It's a curious quirk of human nature that most investors believe their own ideas represent a contrarian point of view. And at no time has this been on better display than in the great horticultural debate that has arisen in recent months among economic forecasters over the emergence or nonemergence of "green shoots."
Investors who see glimmers of global economic growth on the horizon believe they are the contrarians because most of the data that have been released in the past few months still look dreadful, so it takes some imagination to see a brighter future. Investors who think the global economy is actually worsening believe they are the contrarians because undue optimism has already lifted stock markets 40% since March.
The reality is that neither group is particularly contrarian; they simply represent the age-old differential between hope and fear. And because the market gods are never satisfied until almost everyone has lost money in equal doses, it's fair to assume that both groups are partly right, and yet neither will be rewarded much for its insight. Here's a look at why, at the bad government math that underlies both sides' arguments and at what you can do to avoid their fate.
First of all, if you don't believe that both can be right and still lose money, take a look at the trading in the year's first half. The headline numbers don't look too bad: The S&P 500 Index ($INX) was up 2%, while the Dow Jones industrials ($INDU) were down 3%. That's about as flat as you can get. But real results are much different because of the violence of the down move in February, when so many despairing bulls sold at a loss, never to buy back, and the violence of the up move in March, when many scornful bears shorted and were crushed.
Those market gods are so devious sometimes. You see their game, right? Most of the green-shoots crowd waited way too long to come around to that point of view and therefore managed to catch only a sliver of the rebound around May, according to New York Stock Exchange trading-volume data. And most of the weed-killing crowd has bad-mouthed the recovery so much that they have likewise had depressed results. It's as if all the hopes and fears of a generation are being buried in the same unmarked grave.
Wal-Mart (WMT, news, msgs) is a great example of the sort of stock that has beat up both the green-shooters and the weed killers. Bears knew coming into this year that consumers in a world of hurt would primarily shop at discount stores, so they thought it would be clever to go long Wal-Mart shares and short-sell high-end retailers such as Coach (COH, news, msgs). Meanwhile, bulls believed that middle-class tax rebates, handouts from the government's Making Work Pay program and jobless benefits would be spent at Wal-Mart on necessities. This made Wal-Mart a pick everyone could believe in.
But whenever an idea is agreed upon by virtually everyone, it's way too good to be true; lacking a surprise effect, it's useless. Plus both sides were blind to some painful trouble facing the U.S. stock market's second-largest company. Wal-Mart came into 2009 hoping for expansion internationally but has had to face up to abysmal failures in Germany, South Korea and Hong Kong, and much-slower-than-expected expansion elsewhere in China. Plus Wal-Mart appears to be negatively leveraged to every business reform initiative of the Obama administration, as many of the proposed labor, health care and carbon emission laws will pull profits directly from the anti-union retailing giant's bottom line. Shares are down 12% in 2009, one of the worst results in the major indexes.
Meanwhile, froufrou retailers like leather goods maker Coach and yoga apparel maker Lululemon Athletica (LULU, news, msgs) were sold so hard in the spring -- under the assumption that the consumer was dead -- that they became terribly underowned. They were anything but a consensus pick. And as a result, true contrarians were able to rush into the void to buy cheap shares, more than doubling the value of each. Now those surprise winners had better take profits fast, because it looks like the data trends are about to tip temporarily back to the bears.
Failing math
Blame the bad math I mentioned. Analysts at TrimTabs Research reported last week (.pdf file) that the government's Bureau of Economic Analysis is painting a wildly inaccurate picture of the health of U.S. consumers. The statistics agency reported that personal savings as a percentage of personal disposable income was a stunning 6.9% in May, the highest since December 1993. That's about 7 percentage points above the rate of 2008, and it suggested a new era of frugality.Ha -- you knew that couldn't be right. TrimTabs' analysis, which is based on real-time income tax deposits rather than mathematical models, suggests that the real savings rate is a lousy 0.9%, not 6.9%. This is bad news for both optimists and pessimists, which fits my both-sides-lose theory to a T. It shows that consumers are in much worse shape than government statistics suggest and therefore have little money available to make house payments or pay for yoga gear bought on credit.
How did the government get it wrong? According to TrimTabs, two temporary factors lifted the savings rate: Social Security recipients got one-time payments of $250 in May as part of the stimulus package, while another huge chunk of money went to welfare recipients. Strip out those anomalies, and the savings rate drops to 4.8%. Meanwhile, TrimTabs' analysis of daily Treasury Department data suggests that the government models -- which are based on lagging Quarterly Census of Employment and Wages data from last year and thus have not been updated to reflect the true impact of the recession -- greatly overestimate wages, salaries and dividend income. Using live data and backing out one-time payments, the analysts conclude the real savings rate is less than 1%.
To be more specific, using its outdated model, the Bureau of Economic Analysis reported in May that personal income had risen 0.3% year over year despite the worst recession and employment crash in 70 years. That's craziness.
TrimTabs' model, using real-time data, shows that personal income fell 3.6% year over year in May while salaries and wages sank 4.8%. That's much more believable. The bureau won't catch up to what's really happening in the economy until its data is updated through the first quarter of this year, and then it'll likely show a big drop.
If TrimTabs is right -- and I trust its work -- then a key reason for a lot of the green shoots showing up is bad mathematical modeling, not positive data. Yet this is not a win for either side. To the extent that green-shooters are relying on Bureau of Economic Analysis data for their optimism about the future, they're wrong now. But to the extent that bears will rely on bureau data in the future, they'll also be wrong. Everybody loses, which is just the way the market devils like it.
Scary, Gary
Optimism over government assistance is colliding with reality most vividly in the housing market. Southern California real-estate analyst Gary Watts, who earned a reputation as "Scary Gary" because of dire predictions that panned out two decades ago, told an industry trade group in Orange County last month that low home prices and mortgage rates are not enough to turn around that region's benighted market because they're outweighed by shrinking access to credit and lower wages.According to an account in the Orange County Register, Watts said the core problem is that lack of move-up buyers. While demand for homes selling for $500,000 is hot, sellers of those homes no longer have any equity. He said that they end up with nothing to invest in a bigger house, so sales of more-expensive homes are dead in the water. That has led to price wars, longer times on the market and more foreclosures for upper-income area residents at a time when adjustable-rate mortgages, called option ARMs, are also resetting at the highest rate in the past five years. In short, don't expect these people to buy a lot of yoga gear this fall.