Tuesday, 10 August 2010 08:55

Does Pessimism Now Sell As Well As Sex, or Are Investors Just So Starved for the Unconflicted Truth?

Many have labeled me a Permabear, particularly my detractors and those in the media (who are decidedly not detractors but still paint a pessimistic bent on my outlooks, see sidebar below). I am nothing of the such. I am what will be soon be known as a realist, as opposed to being a pessimist or optimist. No, I am no Permabear. My proprietary investment style (see "The Great Global Macro Experiment, Revisited")

Crain’s New York

“His work is so detailed, so accurate, it’s among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton’s research.

Reggie in Forbes (Going short)

Middleton’s site combines self-promotion with meticulous financial analysis that is often delivered with a whiff of bathroom humor

dictates that I switch between extremes of bullishness and bearishness contingent upon the extreme policy errors of central bankers. As a matter of fact, I was as bullish as can be in residential real estate in NYC form 2000 to early 2004. I leveraged up on all the "in the money" distressed real estate I could find in areas of heavy gentrification, literally extracting 4 digit returns. That doesn't mean I disobeyed the laws of math though. As 2004 progressed, the writing on the wall became larger and more pronounced... Enter 2005 and math said turn bearish, common sense said turn bearish, and not to be one to look arithmetic in the face and argue, I grew bear claws and donned a ruffled brown grizzly coat! After liquidating my real estate, I took a year off and started shorting every industry that was even tangential to real assets. That was 2007. By the first quarter of 2009, I had a cumulative return in my portfolio of about 452% averaging roughly 50% cash (see Updated 2008 performance). I sensed the market was oversold, but the fundamental and macro outlooks was still quite negative, hence I pulled my profits one weekend in March (but let a few underwater positions ride). This weekend, coincidentally, happened to be the beginning of the rally that shouldn't have been, and I fought the faux bull to my detriment I got hurt in the artificially engineered, central banker and government synthesized rally of 2009, and my cumulative return was almost halved.

I was quite disappointed in my performance - yes, despite the fact that a 3 year real world return of 225%+ blows the snot out of practically every name brand investor most can think of. The reason why I was upset was because I knew the rally was coming and should have realized that there was a concerted effort to kill alpha (the expertise generated excess return over the broad market return, see ZeroHedge's Barclays Quant Strategy: "Mispricings In The Market May Be Beginning To Take Root"). Alpha is what I am about, not momentum trading or leveraging beta. I study companies and macro opportunities, not money flows and investment trends, and use these studies to (accurately, in my opinion) take positions and capitalize upon them. Since September of 2007 when I started publishing my blog, I have called the collapse and downfall of well over two dozen companies, and have done so publicly with research disseminated from my site. This is what I consider alpha, for many of these companies and the sectors they hailed from were still being lauded by the sell side as I stamped doom on my reports. As a matter of fact, the companies that I actively took positions against (for the most part) actually collapsed or were rescued by the government (reference the accuracy of BoomBustBlog reports). I even took the liberty of showing subscribers the delta between my opinions and research and that of Sell Side Walls Street (see and Blog vs Broker, Whom Do You Trust!), wherein Alpha for them is generated by separating their more unwitting clients from their capital!. While this all looked and sounded very good, once the entire investment universe approached a correlation of 70%, stock picking acumen (or at least the positive results of such) went out the window. Despite proper calls on the commercial real estate sector, the regional banks, and the European debt crisis, if the bad stuff starts to move in the same direction as the good stuff all of the tie... Well, you know how that story ends.

Here is the good news, though. You can only manipulate the markets for but so long, and markets tend to overshoot the mean on correction.

Understanding my proprietary investment style


Translation, those guys who messed with Mother Economics and Father Fundamentals will cause the rest of us who can't count (or generate alpha) to pay the Piper, and I feel will be doing so relatively soon. So, I am not a bear, I am a realist - and on that note let's review this article from CNBC that alleges pessimism (or realism, like sex) sells:

The central question dividing economists these days is whether Western governments should spend more to ward off a potential second recession or retrench to hold down their ballooning debts to restore confidence among investors.

But Albert Edwards, an investment strategist in London for the French bank Société Générale, considers the debate a waste of time. To be specific, he forecasts a “bloody, deep recession” that produces a stock market collapse of at least 60 percent, followed by years of inflation of 20 percent to 30 percent as the persistent printing of money by central banks desperate to improve the situation sends prices soaring.

Mr. Edwards’s sandals and chuckling demeanor belie his reputation as perhaps the City of London’s best-known permabear — a species that has long flourished on the outer margins of the financial industry but rarely inside mainstream banks.

That is no longer true....

In the tradition of the great macro hedge fund investors like George Soros and Julian H. Robertson Jr., Mr. Pal, whose last job was as a portfolio manager at GLG, a hedge fund based in London, likes to pick a theme that may take years to pan out and run with it. His big bet is that the United States economy is not just about to enter a double-dip recession but that it will be far worse than anything experienced in the lifetime of anyone younger than 70.

He points to a weak rebound in consumer and industrial spending from the 2008 plunge, suggesting that companies and people will remain reluctant to borrow and spend. “Never before have we entered a recession with 10 percent unemployment,” he wrote in his August report. “And if you take into account that on average a recession increases unemployment by 3 to 5 percent, we could see 15 percent unemployment in the U.S. — that is staggering.”

As for whether central banks can rescue their economies through a fresh round of money injection, both Mr. Pal and Mr. Edwards are skeptical. They contend that there is no evidence that the huge injections of liquidity already engineered by the Federal Reserve, the European Central Bank and the Bank of England have led to a pickup in demand for loans.

That may be so. But Ed Yardeni, an independent strategist in the United States recognized for his consistently optimistic views, says it would be a mistake to bet against the evidence from strong corporate profits, which he thinks are already driving a global rebound. “Despite all this negative spin, we have seen one of the best corporate recoveries ever,” he said. Executives at large companies “are being fed this same diet of pessimism, but instead of shutting down they are growing their profits and expanding their operations."

I query, Mr. Yardeni, "How can one be so optimistic about corporate profits when they really didn't seem that strong at all?" Strong corporate profits stem from strong increases in revenues, potentially bolstered by expanding margins. What we have seen was the typical sell side game of "beats", wherein companies earnings come in above manipulated and guided consensus estimates that compare a year when many companies were actually threatened with going out of business. The revenues backing many of these beats were actually fleeting. A company making more than nothing is not necessarily indicative of strong corporate profits. Speaking of highly manipulated guidance and managed earnings, the BoomBustBlog forensic analysis of Apple is coming out in a few days. Those who invest with emotion and passion, sans a spreadsheet are going to love what I have to say. I'll post a little preview in a few hours.

Last modified on Tuesday, 10 August 2010 09:55


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  • Comment Link Reggie Middleton Wednesday, 11 August 2010 13:21 posted by Reggie Middleton

    I think its quite appropriate.

  • Comment Link Mark Hankins Wednesday, 11 August 2010 12:06 posted by Mark Hankins

    I just happened upon a new word "Nachrichtensperre" which is a Nazi term that denotes the act of making sure nothing of substance makes it into the media. Does that ring any bells?

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