Zeev's Turnips Patch-No Politics (ZEEV)

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Zeev,
FYPerusal
Forbes' Ken Fisher forecast for 2003 (if memory serves, his forecasts for 2000 and 2001 were right on, but as he says himself he was too optimistic last year):

http://www.forbes.com/forbes/2003/0303/106.html

The Bipolar Market
Kenneth L. Fisher, 03.03.03, 12:00 AM ET


One reason for the market to rebound: Presidents' third years tend to be a time of loose money and warming economies.


Last month I suggested 2003 would be a great stock market year. Why? Because the forecasting methodology I've long used says 2003 will be great or terrible. Since I see abundant reasons it won't be terrible, I expect it to be great. Here's why:

Years ago I fashioned this tool by building representative samples of professionals' expectations. Then I noted what they agreed would occur, and figured the best place for an investor to place a bet is on some other outcome. Financial markets discount all known information. That means what we all know and commonly discuss is priced into markets--having no residual power. You can't make money off it. So, contemplate other possibilities and choose among them.

Suppose the consensus forecast is for So & So Co. to double its earnings next year. If you buy the stock now, do you have a big hit when the company delivers? No, that outcome was figured into the price you had to pay. You win when you know something others don't.

Sometimes you're right. Sometimes wrong. Last year I was wrong. My Feb. 4, 2002 column said that there were three holes in the pros' array of calls for 2002, meaning three S&P 500 outcomes worth betting on: to end with a gain above 40%, with a loss of 20% or worse, or with a loss between 2% and 10%. I bet on the last option. The second proved to be the correct one. The methodology wasn't wrong, just my particular choice.

The same technique now offers only two outcomes. Up 35% or more. Or down 35% or worse. I'll bet the former. Why?

You bet based on what is historically reasonable and what you see that others can't. First, a fourth big down year would be rare and would make this bear market fully comparable in magnitude and duration to 1929-32, a uniquely bad episode in economic history. Next, as I've often detailed (over the objections of many readers), history and reasoning point to the fact that the market will not experience a fall during a President's third year in office.

The third reason I don't expect a 35% fall has to do with a quirk of investor psychology. Recently I discovered investor psychology runs a continuous spectrum from higher-end, more famous and formally trained professional forecasters from the very biggest firms, down to lower-end, small money managers with little or no formal training (and nonprofessionals). Upper-end pros tend to be "mean reverters," meaning above-average years make them more bearish and below-average years make them more bullish. They want to revert toward average. Lower-end investors (professional or not), tend to be trend followers. They expect good years to be followed by good, and bad years by bad. From upper end to lower end is an accordionlike flexible psychological continuum. So, a long bull market pulls all investors together--toward more similar views. But long bear markets spread out sentiment, with high-end folks getting optimistic (by mean reverting) while low-end folks get ever more bearish.

The longer a bear market, the more that spreads out. And they all get more sure they're right. If the market is down 35% this year, high-end mean reverters will get more optimistic still, and low-end trend followers will get more pessimistic. Then, in 2004, with sentiment pancaked even further than it is now, the market will have to rise or fall a lot more than 35%, which seems much too much to be realistic, either way. But if the market is up big later this year, the mean reverters will get less optimistic, the trend followers less pessimistic and 2004 won't have to be unrealistically extreme. Hence psychology argues for up, not down. (For more, see "Blowing Bubbles," by me and Meir Statman of Santa Clara University, in the Journal of Psychology and Financial Markets, 2002, Vol. 3, No. 1).

Fourth reason to expect a rebound in 2003: Professionals overwhelmingly forecast a big move up in both long- and short-term rates this year, and the possibility of this bearish development is already figured into stock prices. I expect rates to stay more or less flat. With economies weak, central banks have scant choice but to err toward looseness. (And with his reappointment in 2004 on the line, Alan Greenspan has no choice but to help Bush's reelection prospects with loose money.) Low rates will be a pleasant surprise, pushing stocks up.

Fifth, municipalities and states plugging gaps in their pension funds will be big net buyers of stocks and bonds this year, to the tune of $50 billion. No one expects this, and next month I will detail what's behind it.

In sum, this is a terrific time to be buying stocks like these: Aegon (nyse: AEG - news - people ) (12), Alcatel (nyse: ALA - news - people ) (7), Bayer (nyse: BAY - news - people ) (17), Best Buy (nyse: BBY - news - people ) (27), Becton Dickinson (nyse: BDX - news - people ) (32), Campbell Soup (nyse: CPB - news - people ) (23) and Diageo Plc. (nyse: DEO - news - people ) (40). For details, go to forbes.com. At the "jump" box, select "premium tools" and type in a ticker.

Kenneth L. Fisher is a Woodside, Calif.-based money manager. Visit his homepage at www.forbes.com/fisher.