-->A Prediliction For Prediction

A Prediliction For Prediction

Weekend Edition
January 11-12, 2003
Paris, France
By Addison Wiggin

The old timers tell us that when a bear market reaches its
nadir, stock market discussions have the same effect as
tequila shots on a teenager the morning after: you can't even
stomach the thought of them any more.

If that's so, we've got a long way to go before this one has
run its course.

Exhibit one: Applying the research of brain scientists to the
stock market, CNN and Money Magazine have come to some
astounding conclusions about investor behavior during the
bust."We come [hard-wired] with this built-in prediction
addiction," Money Magazine's resident market-apologist Jason
Zweig says confidently."Brain research [shows] that you're
going to try to outsmart the market whether you can or not."
And who would argue with brain scientists? They're geniuses,
after all.

"If a company has stable earnings quarter after quarter,"
Zweig continuess,"and each quarter its earnings go up another
penny, and then all of a sudden, they don't go up anymore,
investors go nuts." [Uh, you think?]"A tremendous sell-off
occurs," the CNN article continues as if the idea needs
explanation,"not because of a dramatic market swing but
because of a subtle change in an otherwise predictable
pattern."

It's not clear to me how a three-year bear market and a 39%
drop in the DOW constitutes a 'subtle change' but... according
to Dr. Scott Huettel of Duke University"[my brain] is set up
to look for that sort of structure... even if there were no
structure there." In other words, even if the market is
tanking like a capsized barge-full of luxury cars in the North
Sea, we're likely to see it righting itself in the near future
- because 'that's what stocks always do'.

Hmmmn... okay."Understanding those parts of the brain will
help us understand not so much why the stock market crashed,"
say Drs. Read Montague and Gregory Berns, another couple of
geniuses at Baylor and Emory respectively,"but why people
didn't sell two years ago."

What a relief. Scientific proof that if you bought at the top,
rode your over-priced stocks all the way down, thereby losing
your shirt, but are still holding on 'for the long run' - you
don't have to worry about it! You're biologically programmed
for this kind of stupidity!

What would we do without CNN and Money helping us apply
science to these crazy post-bubble markets, huh? We'd be lost,
no doubt.

And look, they're champions of statistics, too.

It was widely reported this week that the stock market will
end 2003 higher - because"the odds are against it" falling
for a fourth year in a row. Our friend John Mauldin had a
choice word or two to say about this particular"statistical
conclusion" on Friday, so I'll leave the commentary up to him.

Mr. Mauldin:"I read everywhere, or at least from the
cheerleaders, that the odds are that we will see a rise in the
market, because there has only been one time in history when
the markets went down four years in a row. The odds are only
one in a hundred.

"With all due respect (actually with no respect at all), that
is the worst statistical garbage I have read in quite some
time. First of all, there have only been three times when the
market have even had a chance to go negative four times in a
row, and one of those times the market was down less than.5%
in year, so that hardly counts as down three in a row. So if
that type of statistic was valid, then the odds would be
either 1 in 4 or 1 in 3.

"But [either way] it is meaningless. The conditions in any one
given year are the reason for the market to go up or down. It
has nothing to do with odds. If any broker tries to get you to
buy stock based upon this 'statistic', hang up or fire him."

Alas, this 'prediliction for prediction' afflicts us all. Bill
Bonner spent the week trying to figure out what to expect in
the year 2003. You'll find the 'Great Expectation' series
below. (Great reading, by the way, Bonner in top form!) Porter
Stansberry has been seeing great things with respect to a
company expecting phase III trial results on their AIDS
vaccine (more in a moment). And even Daily Reckoning readers
are getting in on the act.

"I'm old enough to have experienced the real estate crashes of
the 70's, 80's and 90's," writes one reader."I'm still
waiting for the next one which I believe will dwarf the
others.

"I work in an area that is being promoted as the Gold Coast or
Newport Riviera of California. It's behind the Orange curtain,
supposedly far enough away from Los Angeles to make a
difference in lifestyles as well as insulate it economically
from many of the pitfalls that L.A. has experienced. Won't
work. A friend told me today that she has a Steinway baby
grand piano from a previous marriage she's been thinking about
selling and its worth about $70,000.

"She called one of the premier piano sales firms nearby and
the manager said he's getting 6-10 calls a day to sell these
pianos. People are hurting so bad that they're trying to stave
off the lenders by selling their assets. Another friend told
me that his son works for a mortgage firm and many customers
who've been buying homes for one million to 1.5 million have
debts of $700,000 to 1.2 million dollars! It's only a matter
of time - and not much longer at that."

Unfortunately for some this is one 'predictable pattern' that
seems to have really taken shape and could pose a problem.

Then again, how would I know? Brain scientists tell me I've
got a 'prediction addiction' that I can't seem to shake. Do
you suppose they'll set up de-tox clinics for this kind of
thing? Maybe they'll invent a new disease to diagnose... and
drugs for a cure.

Until then enjoy your weekend,


Addison Wiggin,
The Daily Reckoning