Dr Boom: 6 Reasons I'm Calling a Bottom and a New Bull

Long-time analyst Paul Farrell of Market Watch writes:

OK, so you're one of millions of investors impatiently waiting on the sidelines, sitting with $2.5 trillion cash under your mattress, waiting for the right moment, that signal screaming: "Bottom's in, start buying!" Yes, it'll go down again, but the bottom's in, thanks to a great March, possibly the third best month since 1950, so it's time to jump back in and buy, buy, buy!

You heard me, I'm calling the bottom, beating Dr. Doom [Nouriel Roubini] to the punch again (yes, again). Last time we were predicting the recession. This time we're calling the market bottom and a new bull.

Farrell then lists "6 Reasons to Buy". In actuality, they are not reasons to buy, but rather 6 reasons why most miss the starts of bull markets. Nevertheless they are worth reading. (Note: His reasons are in italics, with my commentary following each reason):

1. The stock market turns before the economy bottoms

Farrell has this right. It does so because it is the ultimate capital goods market, and when the Fed injects money, it  generally flows into the capital goods sector first.

2. Stocks make big money fast then go to sleep

This is why you need to be in early before the up move, and out early before the end. Farrell writes:

"Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial Average back to 1900." He "found that if you took away the 10 best days, two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. Conversely, had you sidestepped the market's 10 worst days, you would have tripled the actual return of the Dow."

3. No one can predict the next big move

True. It often is a very specific news event that causes the big move. You can often sees tons of money on the sidelines and know the big move is coming, but you generally can't tell in advance what the big news will be.

4. Famous media-darling pundits inevitably flameout

A lot of the media darlings are one note Charlies. More than understanding the markets, they tend to strike one note forever. When the market hits that note, they look like geniuses--especially if they tend to be bearish, since most are usually optimistic, the bear will stand out.

5. Even the best economists make huge errors

Farrell doesn't understand why, but he simply notes the problem.

In actuality, the problem is that most economists are trend followers, they will never catch the major changes in trend--by definition. And a lot of Austrian economists who understand the business cycle are way off on their forecasts because they do not study the economy in enough detail. This happens partially because some Austrians, such as Joe Salerno, promote the idea that Austrians should be wasting their time studying voodoo equations instead of the economy. You will never know enough about the economy to make accurate forecasts if you waste hours, days, semesters and graduate studies learning voodoo equations. In truth, what the Austrian school needs is a bit of division of labor where some study and understand in detail the voodoo equations so that they can be blown up, and others who spend time understanding the real economy in detail. The latter is pitifully lacking, and there is an over supply of new Austrians who spend way too much time with the voodoo economists.

6. Will the real Dr. Doom please stand up?

Here Farrell questions Roubini's forecasting credentials:

Roubini actually shares the Dr. Doom title with many others, including Hong Kong economist Marc Faber who publishes the "Gloom Boom Doom Report;" legendary Salomon Bros. strategist Henry Kaufman; and Houston billionaire Richard Rainwater, whom Fortune mentioned as Dr. Doom...the "Roubini Hype Machine" may well be the "one-hit wonder" Portfolio calls him. He was not ahead of the competition with his December 2007 recession call. So if you're one of America's 95 million investors waiting for Roubini to call a bottom before getting back in the market, you'll miss the real turning point.

Farrell then ends with this gem that nails the current situation:

One final, crucial warning: This next bull will be short. First, it will suck money out of the mattresses of investors who are sitting on cash. Then Wall Street will recreate the insanity of the '90's dot-coms and the recent subprime-credit mania.
But underneath it all, Wall Street's bulls will be setting the stage for yet another catastrophic bubble and meltdown. So please be careful when "Dr. Doom's PR Hype Machine" proclaims that Roubini's finally morphed into "Dr. Boom" later this year. It'll be too late.