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How to Get Rich Investing in Stocks by Riding the Electron Wave

According to Robert Prechter, Is the World Doomed?

Stock-Markets / Financial Markets 2010 Jul 09, 2010 - 05:57 AM GMT

By: Andrew_Butter

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleRobert Prechter has another FREE gift on the internet predicting the End of the World (20 Questions For Prechter)

Open that up and you get the Sales Pitch:
Consider these recent forecasts:


  • In 2005, Prechter warned readers of an imminent top in real estate.
  • In October 2007, Prechter warned that stocks and commodities were historically overvalued and due for an immediate crash.
  • In 2008, Prechter maintained that the U.S. dollar would rally throughout the most volatile market environment since the Great Depression.
  • In February 2009, Prechter told readers to end their short bets and prepare themselves for a "sharp and scary" bear market rally.
  • In April 2010, Prechter wrote, "we can project a top ... between April 16 and May 7, 2010."

Generally I find Prechter’s analysis of what’s going on right-now and why the financial system is in such a mess, to be pretty much spot-on. He speaks clearly and intelligently, he has an excellent command of the facts, and he gets to the real hub of the matter very quickly; I typically agree with most of what he says.

But I have a few problems with his ability to predict what’s going to happen next. On top of that I simply can’t get my head around the Elliott Wave theory that he champions. For every piece of “evidence” there is that they work, I come up with evidence they don’t.

So I say…”Err, but”… and I get told, “Ah but it’s MUCH more complicated than that”. Like “you are simply too dumb to understand properly” (that’s most certainly true, and I’ve heard that said many times before), “but if you pay me money I will tell you the secret”.

I’ve also heard that one before.

But above-all there is one thing which irritates me intensely, which is people who say that they made prescient forecasts, but do not (a) give you the internet link to where they actually made the forecast (so you can check if retrospectively they cleverly massaged a vague declaration into a rock-solid forecast), and (b) give you internet links to their spectacular failures to forecast accurately.

For example – bullet point #4:
In February 2009, Prechter told readers to end their short bets and prepare themselves for a "sharp and scary" bear market rally.
In the “20 Page Free Download” he goes on to say:

On February 23 in the Elliott Wave Theorist, I said that we were almost at the bottom; that ideally the S&P should get down in the 600s before turning up; and that the Dow was going to rally from that low up to about 10,000.

Well he doesn’t give a link, so I looked it up on Google. Have a look at this video (dated 4th March 2009), perhaps my command of English is not that good, but I’ve watched it three times and as far as I can figure he did NOT say that, plus he also said a lot of stuff that turned out just plain wrong.

http://www.youtube.com/watch?v=4SG7XGcL7JE

OK he did say:

“Close Your Shorts”:  That was correct, although he also said “this is not a market call…it’s time to take some money off the table…the DOW is down a long way…only 3% of traders are bullish and I don’t like to be in crowds”.

That’s hardly a “buy”, and what’s the “science” in that? All he was saying was “well now the crowd is all on one side of the boat, logically at some point either the boat will tip over or they will start to drift back to the other side”.

I’ve heard that one before too – but it’s hardly rocket science.

And so what, everyone was saying that, the issue was WHEN? Buffet had called a bottom at S&P 900 a few months before (a bit early), and at that time the world was full of people calling the bottom in October…November…December…January….do that enough times and you have to be right eventually.

Nowadays a lot of the people who called the bottom three or four times are strutting their stuff picking out the one correct call they made and forgetting about the others.

When he was asked by the interviewer “is this is a bullish call”, he said; “This is definitely NOT a bullish call”

I don’t know where he got the “Dow 10,000-next-stop” prediction from, but that sounds remarkably like a “Non-Bullish-Call” to me, like “Read-My-Lips”.

His over-riding message was “Buy Cash”; and on top of that keep a good part of it under the bed. And that even if there is a “bounce” what will happen next will be a bear-market rally and THEN after that the S&P 500 will see lows in the 600’s.

He also said gold (at $900) was a top, and in the same breath said he was a “Gold-Bug” (although I’m not going to make too much of a meal about that one because all of my calls on gold have proven (so far) to have been completely wrong).

Well OK, he was careful to say he was “NOT giving investment advice”, although I can’t imagine why anyone would want watch him on Bloomberg if they weren’t looking for investment advice?

Or is it perhaps because he has a pretty face? Either way what that goes to show is that the value of “Free-Non-Advice” is exactly equal to what you paid for it.

But a lot of people followed his “non-advice” (and other peoples), and stayed in cash, and watched the DOW and the S&P go up 75%.

Well that happened in a lazy bounce over a year or so, putting aside for a moment what’s likely to happen next, that was a slow and easy gain. If he’d said back on 4th March 2009 (1) “buy when the S&P 500 hits 675” (2) “stay in until the DOW hits 10,000 then have a re-think”, that would have been good advice.

Only two people I know of said precisely and exactly that:

http://www.marketoracle.co.uk/UserInfo-Nadeem_Walayat.html

Like in: “The stock market turn will be when the Dow hits 6,600 and the S&P 500 hits 675” (February 2009): http://www.marketoracle.co.uk/Article9131.html; “Bull-Run Warning” (April 2009): http://www.marketoracle.co.uk/Article10101.html, and “Negligible Risk until the DOW hit’s 10,000” (May 2009): http://www.marketoracle.co.uk/Article10604.html

So in my opinion instead of strutting-his-stuff about how great his predictions were, Robert Prechter ought to come clean and apologize to everyone who followed his “non-advice” in March 4th 2009, and kept their money under the bed since then.

But does that mean he’s wrong now?

Like they say on the packet in the small-print; “past success is no guarantee of success in the future”; equally “past failure is no guarantee of failure in the future”.

It’s interesting that one of the guys who got it right, Nadeem Walayat has completely different views about whether the future is deflation or inflation from Prechter. He uses Elliot Waves (amongst other things), and his calls are generally right, as opposed to Prechter who also uses Elliott Waves and appears (by my scorecard) to be lucky if he get’s it right half the time, and even then his timing is awful.

Granted Walayat lives in Sheffield which is somewhere on the left of the M-1 on the way to Leeds (it’s easy to miss), that possibly explains something although I’m not quite sure what except they have a lousy football team?

Sheffield used to have a lot of manufacturing but now it’s mainly famous because it’s where “The Full Monty” was filmed plus it has a lot of “massage parlours”, a sort of Amsterdam of the North. Anyway, naturally his focus is UK, and inflation is more of an issue over there than in USA. 

But even if he gets it wrong a lot of the time, I tend to agree with Prechter on “deflation” rather than “hyper-inflation”.

My view is that regardless of how much money is printed and handed over to moronic bankers, that won’t translate into more money supply until they manage to lend it out into the private sector.

And right now anyone in the private sector, who has cash, doesn’t want to borrow; and no one wants to lend to anyone who does not have cash and are up to their eyeballs in debt collateralized by assets that are worth now, less than their debts. Like the maxim, “whenever you want find a policeman, you never can”.

That’s why I think that the next Big Thing in USA is going to be the deleveraging of private sector debt: http://www.marketoracle.co.uk/Article20418.html

So on that score – I’m with Prechter rather than Walayat

What I don’t agree with Prechter about; is the idea that’s going to cause the S&P 500 or the DOW to “go back down to S&P 500 less than 600”.

Two reasons (1) the market now is ‘post-bubble-bust” and it’s undervalued (http://www.marketoracle.co.uk/Article20748.html), not that it’s going to get overvalued (i.e. bubble) any-time-soon; (2) long-term (10 and 30 Year) yields are down and in spite of what Nouriel Roubini, Morgan Stanley, and Nassim Taleb say, the consensus now is pretty much that the medium-term prospects are that they will stay down.

On that score one way to value a stock (there are three) is to guess what future earnings will be and discount that to get today’s NPV using the prevailing long-term yield; on the earnings that are projected, it looks like the stock market has got some way to go up, if yields stay down; that’s of course contingent on the dynamics of post-bubbleomics.

Just because the economy is a hole, doesn’t mean that decent companies can’t make a buck. In fact in many ways it’s easier, particularly if you have a good product or process and you don’t have to compete with lunatics who under-price because they can make money on inflation; if your business model does not rely on amplifying the little profit you make by gearing to the hilt and letting inflation do the rest, then you have a solid foundation.

Two other points; the first is that 50% of the earnings of the companies on the S&P 500 are outside USA, having a global spread of revenue streams is safer than focusing on one market.

Second, in a decent company, things happen slowly; I was reminded of that yesterday when I got on the phone trying to buy a couple of miles of submarine cable. So I got on to ABB, nice Germanic sounding chaps takes the call and says, “Great – but don’t expect delivery of that until early 2011”. So then we got to bury it, that’s a process if you are doing it underwater and you have a lot of landings, and we might get paid up in full by end 2011. That whole process went into engineering in early 2009, so that’s a three year “business cycle”, minimum.

A good company does well in peace and in war, in boom and in bust, and in deflation and inflation; OK over the past decade a lot of clever people made money buying and selling “instruments”, but that’s not what the real world is about. The real world is about real people, doing real things and creating new things and processes, and figuring out ways to keep the government off their back. Long-term, that’s worth investing in; regardless of what the “instruments” are doing.

It’s time to get back to basics, and forget about all those ideas about making Big Money from nothing; in those deals someone always loses, and sometimes it’s you.

Those days are gone, but that doesn’t mean it’s the end of the world, in fact, it’s just another beginning.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Orvin
17 Jul 10, 07:05
Elliott Wave theory

You are "correct" about not understanding Elliott Wave Theory. Here's the reason EWT can't work from the outset:

http://orvinfive.blogspot.com


Nadeem_Walayat
17 Jul 10, 10:39
Analysis and Theories

Any single technical tool, pattern, theory or indicator won't be as reliable as a coin toss.

One has to always remain skeptical of TA despite using it as one of the primary tools for determining probability of outcomes.


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