Dear Abby, You Goofed
EDITOR'S NOTE: Abby Joseph Cohen, the formerly prophetic Goldman, Sachs & Co. investment strategist, updated her stock market outlook Aug. 21, slightly lowering her target a second time this year and slashing her too-high estimates of earnings. Later, she spoke with Associate Editor David Henry about her calls. Using words from the interview and her reports, here is how she might reply to hypothetical letters from disgruntled investors:
My problem is you. I used to trade stocks every time you said something about the market. And since you never said anything really bearish, the only thing between your words on the TV and my buying more stocks was a click of my computer mouse. I made a lot of money. No more. Mar. 7, 2001, was the last day I'll ever take your advice. You said then to put more money in stocks. The S&P 500 was at 1254, and you said it would go to 1650 by yearend, up 32%. The other day, Aug. 28, it was at 1162, down 7%. I should have known you didn't have the inside line in late 1999 when you grew quiet while the Nasdaq had another 40% of upside.
You're no different from other salesmen on Wall Street. I don't care if you sound like an authority, talking about "we this" and "we that." It must have been dumb luck that made you bullish early in the 1990s and then stubbornness that kept you that way for so long. When you pounded the table for tech early on, it was probably just to make a name for yourself. I'd bet on that before I'd bet the S&P will be up 29% to 1500 by New Year's, like you're saying now.
Furious in Philly
We understand your frustration. We all wish we knew exactly what lies ahead. But give us credit for having set Wall Street's second-lowest price target for 2000, a year that proved to be subpar. And let's not forget that we advised getting out of tech in March, 2000, and moving into energy, real estate investment trusts, and pharmaceuticals. All generated positive returns in 2000.
Our price targets are not meant to be precise. We provide them to offer a sense of direction and magnitude over coming months. They are derived primarily from our forecasts of corporate earnings.
Without question, however, our original estimates for 2001 earnings were too high. A more accurate view would have given us a more accurate--and pessimistic--view of stock price performance. Our original estimate for 2001 operating earnings was $61.50 per S&P 500 share, later revised to $56.50 and now $51. The second quarter was likely the worst ever for earnings. Measured conservatively, they declined 50%. The scale of the disappointment surprised many people.
For years, I was impressed by the hard work you and your staff devote to analyzing corporate accounts and learning how much companies are truly earning before you make projections. Your diligence put you a cut above other strategists. But your earnings estimates have proven so wrong you might as well have made them up. Worse, now it looks like you missed a key warning while you had your head in the books. Did you not see how much of the growth in earnings was coming from sales of technology, particularly telecom equipment paid for with money raised in the bond and stock markets?
Disappointed in Dubuque
We still think the accounting scrub we do on financial reports and our economic analysis set us apart. Remember that at the beginning of 2000, our S&P earnings forecast was the lowest on The Street. We were very much out of the consensus. We were one of the few who correctly thought that there would be a dramatic deceleration in the economy. We took a lot of criticism, and we heard from our clients. In retrospect, our 2000 estimate was very close to the actual result.
We did see the enormous borrowing by telecom service companies, and we spent a lot of time talking to our clients about it. We thought it was a major misallocation of capital. We had it in mind as part of what we called "the dark side of Y2K," our expectation that tech sales would slow after so much money was spent in 1999.
What we misjudged was how long it would take for the earnings deceleration to run its course. We thought things would look better by the middle of 2001. We were surprised by the weakness of the economy and the charges taken by many companies.
We have never seen such aggressive use of accounting as corporations are using this year. In some cases, they are throwing in the kitchen sink.
I can't believe you are complaining about accounting games. For years, you told us the quality of reported earnings was improving. It was one of your reasons to believe the bull market. Now companies admit they weren't earning what they said when stocks were going up. Looks like you got hoodwinked, too.
Payne N. Portfolio
For some companies, that was the case. We did, however, begin to express some concern about accounting issues over the last year or two. But we still believe the overall quality of earnings has been dramatically enhanced by low inflation. And companies now give us more information and in greater detail, thanks to actions by the Financial Accounting Standards Board and the Securities & Exchange Commission over the last three years.
Now, companies may be overstating how bad the situation is. The SEC told companies a few months ago to issue long-range estimates of charges. Some have announced enormous adjustments for potential layoffs and inventory reductions. To the extent these do not occur, current earnings may be understated and future earnings may benefit.
I see you've gotten yourself on the wrong side of a lot of people lately. What have you learned?
Bob in Tupelo
The mistake I made was not being more cautious on stocks when I realized that our earnings estimates were so much below the consensus. I should have anticipated stocks would suffer more from the disappointment. Second, which we have taken to heart, is the need to delve into the earnings numbers more, really pushing the analysis.
I always say everyone deserves another chance. And I still want market advice. Please try again.
Patient in Peoria
Thank you. We see earnings rising in 2002 about 10% from 2001, based on a moderate acceleration in the economy and help from some special factors. Those include new accounting standards, the decline in energy costs, and the projected decline of the dollar. Many industries will benefit from ongoing productivity improvements.
While the poor earnings results and disappointing share-price performance continue to weigh on investor sentiment, we believe this will fade. Our price targets of 1500 on the S&P at the end of 2001 and 1550 in mid-2002 are likely to be achieved in 2002.
How does it feel to blow the bear market call and your chance to be immortalized as a great strategist?
Wondering in Santa Monica
I am an analyst, and I do the best job I can. I'm not going to be infallible, but we try to get it right more often than we get it wrong.