Getting it Wrong - Mobius

Aug 27, 2008
Author: SCP Editor

August 27, 2008 – From time to time we look back on previous commentary to check ourselves against previous punditry as a way of keeping ourselves honest and in check. This morning we looked back a year ago to commentary where we wrote that:

August 27, 2007 - This morning’s bonehead comment comes from Mark Mobius, Templeton Asset Management’s fund manager, who said that “the credit crunch and mortgage problems have almost passed us” and that “markets are going to surge to new highs barring any other unforeseen circumstances.” Well, given the fact that Mobius’ vision is myopic we would agree with his qualification. Namely, that given any other unforeseen circumstances things look good. The problem is that his myopia is keeping him from assessing even the most obvious circumstances.

This would include the fact that the deteriorating dollar will likely weaken further on the Fed’s interest rate cut and that will negatively impact consumers’ ability to purchase (coupled with the fact that their credit is at all time highs and personal savings are negative). This will have a negative impact on GDP growth here and global expansion as well in as much as consumers will be able to purchase less imports.  Mobius, in our opinion, is now about as credible as other pundit cheerleaders including Larry Kudlow.

What was he thinking? It was pretty clear last August that the credit crunch was nowhere close to being past us, and here we are, a year later, still in the midst of the turmoil. We have commented previously about how so many of these ‘gurus’ say idiotic things and never are held accountable by the media after their prognostications and platitudes have been proven out to be rubbish. Pace Tobias Levkovich, Chief Equity Strategist at Citibank, which we railed against in July in a blog called “Getting it Wrong.”

We also wrote about Levkovich in January,

Jackass Statements – This Time From Levkovich, Chief Equity Strategist at Citigroup

January 21, 2008 - In Sunday’s Wall Street Journal, Citigroup’s chief U.S. equity strategist Tobias Levkovich is interviewed, forecasting for the S&P index to reach 1,675 by the end of 2008, up 26 percent from Friday’s close. His forecast is not without some heavy quantitative analysis, arguing for a price reportedly based on long-term patterns of earnings multiples, versus bond yields and equity-risk premiums. Levkovich’s conclusion is the current prices have only occurred in 87 months out of the last 46 years and in every single instance, the markets were up an average of 23 percent within the next 12 months of hitting those prices.

This line of reasoning is open to so many holes that we don’t know where to start. First, we would ask Levkovich to demonstrate the parity between today’s economic climate – sliding dollar, housing market and financial market crisis, rising unemployment, soaring commodity prices and massive debt both at the government and consumer level (negative personal savings). Our bet is that this condition for Levkovich’s quantitative bucket would narrow the control group significantly, if not reduce it to non-comparable status right away.

The bottom line is that arguing that the sun will rise tomorrow because it did so today, and even every day in the past works for things  like the sun, gravity and other instances where “all things remain equal” to an extent that enables a priori-like predictability, if not necessity. But economics are not quite that exact of a science and things are never even close to remaining equal.

So Mr. Levkovich, let’s throw out your comps and let’s just get down to today’s set of data. Based on what we are seeing today, can you really make a serious argument that the markets will rally more than 20 percent this year? What basis do you have today to make that forecast? Remember, we ruled out your ability to use the “because it did it before” argument. The fact is that it just isn’t there.

The Fed currently sits in an unwinnable situation facing a devil’s choice. Either it satisfies the altogether gluttonous expectations of the Fed futures and cuts rates by 75 basis points at the meeting on January 30, thereby almost certainly sending the dollar into a spiral, or it takes a more conservative approach, which will at least buoy the dollar and slow down the spike in commodities prices but it will send the markets into a spiral of their own. In either case, the consequences of the Fed’s action will increase the odds of a more challenging market and economy materially. And certainly, the consequences do not suggest of any catalysts to spawn any rallies anywhere near 20 percent.

No, we are buckling down for a long-cold winter and are planning our investment strategies accordingly. We thought about not taking a shot at Levkovich for his comments and forecast which is all too easy to levy. Namely, with strategists making this kind of analysis on behalf of their financial institutions and investors, it is no wonder that Citigroup is in the shape it is in. But since we so strongly believe that Levkovich’s analysis is so irresponsible and misleading, and can potentially lead so many more investors down the wrong path we had to comment.

Well, we are 31% off of Levkovich’s January target of 1,675 for the S&P by the end of this year, To be fair, Levkovich just  again lowered his year-end forecast for the S&P 500 to 1,475 citing “unsettled credit environment.” We are doubtful about this target, which represents a 15% gain from current levels, as well.

And getting back to Mobius, he is looking for help anywhere he can get it and most recently from media appeals to the Fed to cut rates to 1% to spur growth. Back in late August, 2007, and heading into September of the same year, the promise of an aggressive rate cutting Fed certainly was a boon to hopes and optimisms across the markets. Wall Street rallied into the first and second rate cuts. But now, seven rate cuts later, it is pretty clear that reducing the real rates into negative territory is not going to produce any silver bullet.

In fact, amidst all of these rate cuts, we have watched the economy begin to slide. Meanwhile, as the dollar has predictably weakened, inflation has predictably reared its ugly head. Rate cuts won’t spur this economy any more than adrenalin will snap you from a coma. The only thing that will ultimately turn this economy around is real deleveraging and getting back to fiscal policy that doesn’t depend on debt as a catalyst for economic growth going forward.

Mobius was way off base last August, and on April 17, 2008, he was sticking to his guns saying that the credit crisis is nearing its end.  “I think we are near the end of it because most of the bad news is already in the market….I think the markets are already accounting for that.” He thought that emerging markets will help the situation in the U.S. because they will be absorbing U.S. exports. On April 17, the S&P 500 sat at 1,363, and the DJIA was at 12, 617. Today, the S&P 500 is down 6% and the DJIA is down 9% from the levels where they were when Mobius opined that the markets were already accounting for most of the bad news.

On Apri17, Freddie Mac was trading at $27 and Fannie Mae traded at 28. The credit crisis was nowhere close to being over, and the markets were nowhere near accounting for most of the bad news.

This morning the FDIC reports that the number of troubled banks has risen 30% to 117 and delinquent loans have jumped by almost 20% in the last quarter.