Talking Points

Sometimes things happen we cannot explain; let me explain:

On 9/11/2001 the DOW stood at 9506.
On 9/11/2009, the DOW stood at 9506.

During the credit crises of 1907, the DOW lost 37%.
During the credit crises of 2008, the DOW lost 37%.

The New York Stock Exchange was founded on May 17, 1792. On May 17, 2006, The NYSE celebrated its 214 year anniversary. On that day, the DOW fell 214 points.

Maybe these oddities are something that we can chalk up to coincidence--one of the elements of investing that is interesting but best left as fodder for cocktail parties. This information can neither help us foretell the future move of the market or explain previous moves, and is only beneficial for those that enjoy gathering the information, or "data miners".

There are a few quirky parallels, however, that have been able to make predictions with uncanny accuracy.

My Father, spending years in the clothing business, often commented on how the length of a woman's skirt could predict the movement of the market. When hem lines went up, so did the market. When hem lines came down, so did the market. 1920's up, 1930's down. '50's and 60's up, 1970's down.

One of my Mother's favorite quotes was an Italian proverb that stated, "The shorter the skirt, the longer the confession." (That has nothing to do with anything, I just wanted to include it).

Another one that gains a lot of press around this time is the winner of the Super Bowl. Legend has it, with great accuracy I must say (77%) [1],that if one of the original teams for the NFL wins the title, we are in for another year of bullish returns. Should it be an original AFL team, then the prognostication turns bearish. This year's win by the New Orleans Saints points to a return of our more bullish glory days. On the other hand, so would have a win by the Indianapolis Colts since they were originally the Baltimore Colts, an old NFL team.

Another one that begs our attention is January's stock market performance. "As goes January goes the rest of the year" (92% accurate since 1951) as the saying goes. Or, "as goes the first five trading days of January, goes the rest of the year" (71% accurate since 1951).[2] This brings up a dilemma, since the first five trading days of January saw the market advance nicely, the remaining days were of great disappointment as we witnessed the same index lose 3.7%.

With hem lines all over the board and the victorious Saints giving us the same cue as would have the Colts and no clear direction from the month of January, the bulls and bears have a new companion; bewildered.

So this year as I look for a new way to predict the markets' direction, I can share with my family and friends an article I was lucky to read about data mining. With the advent of computers and their ability to search great reams of data, David Leinweber, author of "Nerds on Wall Street" was able to discover that the most precise elements to watch for, for this years prognostication (with tongue firmly placed against cheek), "is the combination of the annual butter production in Bangladesh plus the U.S. cheese production and the total population of sheep in both Bangladesh and the U.S." With this, Mr. Leinweber was able to "predict" past U.S. stock returns with 99% accuracy [3], an enviable track record I must say.

But why do stocks go up? I can say with confidence that neither the victorious Super Bowl team nor the sheep population in Bangladesh has anything to do with it. Quite simply stocks go up because earnings improve. Period. End of story.

For those who are intrigued by the latter statement, please allow me to elaborate. Since 1926, the equity return of the S&P, stripping out dividends, through the end of 2009, is up 5.5%. Corporate earnings during that same period are up 6.1%. [4] Post WWII, stocks are up 63 fold. Earnings are up 63 fold. [5]

Stocks go up because earnings improve. Period.

What is curious about the information is that over the past 10 years the stock market's return has been zero while corporate earnings are up over 50% during that same period.

For those of you intrigued by the former rather than the latter, i.e. the area of data mining, you may find the above quite interesting. However, I know as well as you that there are a few of my readers that can't help but wonder and research how the current weather pattern is affecting the sheep population in Bangladesh.