It's a curious quirk of human nature that most investors believe their own ideas represent a contrarian point of view. And at no time has this been on better display than in the great horticultural debate that has arisen in recent months among economic forecasters over the emergence or nonemergence of "green shoots."
Investors who see glimmers of global economic growth on the horizon believe they are the contrarians because most of the data that have been released in the past few months still look dreadful, so it takes some imagination to see a brighter future. Investors who think the global economy is actually worsening believe they are the contrarians because undue optimism has already lifted stock markets 40% since March.
The reality is that neither group is particularly contrarian; they simply represent the age-old differential between hope and fear. And because the market gods are never satisfied until almost everyone has lost money in equal doses, it's fair to assume that both groups are partly right, and yet neither will be rewarded much for its insight. Here's a look at why, at the bad government math that underlies both sides' arguments and at what you can do to avoid their fate.
First of all, if you don't believe that both can be right and still lose money, take a look at the trading in the year's first half. The headline numbers don't look too bad: The S&P 500 Index ($INX) was up 2%, while the Dow Jones industrials ($INDU) were down 3%. That's about as flat as you can get. But real results are much different because of the violence of the down move in February, when so many despairing bulls sold at a loss, never to buy back, and the violence of the up move in March, when many scornful bears shorted and were crushed.
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Those market gods are so devious sometimes. You see their game, right? Most of the green-shoots crowd waited way too long to come around to that point of view and therefore managed to catch only a sliver of the rebound around May, according to New York Stock Exchange trading-volume data. And most of the weed-killing crowd has bad-mouthed the recovery so much that they have likewise had depressed results. It's as if all the hopes and fears of a generation are being buried in the same unmarked grave.
Wal-Mart (WMT, news, msgs) is a great example of the sort of stock that has beat up both the green-shooters and the weed killers. Bears knew coming into this year that consumers in a world of hurt would primarily shop at discount stores, so they thought it would be clever to go long Wal-Mart shares and short-sell high-end retailers such as Coach (COH, news, msgs). Meanwhile, bulls believed that middle-class tax rebates, handouts from the government's Making Work Pay program and jobless benefits would be spent at Wal-Mart on necessities. This made Wal-Mart a pick everyone could believe in.
But whenever an idea is agreed upon by virtually everyone, it's way too good to be true; lacking a surprise effect, it's useless. Plus both sides were blind to some painful trouble facing the U.S. stock market's second-largest company. Wal-Mart came into 2009 hoping for expansion internationally but has had to face up to abysmal failures in Germany, South Korea and Hong Kong, and much-slower-than-expected expansion elsewhere in China. Plus Wal-Mart appears to be negatively leveraged to every business reform initiative of the Obama administration, as many of the proposed labor, health care and carbon emission laws will pull profits directly from the anti-union retailing giant's bottom line. Shares are down 12% in 2009, one of the worst results in the major indexes.
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From the 'green shoots' campLarry Kantor, Barclays Capital's head of research, explains why he is optimistic about the economy in the second half of the year.
Meanwhile, froufrou retailers like leather goods maker Coach and yoga apparel maker Lululemon Athletica (LULU, news, msgs) were sold so hard in the spring -- under the assumption that the consumer was dead -- that they became terribly underowned. They were anything but a consensus pick. And as a result, true contrarians were able to rush into the void to buy cheap shares, more than doubling the value of each. Now those surprise winners had better take profits fast, because it looks like the data trends are about to tip temporarily back to the bears.
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