Dougie: Sentiment Has Become Irrelevant

My pal Doug Kass and I have been going back and forth behind the scenes about whether or not negative sentiment or peak pessimism even matters anymore.  He argues this morning that the contrarian inclination to fade all the negativity is misguided…

We shouldn’t be surprised, however, by how weak sentiment/expectations are given the following factors:

  • a decade of underperformance by U.S. stock market;
  • two large drawdowns in stocks in last decade (2001 and 2008-2009);
  • the screwflation of the middle class (when the average Joe sees stagnating incomes while the cost of the necessities of life rise, buying stocks ends up low on a consumer’s list of priorities);
  • the flash crash in 2010 scared the crap out of everyone (we still don’t know the reason for the flash crash, and algos and high-frequency trading strategies still rule the roost);
  • our dysfunctional leaders put partisanship in front of patriotism and effective fiscal policy; and
  • scandals and loss of investor monies with Madoff, Stanford, MF Global and now Peregrine, plus the latest Liebor issues underscore (to many investors) that the system is rigged.

To these influences, I ask two questions:

  1. Why should an investor be optimistic and feel safe under these circumstances?
  2. Won’t it take time to win back investor confidence?

In other words, it is different this time.

Poor sentiment may no longer be a positive market tell, as it has been in the past.

Is it really different this time?  Has this historically wonderful indicator lost its meaning for good?

What do you think?



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