Don’t Sweat the Big Picture!
Tuesday, November 13, 9:45 a.m. I’ve written fairly often of the folly of investors becoming overly concerned with big picture analysis, and predictions of calamities that are sure to hit down the road. About all one can hope to do is be right on what will likely happen three to six months ahead. In my [...]

Tuesday, November 13, 9:45 a.m.

I’ve written fairly often of the folly of investors becoming overly concerned with big picture analysis, and predictions of calamities that are sure to hit down the road.

About all one can hope to do is be right on what will likely happen three to six months ahead.

In my 1999 book ‘Riding the Bear – How to Prosper in the Coming Bear Market’ I devoted a chapter titled ‘Extending Current Trends Into Infinity’ to the subject of big picture analysis, pointing out that extending current trends far into the future was the favorite forecasting tool of scientists and economists – and investors.

Tongue in cheek I said the delusion of such thinking is best illustrated by the fact that the world hardly ever comes to an end. Yet for centuries ‘trend-extending’ has regularly predicted just such a result – based on everything from holy wars, black plague, and rising ocean levels a century ago, to nuclear weapons, depletion of the ozone layer, global warming, communism taking over the world, etc., of more recent times.

The fault in such thinking is that trends continue only until conditions end.

Vaccines are quickly developed for the black plague, TB, AIDS, deadly bird-flu and mad-cow type epidemics and pandemics that periodically threaten to envelop the world.

In the 1940s, by simply extending the current trend of food production and population growth, it was scientific fact that there would not be enough land to feed the growing U.S. population by the year 2000.

But farmers learned new soil management, new cattle feeding and breeding techniques. science developed healthier seeds and feeds. Farm machinery manufacturers provided more efficient equipment. Oblivion was not only avoided and the trend reversed, but the problem reversed to the opposite extreme; food surpluses, overflowing government food warehouses, gifts of surplus grains to foreign countries, and even subsidies to farmers to leave fields unplanted.

Governments are certainly not immune to the fallacy of thinking trends rather than cycles.

In the 1980’s the U.S. budget deficits had been worsening for decades. Economists, extending the trend in a straight line into the future, competed with each other with dire forecasts of how soon the country would be bankrupt.

However, in the 1990s, government spending cut-backs, combined with a big surge in tax revenues (thanks to the booming economy and explosive stock market of the 1990s), not only produced a balanced budget, but several years of large budget surpluses.

Not surprisingly, in no time at all, that trend was being extended endlessly into the future. Congress began making plans to spend the budget surpluses it was now projecting would continue for several decades.

Washington projected that within ten years the entire U.S. national debt would be paid off; social security would be completely funded; and the population could be provided with full healthcare. There would even be plenty left over for tax cuts, and increased spending for defense and education.

Once again the trend only lasted until conditions changed.

The stock market plunged into the severe 2000-2002 bear market, depriving the government of the healthy capital gains taxes it had been receiving. The economy plunged into the 2001 recession. Workers lost their jobs, causing the government’s take from income taxes to nose-dive. The 911 terrorist attacks took place, resulting in large increases in government spending for homeland security. The invasion of Iraq followed, with its escalating costs. The picture reversed again. Budget surpluses became budget deficits.

The 2008-2009 financial meltdown and Great Recession then hit, and the budget deficits grew even larger as massive and costly stimulus efforts were undertaken to prevent the recession from becoming a full-blown Depression.

Not surprisingly, as the budget deficits have reached record levels, economists are now extending that trend in a straight line again into the future, returning to predictions that the Social Security system will soon be bankrupt, the country will face dire healthcare shortfalls for decades, and providing school and welfare funding will be an insurmountable problem.

And so it goes, cycle after cycle, as conditions swing back and forth from one extreme to the other. Sometimes the pendulum catches a tailwind, and a trend lasts longer than usual. But at some point, the pendulum reaches an extreme and begins to swing in the opposite direction.

I was reminded of that in recent days, on reading of another dire big-picture prediction that has seen a surprising turn of events.

It was not many years ago that it was predicted that at the rate the U.S. was consuming oil, its domestic sources of oil were being depleted, and its imports of foreign oil were soaring, the U.S. would soon be at the mercy of OPEC and foreign oil producers.

But trends only continue until conditions change.

And now it’s being reported that the U.S. will surpass Saudi Arabia as the world’s biggest oil producer by the year 2017, and will eventually become totally energy independent.

Extending current trends into the future is also what entices investors to buy more enthusiastically after rallies and bull markets have already made big gains and that trend is extended in a straight line into the future, a straight line of rising stock prices, often even as so-called ‘smart money’ institutional investors and other professionals have begun selling into that final strength.

In the other direction, investors tend to finally sell in disgust, and have no interest in ‘the damned market’ after a significant correction, and more so after a bear market, extending that trend in a continuous line down, often even as so-called ‘smart money’ institutional and professionals have begun buying again at the bargain prices.

Think cycles, not endless trends.

To read my weekend newspaper column click here: Probabilities For Market Going Forward!

Subscribers to Street Smart Report: There will be an in-depth U.S. Markets update tomorrow in your secure area of the Street Smart Report website.

Yesterday in the U.S. Market.

The U.S. market traded very quietly yesterday as the nation was basically closed for the Veteran’s Day holiday. The Dow traded in a range of 78 points from its intraday high to its intraday low, and closed unchanged. The rest of the market was mixed.

Volume was so light you have to wonder why they bother to have the market open with banks and the bond market closed. Fewer than 0.3 billion shares traded on the NYSE.

The Dow closed up 1 point, basically unchanged. The S&P 500 closed unchanged. The NYSE Composite closed up 0.1%. The Nasdaq closed unchanged. The Nasdaq 100 closed down 0.1%. The Russell 2000 closed down 0.1%. The DJ Transportation Avg. closed up 0.8%. The DJ Utilities Avg closed down 0.9%.

Gold closed down $3 an ounce to $1,728.

Oil closed down $.50 a barrel to $85.57 a barrel.

The U.S. dollar etf UUP closed up 0.1%.

The U.S. Treasury bond etf TLT closed up 0.2%.

Yesterday in European Markets.

European markets were mostly down yesterday. The Europe Dow closed down 0.5%. Among individual countries the London FTSE closed down 0.5%. The German DAX closed up 0.1%. France’s CAC closed down 0.4%. Greece plunged 3.6%. Ireland closed down 0.8%. Italy closed down 0.4%. Spain closed down 0.9%. Russia closed up 0.3%.

Asian Markets were down Sunday night and again last night.

The Asia Dow closed down 0.4% Sunday night, and down 0.9% last night.

Among individual markets last night:

Australia closed down 1.5%. China closed down 1.5%. Hong Kong closed down 1.1%. India closed down 0.3%. Indonesia closed up 0.3%. Japan closed down 0.2%. Malaysia closed down 0.2%. New Zealand closed down 0.3%. South Korea closed down 0.6%. Singapore closed down 0.1%. Taiwan closed down 1.8%. Thailand closed down 0.4%.

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Markets This Morning:

European markets are down again this morning. The London FTSE is down 0.8%. The German DAX is down 1.2%. France’s CAC is down 0.9%.

Oil is down $.53 a barrel at $85.18.

Gold is down $5 an ounce at $1,721.

This Morning in the U.S. Market:

This week will be an average week for potential market-moving economic reports, including the Producer Price Index, Retail Sales, the Fed’s Phila Fed Index, Industrial Production, etc. To see the full list click here, and look at the left side of the page it takes you to.

There were no reports in the U.S. yesterday.

This morning’s report was that the NFIB’s Small Business Optimism Index edged up 0.3 points in October to 93.1. Drilling down in the numbers, the NFIB said that the percent of owners uncertain whether business conditions will be better or worse six months out was at a record high of 23%.

Outside of the U.S., Germany’s ZEW Expectations Index, which is based on a survey of financial market professions, unexpectedly fell to –15.7 in November from –11.5 in October. It had been forecast to rise to +10.

And in the U.K. it was reported that inflation moved up sharply in October, to 2.7% from 2.2% in September, well above the Bank of England’s target of 2%. It raises concerns about about the BOE’s QE easing program, which the BOE has been promising would not be inflationary.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being down 50 points or so in the early going this morning.

To read my weekend newspaper column click here: Probabilities For Market Going Forward!

Subscribers to Street Smart Report: There will be an in-depth U.S. Markets update tomorrow in your secure area of the Street Smart Report website.

I’ll be back with the next regular blog post on Thursday morning at 9:25 a.m.

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