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Dec 1, 2008

Chicken Little Pundits - Paralysis Analysis

Ed: Wall Street analysts have too much idle time - not enough analysis. Despite the massive effort and pretty charts, the analysis shows the slow market recovery after a drastic drop. 


This is a classic, single variate, cross-sectional analysis of 3 data points in time - thin on analysis, biased on the selection of time series, and meaningless. Using this trivial thinking, you can select hundreds of data points to prove fast recovery after a market drop. 

The analysts have a 1 in 3 chances of being correct. Markets go up, down, or stay the same. Their chance of being correct of being correct is the same as flipping a three-sided coin.

How Oil Prices Impact the Cost of Bottled Water 
Watch the Grocery Prices - Economic Recovery in Place? 

Oil prices have climbed and dropped dramatically. This is a single data point with no comparables in history. In 1972, the MIT, Wharton, Chase, UCLA, and Lionel D. Edie macroeconomic models could not predict the impact of increased oil prices. 

In 2008, we can't predict current events using irrelevant comparables. 

Nastiest Bear Markets In History: How Does Ours Compare?


Doug Short (via Barry Ritholtz) offers this interesting chart of four nasty 20th Century bear markets: 1929, Nikkei, NASDAQ, and our current S&P 500. As the chart shows, we're right on track for... well, we're right on track for any of the scenarios, as well as for a recovery.  But regardless of how this one ends, we're off to a historically horrific start.


And here's another good one, showing a shorter time span. Note that we have just caught up with the pace of the 1929 crash. (It was quicker early on, but the last three months have made up for lost ground).


What do you think?

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