Lessons from the Subway

I was on the subway this evening, and on stumbled a man with a cane, a bag for food, and plastic container held together by a string for any monetary donations he might collect. Appearing to be vision impaired, he began his routine by showing one of his eyes and its redness, discussing how he had been (sorry for the imagery) "stabbed in the eye on his way home from work", and lost vision in that eye. For some other reason, he claimed poor vision in the other eye as well. I was very curious to see how the others in the car reacted, as I had a strange suspicion that his presentation was a bit too subtly refined to be completely true. His use of being stabbed "on the way back from work" painted a picture of someone who was out there trying to do the right thing (work) and just got unlucky. These are the people we want to help, the ones who are trying their best, because especially now when sentiment about our own future employment prospects is far lower, we fear that we might one day walk in their shoes. Emphasizing that he would take food, the lady to my right gave him some almonds she had, and then a dollar. Then, a 30 year old woman (give or take a few) with her boyfriend gave a bag which had some takeout that looked reasonably high end. This guy had made a pretty good splash, but the man sitting across the isle had a look of doubt. At that moment, I became pretty sure that my suspicion was right, and that these women had been duped by a pro.

After the "blind" man made his way through, the man across the way, adorned in an enormous awesome ugly patterned hat started teaching the rest of us about the act. He started explaining how a simple eye irritant could cause the redness he showed, and that were he to have been stabbed, there would need to have been some scarring around his eye, which indeed there wasn't. To add a little levity, I turned to the lady to my right and said "at least it was only almonds", not making mention of the dollar. At this point, our friend chimed in about how he used to give a dollar to a man in a wheel chair until he saw him get off one day, and throw the wheel chair over his shoulder as he trotted up the stairs. Ok, you mentioned the dollar, now this sweet woman just feels like an idiot. So much for my efforts.

Lost in my thoughts the rest of the ride, I imagined that had I had a friend with me, I would've probably bet him that this guy was an actor. Burden of proof would have been onerous, but our big hatted friend made a very strong case, broken down with solid relevant evidence. I would've made this bet at the point that I saw the look that Mr. Big hat had on his face during the ordeal. Mr Big hat looked like he had been around and probably had a little more street wherewithal than myself. So I began thinking about how sometimes the best bets we can make are not the bets we make on our knowledge, but our knowledge of those who have more knowledge than us.

So now that the S&P settled on the week above 1230, who to look to for answers? It probably makes sense to choose the smartest guys with the best track record, but as many know, that can get you in a world of hurt quickly. Anyone who tried to construct a portfolio based off of John Paulson's ideas following his subprime score is probably missing 1900/oz gold (you'll get it again soon be patient) and wondering if Meg Whitman can help those far less valuable HP shares they are holding recoup some losses. Two different market environments, two very different results. But while Paulson might have made a few bad bets on stocks, I would raise a very curious eyebrow if all a sudden he started buying subprime. Now however, subprime is not  the main driver of this market. So who would be good at dissecting a market like this? No, its not Warren Buffet, Bill Gross, or Julian Robertson. For a time like this, I wanted to hear what Bob Doll, BlackRock chief equity strategist had to say.

Why Bob Doll you ask? I had thought that Friday's S&P close above 1230 meant that we had reached a point on the chart where we could expect some buying to come in and push the market higher. As discussed in previous posts (particularly the last) I have been concerned that the headline risk game might be keeping investors away from a market that has the potential to creep higher. This "melt up" scenario happened following the lows of March 2009. While I can't speak to exactly when Doll put on his long call on, he definitely was dead on for most of the S&P's move up from 900 to 1200. After the events of our financial meltdown, people were scared to put money in markets, even as stocks started trading at silly valuations. Thus there are similarities between now and say July 2009. Investors are scared to get out of cash, and the headline risk, which could tell us at any moment that the world is doomed, controls the markets. 

So I decided to check out Doll's letter. (included below)

http://www2.blackrock.com/US/individual-investors/market-insight/investment-commentary/bob-doll-weekly-commentary

Doll, during our last "melt up" finished nearly every letter the same way, discussing how the fundamentals of earnings lent them to continue long exposure to equities....all the way on up. So would this time be the same? If you'd rather skip the weekly commentary, the short answer is, no. He sees us in a range-bound state still, between 1100 and 1250.

As he writes to conclude his letter

"For the time being, we expect that markets will remain in their trading range as the downside macro risks compete with attractive valuations and strong fundamentals. Should we continue to see progress and improved clarity around the European debt crisis, however, stocks could be poised for improved longer-term performance."

So it looks like our man is not yet ready to get optimistic, though there is a glimmer of hope in his writing. I'll be checking in on Doll's letters if the market continues to dilly dally. The last thing you would want to do is find yourself lulled to sleep by this market and miss an entry point for a ride up. Speaking of, getting lulled to sleep sounds pretty good right now. Til next time.

-Ben