Beware of Scarecasts

All you need is a string of negative reports on the economy, accompanied by a skein of messy down days in the stock market, to touch off a burst of scarecasts. We're not referring to the bearish predictions of chronic (critics would say clinical) pessimists like Société Générale's admirable Albert Edwards, whose lugubrious view of the global scene we often share.

Albert is both consistent and open about what he predicts, like the S&P 500 ultimately declining to 400, and why. In contrast, perpetrators of scarecasts, whose ranks have swelled in recent weeks, insist that their dire prognostications are not forecasts, although they sedulously avoid saying exactly what they are. Something a mean little bird told them? A revelation distilled from a bad dream occasioned by eating bean sprouts for dinner? But let's not quibble—we'll call them scarecasts.

Lest you think we've invented a special class of prognosticators for the sheer joy of jeering at them, we readily admit that would be a temptation we probably couldn't resist, but it happily wasn't necessary. Scarecasters abound, but we'll confine ourselves to a few notable examples of reasonably high repute: Robert Shiller and Jean-Claude Trichet.

Shiller, a Yale professor, gained fame and, we hope, ample fortune by timely foreseeing that the housing boom would go bust. Last Thursday, at a Standard & Poor's conference on housing (given the state of that industry, the powwow seems more suitable for archeologists than investors), in response to a query about how far home prices might still decline, he ventured 10% to 25% wouldn't surprise him and immediately insisted that was not a forecast.

In like vein, last week, Jean-Claude Trichet, top dog at the European Central Bank, warned, at his monthly confab with the press, that the bank might hike interest rates as early as next month, a possibility that caused the euro to wilt like a scoop of ice cream left at the mercy of an unforgiving summer sun.

Mr. Trichet's heart sank with the euro, eliciting from him the feeble disclaimer that, good heavens, he wasn't making a forecast. We've always assumed that if it sounds like a forecast and looks like a forecast…but, oh well, let's not quibble. Perhaps Mr. Trichet, apparently an intimidating type, merely was trying to throw enough of a scare into inflation by demonstrating his eternal vigilance against the monster so it wouldn't dare to even think about raising its ugly head.

Mind you, we're not taking issue with the bearish slant of these non-forecast forecasts, but the rather pusillanimous refusal to call a spade a spade. We should confess as a confirmed skeptic about the economy and the stock market (a stance that induced us, alas, to miss equities' spectacular rebound from the March '09 lows), we grow more than a little uneasy as the crowd of converts to the bearish side steadily increases.

For bull markets rarely go kaput when just about everyone pays at least lip service to the need for caution. Or, for that matter, when investor sentiment droops so unmistakably. On this score, the latest weekly reading by the American Association of Individual Investors shows 47.7% of its members negative on the market, 27.9% on the fence and a meager 24.4% bullish. That's the skimpiest tally of bulls in the polls since August 2010, when stocks pulled out of a prolonged funk.

Nor do we find the sentiment readings of the financial advisors by Investors Intelligence providing much comfort. The latest count showed the number of bulls among that normally optimistic bunch had shrunk to 40.9%, from 45.2% the previous week and down a bundle from the 57.3% high set in early April. The bearish contingent, which had been hovering below 16% a little over a month ago, weighed in at 22.6% in the latest reading.

There are, it goes almost without saying, no shortage of serious and tangible concerns confronting investors (and civilians as well), and we've spilled lot of words in recent months laying them out. The economy is about to lose one of its main stimulants—Uncle Sam's largess. The great inventory binge that has revived manufacturing is showing signs of fatigue. Housing undeniably is a shambles. Prices at the gas pump are still way too high, especially with consumer income stagnant, unemployment rife and hiring slackening.

Meanwhile, we're still mired in Afghanistan and, in some significant way, Iraq. The uprisings in the Middle East and North Africa may yield some more palatable governments, but increasingly it seems likely to produce some troublesome ones as well. Greece still teeters on the brink of default and, financially, Portugal, Spain, Ireland and even Italy are in deep do-do. China seems ripe for an economic shock or two that seem destined to ripple around the globe.

All of this, to one degree or another, merits grave worry. But, none of it is exactly a secret. Quite the opposite, indeed. Thanks to media attention, it has all forced its way into widespread public awareness. And just as bull markets rarely end when investors least expect them to, they also are not likely to turn tail when the caveats about the economy–ours and the world's–are so heavily advertised.

We're not suggesting you ignore this frightening array of red flags. The woes are real and most are not likely to vanish anytime soon. For stocks to do an about-face and suffer a prolonged plunge ending in a resounding crash requires, at least in our book, the surging momentum furnished only by surprise and panic. But surprise, whether economic or market-based, is conspicuously absent at the moment. And so we don't think the timing is right for the kind of umcompromising swoon that spelled finis to the dot-com boom or housing bubble.


HAVING UNBURDENED OURSELVES of this modest jeremiad against scarecasters, it's a pleasure to direct your attention to the cover story and the prophecies and piques of the truly knowledgeable and free-wheeling group who make up our midyear Roundtable. While the gang's crystal balls are not infallible (whose are?), their predictions are rendered unadorned by apology or hazy hedging. Thus, despite the reservations expressed by hordes of so many of their peers, though hardly insensitive to the investment climate, our guys and gals call it as they see it.

Abby Joseph Cohen, for example, hews to her usual upbeat outlook, even while allowing for some lessening of the economy's vigor. At the same time, Marc Faber is unabashedly bearish. Scott Black is still bullish on selected stocks, even though he's less than thrilled with the prospects for the economy as a whole.

Mario Gabelli is as ebullient as ever and aburst with stocks to buy. Our old buddy Archie MacAllaster, far from daunted by the dismal showing of one of his favorite sectors—financials—contends the group is now awash with long-term bargains, with equal stress on long-term and bargains. He picks as especially promising a 200-year-old insurer selling at less than six times next year's earnings.

Felix Zulauf offers his usual measured assessment of global markets, while Bill Gross reiterates why he's down on U.S. Treasuries. Oscar Schafer sees the market eking out a gain for the year as a whole and serves up some intriguing picks. Meryl Witmer finds some beguiling and diverse investment opportunities, and Fred Hickey puts in a plug for gold.

Our point is that there's no group-think on the Roundtable; it's every man and woman for themselves. That and the savvy of the people doing the talking makes it great reading. But see for yourself.


NOT THE LEAST NOTEWORTHY event last week was the get-together of the Organization of the Petroleum Exporting Countries, familiarly known as OPEC, in Vienna. It proved one of the rare times since this predatory bunch was formed half a century ago that it was unable to cook up some semblance of an agreement on what to do about production. Not that such agreements have ever been rigidly adhered to; quite the opposite, cheating, especially but not exclusively when petrol prices are going through the roof, is typically rampant.

Controlling something like 40% of global crude, the cartel still holds considerable sway over the market. The split last week pitted Saudi Arabia against the likes of Iran and Venezuela. The Saudis were for holding the line, fearful, among other things that richly priced crude might push any number of developed economies, including ours, into double-dip recession with dire consequences all around.

Iran and Venezuela, both in desperate need of more revenue, and, in any case, hardly concerned about the impact on such reviled enemies as the U.S. and the European Union, flat-out refused to go along with any production quotas. The Saudis pledged to fill the gap created by the effective halt of Libyan production and a smattering of frozen shipments from other beleaguered sources. In response, crude prices softened a tad, but remain quite elevated.

Comes now President Obama brandishing a big stick that has sparingly been used by some of his predecessors—the Strategic Petroleum Reserve. And Andy Laperriere and Roberto Perli, who put out Ed Hyman's always useful ISI policy report, believe Mr. Obama is serious about applying that stick.

They note that when previous administrations tapped the SPR, the effect on oil prices tended to be rather short-lived. However, they believe this administration may choose to make more than a symbolic draw on the reserve and thus exert more of an impact. They also suggest other nations might follow our lead, and a joint effort could do a much more meaningful number on oil prices.

And, more to the point, they point out, stingingly high gas prices are hurting consumers, the economy and the president's poll ratings. Too, we seem to recall, 2012 is an election year.