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Tuesday, December 17, 2013

Vehement agreement with Ritholtz

I'm in a chatty mood today, so I'll probably go thru the interesting news articles one at a time.

Ritholtz - am I too bullish? Ritholtz tries to clarify his point of view. For example:
First, our discussion on recent surveys of affluent investors revealing them sitting on $6 trillion and as much as 50 percent cash in their portfolios was about investor psychology. That pile of cash is not likely the result of carefully studied market history and astute observations of timing. Rather, it is most likely the result of fear. It has been a drag on portfolios for at least four years; it typically reflects a combination of poor planning and emotion.
And as for the CAPE crap, he has an important thing to point out to you:
But I keep bringing CAPE up in the context of confirmation bias. One should not cherry pick the valuation measure that supports a prior view to the exclusion of all other measures of what is dear. Indeed, as discussed back in August, Merrill Lynch’s quant team looked at 15 valuation metrics and concluded that stocks were not overvalued; by most metrics, they were fairly valued. My reasons for discussing CAPE was to critique newfound discoverers of Bob Shiller’s valuation metric who were attracted to it for all the wrong reasons. That sort of cognitive error cries out to be recognized.
It's entirely true and I've been screaming this at people for a while now too. Number one, if all the other metrics disagree with CAPE, why should you care about CAPE? What makes CAPE special? And number two, if all the other valuation metrics disagree with CAPE, why aren't you looking under the hood to see exactly why CAPE is disagreeing? Because you might learn something.

Next, comparing corporate profits to gross domestic product is a metric that has been used by bears for about a year now. But just like the flawed Fed Valuation Model, there are two variables involved. Mean reversion of that ratio does not have to occur only by an earnings collapse. If GDP were to accelerate on improved hiring or spending, that would also satisfy the mean reversion of that ratio.
If someone fails to comprehend the underlined sentence above, it means simply that he failed grade 8 math. A ratio can go down either because the numerator goes down, or because the denominator went up: if someone doesn't understand this, I block them forever off my reading list.

Ritholtz isn't a screaming bull, he's watching for downside: if you're mocking him for simplistic bullishness, then you've never bothered to read a damn thing he has to say.

UPDATE: I dunno why Ritholtz himself bothered to tweet a link to this post, cos it's not like I'm adding anything new. All I'm doing is agreeing with a post of his.

So to make it worth your while, here's a picture of Mila Kunis, who's a better stock market analyst than you because she quietly put her money in the market while all you clowns were still freaking out about impending Euro collapse and debt ceiling childishness and China doom and whatever:

You are looking at the woman who just whooped the ass of every hedge fund in the US.

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