Excellent Strategery

Bloomberg has surveyed strategists and they are more bullish about 2009 than they were about 2008. At the beginning of 2008, the strategists on average predicted an 11% gain in the S&P. Off juuuust a smidge; it went down 38% instead. For 2009, they are predicting on average that the S&P will climb 17%. Hey, if they keep predicting a bull market every year, eventually they are bound to be right.

I especially like the optimism of David Bianco at UBS, who for 2008 predicted a 16% climb in the S&P. In July of 2008, well after this mess was obvious to pretty much anyone, he predicted that the rebound in stocks in the second half of 2008 would be "one of the greatest roars we've seen." That particular roar was deafening, wasn't it? I guess he failed to realize that bears roar, not bulls. Is it any wonder banks lack any credibility these days with predictions like these?

http://www.bloomberg.com/apps/news?pid=20601213&sid=a5mSOfz7Alhk&refer=home

What is amazing is that Mr. Bianco, with predictions like this, was not one of the 7,000 layoffs at UBS that they announced last year. Go figure?

"Catatonic Fear"

Perhaps some of the financial institutions for whom these optimistic strategists work are not listening to their own strategists. Right now it does not seem to be the case. Banks are still fearful to lend money and credit remains tight. Haven't they heard - the S&P is going up 17% this year and everything will be just dandy?

http://www.bloomberg.com/apps/news?pid=20601109&sid=aqLT6v88t.Jo&refer=home

I guess there is a nice sound-proof wall between the risk managers and the strategists at these institutions They are happy to be optimistic with our money, just not their own money.

VaRy Interesting

For those who missed it (hat tip Chris), the NY Times did a (very) long piece earlier this week on Value at Risk ("VaR") quantative analysis that is used by most financial organizations for evaluating the risk they have taken on through investments. Not their only model, mind you, but one that gets much more use than it deserves. I read the NY Times piece in full. While it provided some interesting historical perspective, it was still missing some key issues with VaR, despite its length (did I mention it was very long). The NY Times piece did note some of the public and private debate over the benefits, or lack thereof, of VaR, but the piece did not do a good job of explaining why VaR is very dangerous and misleading.

The biggest problem with VaR is that it assumes a normal Gaussian distribution for financial markets. But financial markets do not behave that way. They have fat tails (kurtosis), i.e. low probability events happen much more often in fiancial markets than a Gaussian distribution would ever predict, and there is a high variance among different types of financial markets making a one size fits all construct inadequate. Yet central bankers like the VaR and impose its use on financial institutions, whether it works or not.

Yves, at Naked Capitalism, does a nice piece explaining the failures in the NY Times piece and in VaR models. Well worth the read, and you will get much more valuable information from it than the NY Times piece, which, I should mention, was quite lengthy.

http://www.nakedcapitalism.com/2009/01/woefully-misleading-piece-on-value-at.html

Disclosures: None