Dear Mr. Market,
How great would it be to have a job where you could constantly deliver results short of expectations and never have to worry about being fired? What if you could always simply blame your lack of performance on random external forces or global events? Imagine if you had a yearly performance review that went something like this…
“You missed your target goals by 28% and were wrong more often than you were right! Nice work, we are going to give you a bonus and a 10% raise!”
This doesn’t happen in the real world…or does it?! The financial services industry has become notorious for overpaying executives even when the company itself is struggling to survive or is even on the verge of declaring bankruptcy. For example, Richard Fuld of Lehman Brothers was one of the 25 best-paid CEO’s for eight years straight – right up until his firm collapsed in 2008. It has been called ‘”the largest bankruptcy in history”; it triggered a chain reaction that produced the worst financial crisis and economic downturn in 70 years! What about professionals in the financial industry that consistently underperform but are not at risk of losing their jobs?
One of the more challenging positions in the Financial Services industry is that of an analyst; attempting to predict where the market is moving and how it will perform. The overall accuracy of these professional is overwhelming not accurate in any way shape or form. A great example is analyst Meredith Whitney; she made a name for herself by correctly predicting the challenging times that financial companies would face in 2008. She was chosen as CNBC’s “Power Player of the Year” and one of Fortune 500’s “50 Most Powerful Women in Business” among many other awards. However, she was quickly brought back to reality when she stated on 60 Minutes in 2010 that there would be “hundreds of billions” of dollars lost in municipal bonds issued by counties, cities and towns across the United States. Many individuals and investment professionals followed her advice and sold their positions but as of August 2013 her prediction has still not materialized. Why would any rational or educated person base their investment decisions on these analysts or trust their financial professional who is being influenced by this type of unaccountable media noise?
Recently we came across an article that we think does a very good job of portraying this information even if it isn’t the intended point of the article. The article we have attached below highlights the outlook and opinions of Adam Parker, Managing Director and Chief U.S. Equity Strategist at Morgan Stanley:
Morgan Stanley’s Adam Parker Unveils Big Bullish Call
A Wall Street strategist, who used to be among the gloomiest of the major market prognosticators, has done a complete about face and is now among the most bullish on the Street.
Morgan Stanley‘s, Adam Parker this week called for the S&P 500 to hit 1840 over the next 12 months, implying about 12% upside from current levels. The upwardly revised estimate comes after Mr. Parker predicted in March that the stock would finish the year at 1600.
The S&P 500 recently rose 0.9% to 1654.
“As we said in March, the lack of a credible bear case seems to be driving multiple expansion for equities,” Mr. Parker says in a note to clients. “Why? For one thing, markets can work while estimates are being downwardly revised.”
While Mr. Parker’s “base case” calls for the S&P 500 to hit 1840 within 12 months, his “bull case” is much more optimistic, at 2327, while his “bear case” target is 1352.
By comparison, Goldman Sachs and Credit Suisse offer 2014 year-end price targets of 1900 apiece and Deutsche Bank has a 2014 target of 1850, according to data compiled by New York research firm Birinyi Associates.
Behind the more upbeat forecasts, Mr. Parker says there’s little reason to think stocks have peaked even as a series of fresh records have been hit this year. He points out confidence among CEOs sits at average levels, capital spending remains low, deal activity is tame, hiring is low and inventory builds are relatively week.
“The date when debt is due is more important than how much there is, and very few companies are likely to go bankrupt in the next 2.5 years,” Mr. Parker says. “By this measure, we’re not at the top of the cycle.”
Between record levels of cash on balance sheets and financial obligations pushed years out, Mr. Parker says the health of corporate America is another reason to remain optimistic about stocks over the next 12 months.
“We are buyers of dips and maintain our constructive stance, even though markets appreciated more than we expected year-to-date,” he said.
Mr. Parker boosted his earnings expectations for this year and next, based predominantly on better-than-anticipated results last quarter from the financial sector. He now projects 2013 earnings-per-share at $105.50, from $103 and lifted his 2014 EPS target to $112, from $110.
Mr. Parker’s latest forecast marks a big change from his original 2013 predictions, unveiled last November. At that time, he called for the S&P 500 to finish 2013 at 1434.
From where the S&P 500 finished in 2012, that target would have meant a gain of just 0.5% over the year. By comparison, the S&P 500 is actually up 15% this year through Tuesday’s close.
For Mr. Parker, even his previous forecast was something of a departure. It marked the first time he called for stocks to move higher in any year in his tenure as Morgan Stanley’s strategist.
“We wish we didn’t have to set a year-end target,” he wrote in that note, published Nov. 26, 2012. “We felt little joy in 2011 and lots of pain in 2012 related to the target, and find few credible investors really care where we think the market is going to be on a particular day one year in the future.”
Now, Mr. Parker says he’s not particularly concerned about the potential of the Fed dialing back its stimulus programs at this month’s meeting. “We don’t believe bond yields will back up much more in the near term,” Mr. Parker said this week. ”The government doesn’t want to slow the economic recovery, demand for income is enormous and the CEOs are [incentivized] to growth their dividends.”
He also notes the market is trading at a slightly higher multiple compared to historical averages, but remains far from some of the exuberant levels witnessed over the past four decades. The chart below shows puts today’ multiple into perspective.
Should the Fed start the so-called tapering process this month and lower its monthly bond purchases to $65 billion from $85 billion, it would then turn into the equivalent of what QE2 was a few years ago.
“In other words, we are very far from tightening and expect accommodation to reign,” he says.
–Alexandra Scaggs contributed to this report.
There are several points that stand out as we read this article. Below are a few that individuals need to consider if using information like this to guide their outlook and invest their assets.
- With his revised outlook he added over 700 points to his previous year-end number for the S&P 500 at 1600. His “bull case” calls for the market to hit 2327 while his “bear case” calls for 1352. That is a difference of nearly 1,000 points! The market is currently around 1650; a 1,000 point spread accounts for 60% of the market itself!
- Last November he called for the S&P 500 to finish 2013 at 1434. As the article states this would indicate that the S&P would have delivered a return of .5% for this year when it has actually posted a return of over 16% through last week (9/6/2013).
- This is the first time that he has called for stocks to move higher throughout his tenure as Morgan Stanley’s stock strategist.
Take a moment to think about this, if you or your Financial Professional based investment decisions on this analyst’s outlook what would your portfolio currently look like? You certainly would have missed out on a very impressive return this year. In fact, you could have taken Mr. Parker’s outlook on the market as an indicator that you should add to your fixed income positions since he predicted essentially a zero return for equities. If you had done that you would have negative returns depending on how you chose to invest in Fixed Income. For example, AGG (iShares Aggregate Bond Fund) is down over -5% for the year. So what is an investor to do?
Here are a couple suggestions so you don’t put ‘all your eggs in one basket’ after reading an analysts compelling story for where they see the market going.
- Gather your information from multiple sources – allow your decision to be an informed one.
- Realize that nearly ¾ of the ‘investment professionals’ can’t beat the market itself. Rather than trying to beat or time the market consider dedicating a portion of your portfolio to simply tracking the market.
- Both the print and electronic media that cover the Financial Markets are providing entertainment and not cutting edge financial information. Just because it is televised or in print does not make it accurate or even reliable.
- If you work with a professional ask them where they get their information and research. Ideally you want them to have multiple sources and not rely only on what their company provides.
We can’t help but make the comparison of a Financial Analyst to that of the weatherman on the nightly news. At best the weather is an educated guess and the same could be said for the financial markets. They have their cutting edge technology and radars much like financial professionals have programs and charts. If they are right you will hear all about it however if they are wrong they have a quick excuse as it is due to a cold front or the value of the yen for example. Take the time to cut through the fluff and noise and get the facts so any decision is an informed one.
As always we welcome your thoughts and questions. If you would like to talk in more detail please don’t hesitate to contact us at your convenience.
Dear Mr. Market: 