Seemingly bleak cover story

I’m a big fan of using cover stories as contrary indicators. (You can see previous examples I’ve cited by clicking here.)  The idea is that by the time an issue makes it to the cover of a publication it’s already widely discounted in prices and markets.  Barry Ritholz provides some rules for using magazine covers at his blog’s post here. I’m not sure mine, below, qualifies, but this is my sandbox.  Here are his rules, verbatim:

  1. Mainstream–not business–publication
  2. Well understood concept that is reaching a climax
  3. Asset price gains

I’m not sure the last one is a requirement; first, asset price losses ought to suffice; second, if a cover captures the general zeitgeist among the populace, and that’s factored into asset prices, than a reversal or lifting of the subject–as the contrary nature of the cover story argues–ought to provide the contrary catalyst.

Anyway, here is this week’s cover from The Economist.

I happen to agree with the cover story’s angle, although I think I know the answer. Not that it’s relevant to this particular posting, but it has to do with the fact that the recent recession was accompanied by a financial crisis. In the past, that combination has lead to very subdued recoveries.Taken at its face value, the contrary angle would be that the economy’s weakness is priced into assets and any positive surprise would push risk assets quickly higher. 

Looked at only from the angle of Jane Consumer, I’d say this pretty well sums it up: this is just a lousy economy. Any surprise in the economic statistics–like a big increase in non-farm payrolls or, better yet, anecdotal stories about one’s neighbors (the closer to home the better)–could spur buying of stocks.

I think, however, that the tenor of professional investors has been much more upbeat, such that they might poo-poo this cover story by spinning things bullishly as they’re wont to do.

In conclusion I’ll put it this way.  Individual investors have not rushed to stocks. Thus, this cover story probably captures their mood pretty well, and if it’s the contrary indicator it appears to be, we might see individual investors return to stocks. But the professional investment class is far more important, and they’re already in, already bullish.


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