Five years ago today, I made the luckiest market call of my career. A few details and some context first, then an explanation as to why this was so lucky.
In 2005, I knew something was amiss in the global markets. The various metrics we track showed that credit had become a full-on bubble, and was manifesting itself in residential housing. We discovered this by looking at such factors as median income to median home prices -- at the time, it was two going on three standard deviations from the norm. Cost of owning versus cost of renting was also flashing warning signals, as was housing value relative to gross domestic product. Indeed, half of all new jobs being created were related to real estate. All other signs pointed to a major correction in housing, despite the denials from pundits
In 2006, I had done a huge analysis as to the fair market value of the Dow Industrials. At the time, the Dow was heading to 12,000, but by my calculations, was worth only 9,800. My expectations was that to reach fair value, something was likely to go wrong in housing, and that could lead to a 3,000 point panic. My best guess was Dow 6800 -- and that hitting this was a greater possibility than most traders might bet.
It was just a guess -- and an early one at that. But after housing began to reverse, it was apparent it would spill into the real economy. The stock market stubbornly ignored the collapsing residential real estate market until October 2007 -- making that time feel like the longest year in my career. But as equities started rolling over, I began to wonder if my guess might come true. And so I made a promise to myself, not to become one of those one-way pundits who got one thing right in their careers, and never changed their stripes ever again.
The market peaked in October 2007, and by January was off by 10 percent or more. The internals looked terrible, and it felt like -- a decidedly unscientific, subjective, squishy gut feeling -- this was not a mere correction. By February, clients were screaming about the amount of cash in their accounts, although those complaints ceased by May or June of 2008.
The entire ride down is etched into my memory. The break of Dow 10,000, the relentless cheerleading on financial TV, the “Buy the Dip” crowd that refused to acknowledge a bear market was possible. When Bear Stearns went down, I became genuinely frightened that my silly academic exercise might actually come to pass.
Late spring of 2008, I had a conversation with a very talented technician friend. I told him I didn’t want to “overstay my welcome in the bear camp,” and explained the factors I was looking at. We mapped out dozens of technical, sentiment and momentum indicators, all with the thought that the combined weight of these might provide some signal as to when to reverse the bear call.
Then the tornado hit the first few trailers in the park. Fannie and Freddie, Lehman Brothers, AIG, and then all the rest. When TARP failed and the Dow had its worst week ever, there was a bounce trade to be had, but it very quickly rolled over. Through the holidays and into the new year, the market kept heading south. From Lehman to March 2009, the Dow dropped about 5,000 points. That’s a lot of wealth destruction in a very tight timeline -- about 11 trillion dollars worth.
In the end, it was easy to make the call. The Dow careened past 6,800, and went even lower. My early and abstract, academic and seat-of-the-pants forecast by some insane twist of fate came to be. All I had to do was declare victory and go home. It was that simple.
All the indicators in our basket were pinned as far into the red as they have historically gotten. Markets at 12-year lows turn out to be very bullish. So I wrote up a brief note, warning shorts that “the Mother of All Bear market Rallies” was inevitable, and e-mailed it out. I got invited to a number of media outlets, but the one that really stands out as pure, dumb luck was Yahoo Finance. We recorded the video on March 9, and the next day they ran this headline: “Big Bear Market Rally Coming,” Says Noted Bear Barry Ritholtz. The Dow gained 5.8 percent that day, it popped 1,000 points over the next week. The call got picked up all over the place, notably, the New York Times blog Freakonomics.
But here’s the thing: I would have said the exact same thing a month or two before or after. It was simply dumb luck. One of the partners I worked for at the time would chastise me every time I said that in the media, but let’s be blunt: No one has any idea what is going to happen in the future. Forecasts are folly, and they certainly cannot be timed down to the day. That is simply good-old-fashioned dumb luck at work.
I will take a teeny bit of credit for having some intellectual flexibility, driven mostly by fear -- I simply did not want to be a novelty act. We all know those songs -- they catch fire, create a one-hit wonder --but that pretty much is the end of their careers. I refused to let that happen to me.
“Better lucky than smart” is an old traders' expression. It was never truer for me than on March 10, 2009.
(Barry Ritholtz writes about finance, the economy and the business world for Bloomberg View. Follow him on Twitter at @Ritholtz.)
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