Peeling the Onion

A fundamental component of accurate stock market forecasting is understanding sentiment. When investors' attitudes take big swings away from reality it usually means opportunity for savvy investors. Warren Buffet is famous for quipping, "…try to be fearful when others are greedy and greedy when others are fearful."

Yesterday in this space, MarketMinder highlighted the spate of resurgent recession talk in the media despite terrifically positive economic fundamentals worldwide. (See "Recession Risks? Inconceivable!" 9/4/07 for more.) Most of the time investor sentiment falls somewhere between dour and mildly content. But when it jumps toward one pole or another to an absurd degree, it's of the most interest to investors.

Often when sentiment is mentioned, folks tend think in terms of fear: "Are investors too optimistic?" or "Are things really worse out there than people expect?" It's relatively rare these days to hear "Investors aren't optimistic enough!" (Note: When you do hear pervasive optimism in the media, it's probably time to head for the storm cellar.)

Most folks worry more than they feel jubilant—it's a natural part of the brain's wiring. As such investors are often too dour about the economy and stocks' prospects. Which is a funny thing because on an annual basis stocks go up over 70% of the time!

In this light, we offer the following headlines. One of these is a real story, professionally reported by an honest-to-goodness journalist, and one was intended as comedic satire. Can you guess which is which?

1. 'She-Male' Leads Prisoners in Dance
2. Mortgage Market Collapse Threatens Nation's Banner Ad Industry

You must be thinking, "How silly …of course number one is satire!" Number two is a serious warning about the ever-growing tentacles of the mortgage disaster and its inevitable decimation of the online ad business.

Believe it or not (and it took us awhile before we believed it ourselves), "She-Male Leads Prisoners in Dance" is the real headline, and "Mortgage Market Collapse" is satire. CNN's topmost headline this morning had to be seen to be believed:

'She-Male' Leads Prisoners in Dance
Hugh Riminton, CNN.com

Besides the completely bizarre nature of this story (is this really what passes for news these days?), dancing inmates headlines reveal an important fact to investors: There aren't any big, bearish, negative headlines out there to beat stocks down for good. Instead of major geopolitical developments, today we get stories about jail music videos. That's a very bullish signal for stocks.

Meanwhile, The Onion (widely considered the number one web destination for satirical and topical comedy), makes light of the hype surrounding today's so-called mortgage crisis.

Mortgage Market Collapse Threatens Nation's Banner Ad Industry
Staff, The Onion

It's funny in itself when satire is confused with truth, particularly when The Onion comes off more reasonable and level-headed than a number of today's legitimate headlines:

Can the Mortgage Crisis Swallow a Town?
Nelson D. Schwartz, The New York Times
https://www.nytimes.com/2007/09/02/business/yourmoney/02village.html?em&ex=1189051200&en=4e5b65547168817f&ei=5087%0A

Housing Slump Strains Budgets of States, Cities
Amy Merrick, The Wall Street Journal
https://www.wsj.com/articles/SB118895953516217811

Mortgage problems have officially been blamed for "swallowing" whole towns, nearly bankrupting states and cities, raising unemployment, and also a leading cause of male pattern baldness (Ok, we made that last one up).

In reality, today's credit problems appear to be well contained and highly unlikely to have a severe effect on the economy. (See our past commentaries "Blood in the Alleys" 8/9/07, and "Best Credit Crunch Ever!" 8/23/07 for more.) In fact, US unemployment sits near historic lows, and federal, state, and municipal tax revenues are hitting record highs.

When satire seems as sensible as real news and headlines describe dancing inmates instead of meaningful developments, it's a great sign sentiment is out of whack with reality. We continue to see positive fundamentals for the global economy and stocks. Stay bullish.