partially, as a result, investor expectations and sentiment have approached a negative extreme, which is best seen in continued and record redemptions of domestic equity funds. As I mentioned in yesterday's opener, analysis -- it seems to this observer -- is taking a back seat to emotion and hyperbole and to those high-frequency and levered ETFs, financial weapons of mass destruction that have likely put more pressure on equities in the last 45 days. While fully recognizing that all is not well with the (economic/financial) world and that numerous challenges still exist, I remain more upbeat than most regarding our investment future: I view the recent market weakness as an opportunity to be embraced rather than something to be feared, as, arguably, much of the headwinds have been discounted in market prices. Over the past few weeks, the business media has been dominated by talking heads who are now expressing a Cassandra-like vision of the future for our capital markets and world economies. CNBC, Bloomberg and Fox Business Network have paraded an endless procession of pontificators, who almost universally highlight the downside to the world's stock markets -- few discuss the opportunities or the upside. And, unfortunately, many who are paraded use past prices as their investment template and/or are not particularly rigorous in their fundamental analysis.