Does Pessimism Now Sell As Well As Sex
Or Are Investors Just So Starved for the Unconflicted Truth?
"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.
Middleton's site combines self-promotion with meticulous financial analysis that is often delivered with a whiff of bathroom humor.
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") 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 Blog vs. Brokers, preview 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.
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Author: Reggie Middleton
Reggie
Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/
Who am I?
Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.
Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.
I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.
So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.
Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.
So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.
Visit his blog Boom Bust Blog.
Copyright © 2007-2012 Reggie Middleton
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