Channeling Stocks

[sludgehound]

2008 LT Market Prediction, boring

Meanwhile 0-0 Yanks Jays in good one, bottom 8th. Jetter out
for rest of day.

A Market Forecast Takes a Long View, and a Dismal One It Is
By MARK HULBERT

Published: July 18, 2004

THE stock market in the summer of 2008 is likely to be only barely higher than it is today.

That disheartening prediction comes from a market-timing model with an excellent record of forecasting four-year stock market returns. The model is based on projections from analysts at Value Line for price changes over the next three to five years in the 1,700 stocks they monitor. The median of those projections is published each week in the Value Line Investment Survey.

Value Line doesn't advise investors about how to interpret this statistic. But since 1968, when Value Line began publishing it, low readings have generally been followed by mediocre stock market returns over the next four years. Similarly, high readings have typically been followed by above-average returns over similar periods.

To be sure, the Value Line numbers haven't been very accurate in forecasting short-term market moves. But they have been quite reliable in predicting the longer term.

They have proved particularly useful when the mood of investors reaches extremes of euphoria or despair. Value Line's median projection was last considered in this column on Sept. 30, 2001, less than three weeks after the terrorist attacks. At that writing, the indicator was at 105, its highest in more than a decade. At the time, many investors were unwilling to make any bets on the stock market, but those who relied on that high reading to invest in equities have been rewarded. The Standard & Poor's 500-stock index has produced a cumulative total return of 20 percent since Sept. 21, 2001, the day of the market's post-attack lows.

Unfortunately for market bulls, however, the Value Line reading has now sunk to 50, a very low level. Over the last 36 years, in fact, the reading has been lower just 11percent of the time.

The indicator has limits, of course. It's hardly foolproof. And because it focuses on median performance, it is not helpful in projecting how large-capitalization stocks will perform relative to small caps. If the large caps lead the market over the next four years, indexes that are dominated by the large caps - like the S.& P. 500 - will do better than the indicator suggests.

Credit for realizing the indicator's market-timing power is shared by at least two people, who independently reported on its usefulness in the mid-1980's. The first is Daniel A. Seiver, an economics professor at Miami University in Ohio and the editor of the PAD System Report, an investment newsletter. The second is Peter L. Bernstein, the founding editor of The Journal of Portfolio Management and now the head of a consulting firm that bears his name.

Professor Seiver is so confident about the indicator's market-timing powers that he bases his newsletter's market-timing advice on it. He considers any reading of 100 or more to be a buy signal, for example, while he uses a reading of 50 or below as an occasion to build a large cash position in his model portfolio. Based on the current reading of 50, Professor Seiver is recommending being only 50 percent invested in stocks. And he says he will not advocate reinvesting any of that cash in the stock market until Value Line's median projection rises back to at least 100.

Professor Seiver says several factors help explain the indicator's usefulness. First, he says he finds that Value Line stock analysts tend to be "less susceptible to valuation manias" than most other analysts, because Value Line's are independent, immune from the pressures that can be found in research departments associated with investment banks and brokerage firms.

A second factor, he said, is that few other firms besides Value Line even bother to focus on what will happen in three to five years, concentrating instead on just the next 12 months. Because so few other analysts are looking so far ahead, Value Line's researchers should find it relatively easy to spot profit opportunities.

"Wall Street is certainly myopic," he said. "Anyone who is willing to focus on the longer term should be able to earn a bonus for doing so."

A third factor, Professor Seiver said, is the "law of large numbers," which holds that random errors become insignificant when focusing on many observations. He has no doubt that many Value Line projections of individual stocks' three-to-five year returns are wide of the mark. But because the median projection is the distillation of nearly 2,000 separate forecasts, he said, "the analysts' errors will tend to cancel each other out."

And for now, the overall forecast suggests that investors should not be too optimistic about the stock market.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of CBS MarketWatch. E-mail: [e-mail].

http://www.nytimes.com/2004/07/18/business/yourmoney/18stra.html