Menu Close

Here’s What Wall Street Bulls Were Saying In December 2007: Read And Take Cover!

The attached Barron’s article appeared in December 2007 as an outlook for the year ahead, and Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in the housing and mortgage markets, soaring global oil prices and a domestic economic expansion cycle that was faltering and getting long in the tooth, Wall Street strategists were still hitting the “buy” key. In fact, the Great Recession had already started but they didn’t have a clue:

Against this troubling backdrop, it’s no wonder investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears.

Indeed, with the S&P 500 at 1460 and just off its all-time high in October, the dozen top Wall Street prognosticators surveyed by Barron’s anticipated still more index gains during 2008:

….. the dozen seers we’ve surveyed all have penciled in higher stock prices in 2008, although their estimated gains vary widely, from 3% to 18%. On average, the group sees the Standard & Poor’s 500 at 1,640 by the end of next year….

That 12% gain didn’t happen! The market ended 2008 in an altogether different place—–that is, about 45% lower at around 900. And, as is shown below, it still wasn’t done—- until the capitulation low was reached in early March 2009 at 675.

In truth, this Barron’s article needs no time stamp. Every one of the arguments being made today were trotted out in almost identical form then. Front and center was the usual canard that the market is cheap on a forward PE basis. For what was surely the 17th time in as many years, Goldman’s Abby Joseph Cohen claimed the market was trading at well below its long term multiple:

….the S&P 500 trades today at just 15.6 times average 2008 estimated earnings — well below the average P/E of 18.6 times earnings during periods when inflation was at similarly muted levels in the past 57 years, notes Goldman’s Cohen.

There were three big clouds in Cohen’s perennially bullish crystal ball. First, inflation didn’t stay so benign. During the next year oil soared to $150 per barrel, bringing the CPI up by 2.9%.

Secondly, 2008 earnings did not come in at $100 per share per the Wall Street hockey-stick, but plunged to $55 on a so-called “ex-items” basis (excluding one time or non-recurring expenses which continuously seem to recur anyway). And actual 2008 earnings for the S&P 500 came in at just $15 on a honest GAAP basis as reported to the SEC under penalty of  criminal charges for deliberate misstatement.

But most importantly, Cohen’s 57 years of historical benchmarks were irrelevant. That’s because these historical cycles reflected a reasonably vibrant mechanism of “price discovery” based on traders assessing, weighing and perpetually re-calibrating the in-coming facts from the macro-economy and individual company performance. But by December 2007, price discovery had long ago been destroyed by the Greenspan era policy of financial repression, wealth effects and the Fed’s “put” under the market averages.

Like now, the short-interest had been driven out of the market and, as is evident from the chart above, the fast money crowd had been handsomely rewarded for buying the dips—-confident that the Fed had their backs. Indeed, the bullish case was overwhelmingly pinned to the expectation that the Fed and other central banks would not let the economy falter, and that a new round of interest rate cuts and other stimulus initiatives would keep the party going:

Read the rest of this post at David Stockman’s Contra Corner. View original post.

Join the conversation and have a little fun at Capitalstool.com. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

RSS
Follow by Email
LinkedIn
Share

Discover more from The Wall Street Examiner

Subscribe now to keep reading and get access to the full archive.

Continue reading