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Selling The Bear Case For Stocks

Tyler Durden's picture




 

Perhaps the miserable failure of the bear case on global equities over the past 5 years has more to do with marketing the message than anything actually wrong with the arguments for higher volatility and lower asset prices. As a reminder, ConvergEx's Nick Colas notes the classic "4 P’s" of marketing are: Product, Price, Promotion, and Place (Distribution), pointing out that when it comes to getting the bear case out, it is clear which component is missing: Price. Stock markets that churn higher - as they do right now - simply make it too expensive to sit out the rally.  The “Product” and “Promotion” are both fine – you can read negative commentary in many reputable places and speak with very intelligent bears. That takes care of “Place” as well; it’s not hard to find cautionary investment opinions. The take-away from this approach is simple: calling the top may not be as hard as you think. The first 10% pullback may be enough to complete the 4 Ps. Until then, however, it’s just too hard a story to sell.

 

 

Via ConvergEx's Nick Colas,

“Sell me this pen.”  That is one of the oldest interview questions in the book.  I have heard that it goes back to the old International Business Machines hiring process, when that organization was light years ahead in terms of hiring the best and brightest. There are many wrong answers to the question and only one right one, even if it comes in many permutations. Here are some examples:

The “Wolf of Wall Street” smart-alecky answer.  Take the pen from the interviewer and quickly say “Write your name”.  Your counterpart will start to look around for another pen.  You then propose that you have one, and they obviously need it.  Cute, but probably not the answer your prospective employer is looking to hear from a potential hire.

 

The “Rookie” answer.  Most untrained salespeople will look at the pen and launch off into a description of its merits.  “Let me tell you about this pen, ma’am.  It has a lovely feel on the paper, never smears, and my firm guarantees that performance for life!”  This may seem like standard used car salesman fare, mostly because it is.  Bad answer. 

 

The “Right” answer.  You start by asking questions about what the interviewer does with his or her day.  If they are a CEO, do they have occasion to sign important documents in the presence of others?  You go for the high end pen sale, with a second one to give the other party as a toke of the CEO’s esteem. If they are an accountant, focus on keeping costs low with a bulk order.  But in all cases, the right answer involves gathering facts first and selling second.

Just as there are “Right” and “Wrong” ways to sell products and services, the business discipline of marketing has its own rules of the road.  Some of the most durable tenets of the profession come from the pen (no sale needed) of E. Jerome McCarthy, a marketing professor at Michigan State after World War II.  In 1960 he codified the “Four Ps” of marketing – essentially the critical features behind marketing any product or service. In case it has been a few years since you studied them, here they are:

Product.  The item or service that a company wants to sell.

 

Price.  The amount the consumer is willing to pay.

 

Promotion.  How the consumer hears about the product or service.

 

Place (Distribution).  Where the buyers goes to purchase the item.

Now, instead of applying these categories to “Mad Men” style marketing of cars or detergent, think of them as the checklist for a point of view on securities prices.  The Internet and social media have made ideas into consumer goods, after all.  For any product – tangible or not – to succeed it must adhere to a solid strategy and address the “Four P’s” directly and forcefully.

For the last five years, the negative case on risk assets – developed and emerging market equities, corporate debt, even notionally riskless sovereign paper (think Greek or Spanish debt) – has been losing market share to its more sanguine counterpart.  Even investors with a positive view of the global economy will freely admit that things are still pretty weak, whether the metric is economic output or labor market growth.  So why are equities higher, with the S&P 500 hitting a new record just yesterday?  It’s not because things are great.  It is because the “Positive story” about risk is trumping the “Negative story”, exactly as Ford might best Chevy or Frosted Flakes win over Shredded Wheat.

Let’s review the two products – positive and negative takes on risk assets – through the lens of the “Four P’s” of marketing.

Product: At first blush, we’re looking at a red car and a green car.  Positive and negative investment cases are really the same product, albeit with different attributes. Stocks go up, or stocks go down. Bonds rise in price, or decline. Granted, there are a lot of reasons used to support these views in the world of investment analysis – political, economic, social, etc.  But in the end it all comes down to a single call.  Buy ‘em or sell ‘em.  The menu in the cafeteria of modern finance is still quite short: chicken or beef.

 

Price: Thanks to the Internet, a lot of investment opinion is now essentially free.  “And worth every penny”, you might add.  Fair enough, but that obscures a larger truth. The price of investment viewpoints is the opportunity cost of doing something stupid or clever. Making money, or losing it. Follow the right counsel, and you profit. Be led astray, and you lose. The price on the dust jacket of the idea is the least of your worries. 

 

Promotion: Again, thanks to business television and radio, the Internet, old school media, and Web 2.0 social networking, anyone interested in learning more about the capital markets knows where to go.  Seeking Alpha for the mainstream, Zerohedge for the edgy stuff that the cool kids like, and hundreds of sites in between. Buy side and sell side businesses have their own pundits and experts, blogs and press pages. No shortage of promotion in this market, including (of course) this note. 

 

Place: Pretty much like promotion, but since research opinions are so widespread and largely without explicit price, you can find them anywhere.  It’s sort of like the old Anglican hymn: “You can meet them in school, on the street, in the store, in church, by the sea, in the house next door”.  Only that refers to saints, not investment views.

In the end, there isn’t actually much of a difference between the bull and bear case on risk assets – three of the four Ps line up pretty exactly.  The one exception is price, as expressed by opportunity cost.  Go short a market that rises 10%, and you have lost 20% - half from your ill-considered negative bet, and half from not buying the asset in the first place. And this is where the positive case for risk has it all over the negative arguments in the Four P’s comparison. Nothing succeeds like success, and the market share winner of this two product race is the full-throated roar of the optimist.

That doesn’t mean that this will always be the case – far from it.  The positive case for risk hasn’t won the day because of a slew of upside surprises for economic data, corporate earnings, or even benign headlines on geopolitics or energy prices. Corporate earnings are great, no doubt, but reinvestment rates are low as companies buy back stock rather than accelerate the expansions of their businesses.  Labor markets are still punk throughout the developed world, oil prices are the straw that sits on the proverbial camel’s back, and no one can argue that the world is a more peaceful place than a decade ago.

There hasn’t been a pullback in U.S. stocks of more than 10% in 30-odd months, and in that fact sits an important reason why the rally has continued.  I am not sure that the +5 year bull market for stocks could actually withstand a 10% correction, especially a quick flush lower.  Remember – the only real differentiator between the bullish and bearish “Product” is cost. Specifically, opportunity cost. Once the negative case begins to pay off, it could begin to gain the advantage with market participants and cause a deeper selloff.  Which will make it even more popular.

Either way, you’ll probably need a pen to write your thoughts. Can I interest you in this one?

 

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Sat, 06/21/2014 - 21:14 | 4881659 wee-weed up
wee-weed up's picture

Only MOMO idjiots are buying stawks!

Sat, 06/21/2014 - 21:20 | 4881666 max2205
max2205's picture

No

Sat, 06/21/2014 - 21:26 | 4881670 deflator
deflator's picture

seriously? short stawks in a rigged market? I am sure the riggers(sic) will greatly appreciate the "extra liquidity".

Sat, 06/21/2014 - 21:25 | 4881675 bugs_
bugs_'s picture

the good news is that we still have "corrections" and we still have "bears".  such optimistic!

Sat, 06/21/2014 - 21:35 | 4881690 DirkDiggler11
DirkDiggler11's picture

Are you kidding me ? The reason for the poor performance of the "Bear" case is bad marketing ? Give me a fucking break. This is the WORST article I have read on ZH, by far. I would rather read the same ol shit from Marc Faber, Jim Rogers or even a "30 reasons the Fed Reserve bank is fucking up your life" type list than this insane pure Bullshit.

Sat, 06/21/2014 - 22:13 | 4881764 eclectic syncretist
eclectic syncretist's picture

Another uninspired dirge writer trying to turn another buck, that's all.

Sat, 06/21/2014 - 21:58 | 4881728 pitterrier
pitterrier's picture

This is the answer - You take the pen and calmly put it in your jacket pocket and tell the interviewer that if he does not pay you a storage and handling fee you are going to kick the #@$% out of him.  Aso ask for his watch and thank him for the gift.  Finally, compliment him on what a beautiful family he has and what a shame it would be if something, like a pen shoved in one of his lovely children's eyes woud be if he didn't sign a long term protection contact.

Sat, 06/21/2014 - 22:08 | 4881755 stoneworker
stoneworker's picture

The way you described it I almost believed that you have actually done something like that.

Sat, 06/21/2014 - 22:11 | 4881760 Temerity Trader
Temerity Trader's picture

Embrace the New Normal

ZH’ers endlessly rant on how the ‘New Normal’ must fail. “It just isn’t sustainable!” they cry out as stocks soar ever higher.  I pity all these narrow-minded people. They fail to accept that valuations are no longer based upon P/E ratios, revenues, margins, balance sheets, etc. They are now based upon central bank money printing.  Stocks cannot be valued under the old normal and must be valued much higher in a zero to negative interest rate environment.  It doesn’t matter if companies have diminishing revenues, tiny profit margins, and faltering sales. Warnings like, “May not be able to continue as a going concern.” are buying opportunities! Investors will pile into such companies knowing that the Fed will print to infinity and reverse their fortunes.  Short sellers sit in shock as their positions are stopped out day after day, until they are penniless while Janet sits laughing at them.  The central bankers will print forever if they have to, and they have to.  Any weakness, tapering will end and QE Max put into place.  In two or three years with the Dow at 21,000 these same naysaying ZH’ers will still be missing out on the Fed free money party. The Fed balance sheet may balloon to $7T and the national debt to $24T.  Meaningless! People see their stock portfolios soar; they feel rich and buy stuff.  Lower income people get no-qual low interest loans and go out and buy stuff.  Look how auto sales exploded with 7-8 year loans! “But, new jobs pay nothing!”  So?  About 50 million have EBT cards for free food.  If debt loads become dangerous to the party, bailouts are certain.  Can you say, “Congress set to forgive student loans?”  You same people will scoff when you hear that 15-year auto loans are becoming the new normal and 100-year mortgages. “But, but, it’s not sustainable!”  Yes it is!  Limitless growth?  Think limitless immigration.  The oligarchs know “Grow or Die”. 

Sure, it may all collapse someday, but when?  In five years? ten? twenty?  To fight this is a fool’s errand. You will be hunkered down in your survival bunker, flat broke.  This is the NEW NORMAL, embrace it!  It is here forever; it is all too big to fail.  Risk has been removed by the Fed!  Their actions are based on models, they know exactly what they are doing.  The New Normal includes massive stock buybacks, rampant consumer and government debt expansion, and housing bubble redux.  

So, get on board or miss out! Buy stocks on margin and sit back watch ‘Dancing with The Stars’ on a new, free from the Fed, 75” OLED TV.  A big payout awaits you!

 

Sat, 06/21/2014 - 22:16 | 4881771 eclectic syncretist
eclectic syncretist's picture

You sir, are fucked.

Sat, 06/21/2014 - 22:22 | 4881784 TeamDepends
TeamDepends's picture

Don't feel sorry for him, he owns acres of paper gold.

Sun, 06/22/2014 - 11:20 | 4882700 the question
the question's picture

Thank you, eclectic, for the most hearty laugh I've had all weekend.

A close second was when I saw that video of the bear. Where do they find this stuff? One of the best things about Zerohedge is the pictures they come up with.

Sat, 06/21/2014 - 22:19 | 4881781 nmewn
nmewn's picture

Oh look, Jamie Dimon has joined us ;-)

Sun, 06/22/2014 - 01:16 | 4882074 Awakened Sheeple
Awakened Sheeple's picture

You're absolutely right... Until your masters pull the fucking plug and you're left with paper that isn't worth shit.

Invest in yourself, your skills and your family. The central bank bubble will pop like all bubbles do.

Sun, 06/22/2014 - 12:00 | 4882797 huggy_in_london
huggy_in_london's picture

See the way i see it, at current market prices. is that guys like you that are long might make a few more percent... maybe 5 or so.  But you will never know when to get out cause you will think every pullback is one to be bought.  But when it unravels it will unravel by 40 to 50% ... so you are betting to make 5 when you might lose 50.  You're 75" tele wont be worth much then ....

Sat, 06/21/2014 - 22:47 | 4881824 Handful of Dust
Handful of Dust's picture

"Stawk prices never drop," my realtor told me.

Sun, 06/22/2014 - 01:22 | 4882085 Tigg47
Tigg47's picture

The only moment to sell stawks is when you notice that everybody around you is buying.

 

Sun, 06/22/2014 - 02:08 | 4882123 Spungo
Spungo's picture

I'm not sure I can say it's a marketing problem. Most people fundamentally do not understand the stock market.
Reality: You are buying ownership of a company.
Perception: Things go up for no reason. It's like buying lottery tickets and some numbers are luckier than others.

You could lay out an absolutely perfect case for why the economy is shit and why stocks are expensive, but you'll get blank faces. None of it means anything to most investors. Twitter has never made a profit, but people value the company at more than 20 billion dollars. Tesla has never made a profit, and their accounting is questionable because I think they are understating the depreciation of the batteries, but investors don't care. As far as they are concerned, there is no correlation between profitability and asset value.

Not assigning any value to likelihood of making a profit is why so many people get suckered into stupid get rich quick schemes. As a real investor, I would put very low value on pyramid schemes like Cutco knives. The chance of me making money selling these knives is very low, so the price I'm willing to pay to get into that business is extremely low. If we throw risk out the window, suddenly these knives are a great investment. There's a 1% chance of me making money? Sure I'll buy the $500 starter kit, or whatever! I'll start my own restaurant after that. Then I'll open an art store.

Sun, 06/22/2014 - 05:52 | 4882262 Laughing Stock
Laughing Stock's picture

What a stoopid fucking post

The "Chimp in Charge" has ordered it to be

And so it is

Q.E.D.

Sun, 06/22/2014 - 08:15 | 4882332 AdvancingTime
AdvancingTime's picture

 What do stock markets around the world have in common with "girls gone wild" the video of college girls on spring break? The answer is both are crazy out of control. We have grown very complacent as money around the world has continued to flow into intangibles and promises.

Currently the market is all a twitter and locked in a "greed and stupidity loop." The loop can be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. When stocks do pullback it is a buying opportunity. Yes, we are indeed experiencing a double down and let it ride mentality. I don't have to explain the greed part. More about this subject in the article below.

http://brucewilds.blogspot.com/2014/06/stock-markets-and-girls-gone-wild...

Sun, 06/22/2014 - 13:10 | 4882983 moneybots
moneybots's picture

"Stock markets that churn higher - as they do right now - simply make it too expensive to sit out the rally."

I don't remember anyone saying in March 2009, that it was too expensive to sit out the 2003-2007 rally.

Sun, 06/22/2014 - 13:20 | 4883016 moneybots
moneybots's picture

"There hasn’t been a pullback in U.S. stocks of more than 10% in 30-odd months, and in that fact sits an important reason why the rally has continued."

There could have been 20 10% pullbacks and yet the rally could have continued.  Some of the biggest one day rallies happen in bear markets, yet they don't prevent the market from continuing to collapse.

Sun, 06/22/2014 - 13:47 | 4883124 jameswvu99
jameswvu99's picture

The million dollar question is, how big can the fed balance sheet get? 7 trillion?, 100% GDP?, Isn't Japan's balance sheet over GDP?, Plus US is the reserve currency. 

Sun, 06/22/2014 - 14:15 | 4883179 AdvancingTime
AdvancingTime's picture

Regardless of what you name it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp.

With a policy of loose and cheap money  and an inflation target of just 2% the Federal Reserve  continues to please those gambling that not fighting the Fed guarantees profits. As many Americans are forced to pay higher food, gasoline, and health insurance premiums, I wish someone would let the Fed know we are already there. Any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages, this is a one off and will not continue. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elu...

Mon, 06/23/2014 - 03:50 | 4884796 firestarter_916
firestarter_916's picture

I can't even read this site anymore. Too many fucking scipts on this page, it just hangs! I wouldn't be surprised if its taking info from my pc, probably one of Snowden's buddies help set this shit off, put a little negative new site together, and find out who really dislikes this pos country.

Tue, 06/24/2014 - 11:55 | 4889550 LaurentDeLyon
LaurentDeLyon's picture

the bear that dances, is just excellent !!!

Do NOT follow this link or you will be banned from the site!