Laszlo Birinyi on Forecasting

From Bloomberg today, Joseph Ciolli reports,

The difficulty of forecasting outcomes in places like China has left Laszlo Birinyi more worried about stocks than he’s been since 2009, when their recovery from the financial crisis was just beginning.

The 72-year-old investor says it’s easy to see why global equities are off to such a bad start — falling oil, tension between Saudi Arabia and Iran, China’s equity selloff, and concern over Apple Inc.’s supply chain. The problem is predicting how they’ll turn out since most defy fundamental analysis.

“While we maintain a positive bias, we are more concerned today than at any other point since 2009 and dispute most forecasts because the issues are not limited to the economic/financial factors which the market can comprehend,” he said in a note dated Wednesday.

The lack of confidence is a departure for Birinyi, whose bullish market predictions over the last seven years have virtually all come true. The president of Westport, Connecticut-based Birinyi Associates Inc. predicted in August that stocks would “come out OK” as a six-day rout sent the Standard & Poor’s 500 Index into a correction. The gauge went on to rally 13 percent through Nov. 3. He said in October that there’s money left to be made in stocks.

To understand China’s economic slowdown and 44 percent stock market slide, it takes more than analyzing things like gross domestic product and earnings, according to Birinyi. Getting a handle on the situation “requires insight into that government’s political agenda which is beyond our capacity,” he wrote.

A similarly improbable set of insights is needed to assess crude oil, Birinyi says. Recession-hit Russia needs a revenue boost, while geopolitical turmoil leaves the Middle East unpredictable, and both distort forecasts.

“Thus, two of the major pressures on stock prices are beyond investors’ and the market’s usual metrics and indicators,” Birinyi wrote. “We would therefore treat market forecasts as ‘best guesses’ and only that.”

Oil’s slide below $30 a barrel, the first time in 12 years it’s breached that level, sent an index of global stocks to the brink of a bear market. The equity selloff has also come amid a breakdown in momentum trades, where investors pile into the best performing stocks from the last six to 12 months.

The best way to combat the ongoing equity market weakness is to buy shares in high-quality companies, according to Birinyi. For him, that means avoiding energy stocks, banks and retailers.

“Market indices may have another disappointing year,” wrote Birinyi. “At the same time, we believe investors can have a rewarding year by adherence to what we term the Ted Williams model: only swing at good pitches.”

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