On “Bubble” Warnings, Bearish Sentiment and “Black Friday”

Today, November 26, marks the day Thanksgiving was “invented” by three revered Presidents at three significant times in American history: at our nation’s birth, during the Civil War and in World War II:

  • On November 26, 1789, during his first year as President under the new U.S. Constitution, George Washington declared the first national day of Thanksgiving.
  • On November 26, 1863, a week after his stirring Gettysburg Address, President Abraham Lincoln proclaimed a national day of Thanksgiving, but the day was not mandated by law until 1941:
  • On November 26, 1941 – 11 days before the surprise attack on Pearl Harbor – President Franklin D. Roosevelt declared the “fourth Thursday in November” as a national day of Thanksgiving.

The “fourth Thursday” falls anywhere between November 22 and 28, so this year’s Thanksgiving falls on its latest possible calendar date – November 28. Maybe that’s one reason why we keep seeing “early Black Thursday” sales advertised on TV, radio, the Internet, billboards and almost everywhere you look.

Black Friday Comes Early – and So Does Santa Claus

For 11 years, my son was store manager in a leading electronics chain, so he had to grab some short hours of sleep shortly after Thanksgiving dinner in order to get up at 2:00 am, or earlier, to rally his staff against the onslaught of hundreds of freezing but eager shoppers camped out in front of his store all night long.

That’s the “Black Friday” tradition, but all that is changing. This year, I’ve seen all kinds of early “Black Friday” sales, on line or in the stores. TIME Magazine says Black Friday now starts the Friday BEFORE Thanksgiving. USA Today reported that retailers like Sears and the Disney Store are introducing Black Friday-style “door busters” (50% or more off) starting November 19 – 10 days before Black Friday. I just got a slew of promotions from Amazon about “Black Friday Week.” In time, the Friday after Big Meal Day will just be a time to relax after you make all those special deals on-line sometime in mid-November.

In recent years, investors have imitated these savvy retailers by “stealing a march” on the competition to buy stocks before major calendar cycles begin. The January Effect, for instance, has moved back to the final week of the year, while the Santa Claus Rally begins in early December. As a result, December is now the best month of the year, as measured by the S&P 500 or Russell 1000 & 2000. December is #2 as measured by the Dow or NASDAQ, according to The Stock Trader’s Almanac, which wrote last week, “Market trading in December is holiday-inspired and fueled by a buying bias throughout the month.”

Bubble Talk & Bearish Sentiment are Usually Contrarian Buy Signals

With the market setting new highs almost every week, you might think that this “dream market” could run forever (it won’t!), but the fact that we’ve seen rising bearish sentiment and a slew of new “bubble” warnings lately is very encouraging. Growing gloominess usually means that the market will keep rising.

When investors are overly euphoric at a market peak – as in early 2000 – a crash is often imminent, but today’s average investor is very suspicious. The American Association of Individual Investors (AAII) poll has become increasingly bearish as the market has risen to new highs. Last week, bullish sentiment at AAII fell 4.8 points to 34.4%, while bearish sentiment rose for the fourth consecutive week, to 29.5%.

Although the percentage of bulls is still five points above the percentage of bears, the 34.4% bullish consensus remains four points below its average for the last 4.7 years of the current bull market.

Short-term, the market usually performs well during Thanksgiving week. Since 1945, according to Bespoke Investment Group (BIG), the S&P has averaged 0.65% gains in this holiday-shortened week. In the best years, when the S&P 500 was up over 10% going into this week, the index has done even better, averaging 0.77% gains, with positive returns 65.5% of the time. Furthermore, since the current bull market began in March of 2009, Bespoke says that the S&P 500 has averaged a gain of 4.41% from the end of Thanksgiving week through the end of the year, with positive returns every year. Bespoke added: “The last time the S&P 500 traded down from the end of Thanksgiving through year end was in 2005.”

In the Latest “Bubble” Wars, Buffett & Yellen Trump the Bubble-Bears

Now, let’s examine the latest run of “bubble” talk from a remarkable array of noted investors who have each used the “B” word recently. In fact, last week’s Barron’s cover story was titled “Bubble Trouble?”

Last Tuesday, when the Dow made its first assault on 16,000, the bears came out in force and the Dow paused in its ascent – for a New York minute. First, CNBC reported that Carl Icahn said the market “could easily have a big drop.” Icahn said valuations are rich and earnings at many companies are fueled more by low borrowing costs and buybacks than management’s efforts to boost earnings. He said “a lot of the earnings are a mirage.” Icahn, however, was merely saying that we should hedge a bit, not “sell all”: “Often when we are concerned about the market, we hedge to some extent and this is one of those times.”

A clearer voice of doom, the perennial bear Marc Faber, said on CNBC last Tuesday that he sees “a bubble in everything that relates to the financial sector.” Faber said the financial bubble is caused by central banks, and the situation may worsen with the nomination of Janet Yellen as the next Fed Chair.

A more credible warning came from Jeremy Grantham, who expressed concern that the stock market was too high. Grantham has high credibility since he predicted both the crash of 2008 and recovery of 2009. In a report titled “Breaking News! U.S. Equity Market Overvalued,” Grantham’s company, GMO, said that the S&P 500 is overvalued by about 40%. The author of this latest report, Ben Inker, head of the asset allocation group at GMO, warned that “The U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities.”

We’re also seeing some major firms predict a market drop in 2014 – a mid-term election year, historically the best year in the four-year election cycle. Last week, Goldman Sachs said that the S&P 500 could fall 6% in the next three months and 11% over the next 12 months, to levels of 1,700 and 1,600, respectively.

Amid all this bubble talk, Janet Yellen was asked about bubbles in her confirmation hearings. To her credit, she said, “Looking at several valuation measures you would not see stock prices in territory that suggests…bubble-like conditions.” Meanwhile, Warren Buffett gave a talk at his old elementary school in Omaha, Nebraska, as part of American Education Week. He was asked what his #1 concern about the market would be, and he quipped, “I don’t have concerns about this market.” Buffet said that stocks are “in a zone of reasonableness. Five years ago,” Buffett said, “I wrote an article for The New York Times that said they were very cheap. And every now and then, you can see that that they’re very overpriced or very underpriced.” Today, “they’re definitely not way overpriced. They’re definitely not underpriced.”

“If you live long enough,” Buffett said, “you’ll see a lot higher prices. I don’t know what stocks will do next week or next month or next year, but five or 10 years from now, they are very likely to be higher.”

That’s a great quote to pin on your refrigerator – an appliance you’ll visit often this Thanksgiving week!

– Gary Alexander

Posted by on November 26th, 2013 at 1:59 pm

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