Market analysts and economic experts love to predict what the market is going to do next. They love being the ones who get quoted in news reports and invited as guest commentators on various business shows to give their lofty-sounding predictions about what stocks are going to do next.

They look professional, sound professional and have professional credentials. And so they’re taken as professionals, with their every word all but good as a gold mine.

Problem is they’re more often wrong than they are right.

Think about it… How many times did you read the words “worse than expected” in a CNBC, CNN Money, Forbes, Wall Street Journal or New York Times report ever since the economy first tanked in 2008?

If you were paying any attention at all, it was a lot. Practically every week – and certainly several times a month – the headlines would be plastered with news of unexpected drops or gains (though mostly drops, it seemed) in one sector or another.

Looking at all of their bad calls – one after another after another – it quickly becomes obvious that the men and women who call themselves “experts” are actually badly out of their league.

Just a few of the many examples of predictions gone wrong last year:

  • On Tuesday, May 31, 2011, Reuters had to report that “U.S. single-family home prices dropped in March, dipping below their 2009 low, as the housing market remained bogged down by inventory and weak demand, a closely watched survey said Tuesday… Eight cities fell 1 percent or more in March, while Washington was the only city where prices increased on both a monthly and yearly basis. Prices in the 20 cities fell 3.6 percent year over year, topping expectations for a decline of 3.3 percent.”
  • On Wednesday, June 1, 2011, CNBC had to report that “ADP’s private sector employment report and ISM manufacturing data were both stunningly weak, signaling a slowdown in manufacturing and probably, a much lower number for Friday’s May employment report. Car sales were also softer than expected, adding to negative sentiment.”
  • On January 6, 2012, the Associated Press had to report that, “Retailers are reporting surprisingly weak December revenue after a strong November pulled forward holiday spending and a blizzard in the Northeast took a bite out of sales after Christmas… As merchants report their figures Thursday, many retailers – including Target Corp., Costco Wholesale Corp., and Macy’s Inc. – reported gains below Wall Street expectations. Bon-Ton Stores Inc.’s sales were virtually flat, and company officials blamed the severe snowstorms… The disappointing December figures were surprising, given earlier data from MasterCard Advisors’ SpendingPulse and anecdotal evidence that pointed to a strong December.”

Heck, on Wednesday, June 22, 2011, even Federal Reserve Chairman Ben Bernanke – who is paid the big bucks to know this kind of thing – had to confess: “We don’t have a precise read on why this slower pace of growth is persisting,” adding that problems pertaining to the housing and financial markets were “more persistent than we thought.”

The Market Experts Do Just as Badly as the Economists

So-called experts boasting in their knowledge of the stock market didn’t do much better, as evidenced by a CNN report at the very beginning of last year. On January 4, the first official trading day of 2011, the news site had this to say:

“Stocks have had a great run since bottoming out nearly two years ago, and Wall Street experts anticipate 2011 to be no different. Investment strategists and money managers expect the S&P 500 to rise 11%, on average, according to an exclusive CNNMoney survey. In fact, not one of the 32 experts surveyed by CNNMoney think the S&P 500 will decline this year.

“‘Everything seems to be in place for the stock market to rise,’ said Weeden & Co. market strategist Steven Goldman, whose 12-month target for the S&P 500 fell right in line with consensus estimates of 1,390. ‘We still have decent earnings growth and stimulative policies from the government that will help stocks keep up their performance.’”

And for a while, those 32 “experts,” seemed like they were onto something…

On January 4, 2011, the S&P started out at 1270, already up nicely from its 2010 low of 1,022. And it kept climbing well into February, peaking at 1,343.

After that, it plunged nearly a hundred points down to 1,256, but recovered quite nicely from there, hitting a new yearly high of 1,361 in early May. Then, for the rest of the month, it hit several rough spots, wavering dramatically between price levels but ultimately heading downward very close to its previous low towards the end of June.

Yet the very next month, it seemed to justify all of the experts’ opinions once again, shooting right back up. Many people even thought it was going to hit a new yearly high from there.

It didn’t.

Instead, it finished off the rough head-and-shoulders pattern it had begun back in August 11… and fell all the way down to 1,172 before starting a nauseating series of dips and rises over the next few months.

By the end of the year, it had recovered most of what it had lost. But it was still down 13 points when 2011 came to an official end.

Once again, the experts turned out to be wrong. Very, very wrong.

The Truth about the Markets

The truth is that nobody can predict what the market is going to do. And anybody who tells you otherwise is lying or sorely mis-educated. If they were honest or realistic, they’d have to up and admit that the markets can be completely irrational – and therefore unpredictable – at times. They don’t always go up when they’re supposed to head higher and don’t always go down when the economic news looks grim.

There are far too many factors involved in every market move – political, geographical, national, international, sector-related, business-related, investor-related, etc. – to make such large predictions, no matter how confidently they are made.

Alexander Green, Investment Director for The Oxford Club and Editor of The Momentum Alert, The Insider Alert and The New Frontier Trader, wrote an article for Investment U in January, describing a conversation he had with a friend of his.

Basically, the friend was having a difficult time with his investments, which were going nowhere in both the short-term and over a longer period of time. Several years back, his broker had him heavily invested in stocks, which – as everyone knows now – was not a good place to be. And after the market crash in 2008, his broker switched tactics completely and put most of Alex’s friend’s money into safer investment plays that promised not to lose a lot… but also wouldn’t make much.

Of course, that was when the market soared.

“I just can’t seem to win for losing,” the friend complained. So Alex clued him in that he had a bad broker giving bad advice, “not because his broker failed to outguess the market… but because he’s guessing at all.”

He went on to write how “It still astonishes me that the vast majority of investors – even ones who have been active for decades – still don’t understand that stock market success has nothing to do with figuring out the economy.

“Look back at history. There’s no correlation between economic growth and stock market performance from year to year. Equities routinely plunge during the good times and rally during the bad. If you know this – and truly understand it – why would you invest your money based on someone’s economic forecast?”

The same goes for market timing, he also shares, pointing out how much easier it is to look backwards and analyze rather than forwards and predict.

That’s a large part of the reason why Marc Lichtenfeld, Editor of The Oxford Systems Trader tends to do so well in the markets. He doesn’t let the prevailing opinion get in his way when looking at an investment.

Instead, he carefully analyzes each one that crosses his radar, taking his cues by looking at fundamentals and the bigger picture over the single or less important factors that tend to catch the “experts’” eyes more often than not.

As his Investment U bio says, “Marc also looked at the market with a journalist’s skeptical eye as a columnist for The Street, where he broke several stories on companies in the biotech sector. His contrarian recommendations (including shorts) gained 12.6% annualized versus the S&P 500’s gain of 0.5%.

How to “Predict” the Markets

There is no way to predict what the market is going to do next. But that doesn’t mean there isn’t a way to make money off of it.

People who buy up individual stocks or markets have a tendency to do better than those who try to predict what the entire economy is going to do. Admittedly, looking at fundamentals instead of listening to a bunch of know-nothing (or, at best, know little) talking heads does require a bit more work.

It requires spending time looking at an investment candidate’s fundamentals. What is its price-to-earnings ratio? This number can be easily figured out by dividing a business’ going share price by its earnings per share (usually determined by the last four quarters’ average).

If the resulting amount is high, that’s oftentimes a good sign, as it indicates that current investors expect better results going forward. Though, a word of caution on that subject: Just because the number seems high doesn’t automatically mean that it is. Different industries have different averages, which should be considered as well.

And that’s only one of the many areas of interest a diligent investor could and/or should look into. A few other relevant questions include:

How has it performed in the past? Are insiders excited about it? Does it offer goods or services that consumers actually want? How does it do at putting its name out there to the public? Does it offer any additional incentives like dividends? If so, what kind of track record does it have concerning investor payouts? What news has come out concerning the company in the last year or so?

There are easier ways to do all of that and there are more difficult ways. The aforementioned Marc Lichtenfeld, for example, uses what he calls S.T.A.R.S. (Stock Trading Analytical Research System), a computer-based program that sorts through “the billions and billions of variables involved in stock market prices each day,” alerting him and his subscribers “to stocks that we would have never expected to rise.”

But individual investors can make healthy returns on their investments by sitting down and crunching the numbers themselves. It takes time and dedication – and, as with S.T.A.R.S. or any other method of crunching the numbers, it isn’t completely foolproof either – but most investments will indicate whether they’re worthwhile or not if a person is just willing to dig into it a bit.

An Investment U Classic:
Nine Invaluable Resources for Every Investor

by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, July 27, 2011: Issue #1565

[With Senior Analyst Marc Lichtenfeld traveling this week, Investment U is running an update to a classic article by the author in his usual weekly space. The original was published on August 21, 2009.]

Heaven help me… Mrs. L is on a mission.

My house has been turned upside down, as she prepares to redecorate several rooms. Fortunately for the household, my input is neither required, nor requested.

Undeterred by the recession, the missus has made Pottery Barn her second home. And look for Williams-Sonoma’s (NYSE: WSM) earnings to cruise higher next quarter, thanks to her spending there.

Trouble is, when I return home from work, the items I expect to find in their regular spots are gone, replaced by new stuff.

Yesterday, I found my books lined up in the hallway and was asked to donate the ones I don’t want anymore. However, a good chunk of my library consists of investing books, which I like to consult from time to time.

I’m often asked for recommended investment books, and as I transferred the books from the floor to the new bookshelf (excuse me, escritoire), I revisited some of my favorite titles. Here are the ones that I’ve found most valuable in my career…

Let These Authors Propel You Toward Greater Investment Success

Make some room on the bookshelf – because you’ll want to add these investment books to it if you want to increase your chances of investing success…

  • Contrarian Investment Strategies – The Next Generation (David Dreman): As an analyst, I worked at a strictly contrarian research shop. In fact, I wasn’t even allowed to initiate coverage on a company unless it went against the consensus. I trained with two of the greatest contrarians in recent decades. So believe me when I tell you that Dreman’s book is a must read. It shows you how and why contrarian investing works.
  • Understanding Wall Street (Jeffrey Little): This is the first book I ever read about investing. It’s terrific for beginners. Written in an easy-to-understand language, it explains what stocks and bonds actually are. If you’re new to investing, I cannot recommend this book enough.
  • The Little Book That Beats the Market (Joel Greenblatt): The author is an extremely successful money manager, who shows investors how to beat average market returns with a value investing approach. You can read this in one afternoon, yet it contains as much valuable information as you’d find in most 500-page tomes.
  • Get Rich With Options (Lee Lowell): If you want to know how to make money with options, learn from the guy who did it and retired in his 30s. White Cap Research’s resident commodities specialist, Lee Lowell, shows investors the most profitable strategies and tools to use.
  • One Up on Wall Street (Peter Lynch): This classic teaches investors how to use what they are already familiar with to make money. Lynch takes a long-term outlook as he guides investors through the analysis process of companies that we interact with every day.
  • The New Market Wizards (Jack Schwager): Profiles successful traders such as Stanley Druckenmiller, Linda Bradford Raschke and Blair Hull. I like that the traders open up in these interviews, letting readers in on their processes and hearing about their failures just as much as their successes. Schwager does an excellent job of selecting traders in various markets with different trading styles.
  • Reminiscences of a Stock Operator (Edwin LeFevre): No investment book list would be complete without this. Originally published in 1923, it’s the marginally fictionalized biography of legendary speculator Jesse Livermore. It’s believed that Livermore actually wrote the book with LeFevre’s help. Livermore walks the reader through his considerable ups and downs. It’s a fascinating tale and a really insightful look back at market speculation in the early twentieth century.
  • Technical Analysis of the Financial Markets (John Murphy): While technical analysis can sometimes sound very complex, Murphy does a great job explaining the theories and indicators in a simple language. If you ever look at charts, you need to read Murphy’s book first – it’s the bible of technical analysis.
  • The Secret of Shelter Island (Alexander Green): Once you’ve read all the investing books and amassed a fortune, Investment U’s Chief Wealth Strategist will illustrate why money is not the most important thing in life. A compilation of his popular Spiritual Wealth essays, Shelter Island provides inspirational, whimsical and sentimental stories that remind the reader what is truly important.

BONUS: One more great book just to make our list round out to ten…

  • Beyond Wealth: A Road Map to a Rich Life (Alexander Green): This might be saving the best for last… Once you’ve read The Secret of Shelter Island, you have to pick up a copy of Alexander Green’s sequel on what it means to be truly wealthy. Each entry can be read alone and is characterized by brevity, wit, and a liveliness of mind. The book is a national bestseller and is ranked by the editors at Amazon as one of the “Top 10 Business Books of 2011.”

You have my list… so what are some of your favorites? Leave your comments below… I still have space in the escritoire.

Good investing,

Marc Lichtenfeld

[Editor’s Note: Laissez Fair Books has offered an exclusive discount to Investment U readers on three titles listed above: One Up on Wall Street, The Secret of Shelter Island, and Beyond Wealth: A Road Map to a Rich Life. Order today and receive 20 percent off any these of three great books. Just use promo code P401M700.]

Why Investors Shouldn’t Ignore the Steel Industry

by Marc Lichtenfeld, Senior Analyst, Investment U
Wednesday, June 22, 2011: Issue #1540

While most investors are focused on precious metals, I prefer to look for investment opportunities in markets less traveled.

Sure, precious metals are still wildly popular – or not popular enough – depending on who you ask. And they’re always in the mainstream consciousness. Either the dollar is going to be worthless and gold and silver will be the only true stores of value, or precious metals are in a bubble and will correct to more reasonable levels. Again, it depends who you ask.

But there’s another type of metal that I have my eye on. It’s one that hasn’t enjoyed the kind of run-up that gold and silver had recently.

Steel, and the companies that make the industrial metal, have been sinking like a piece of iron in a swimming pool. And this decline is likely to continue, here’s why…

Steel Industry Faces Weakening Demand and Price Erosion

Last week, Steel Dynamics (Nasdaq: STLD) tanked after issuing an earnings warning. The company said second-quarter earnings per share would be $0.35 to $0.40 rather than the $0.57 Wall Street was expecting. The lower-than-expected guidance was due to a slump in orders in April and increasing costs.

Other companies within the steel industry, including Arcelor Mittal (NYSE: MT) and Nucor (NYSE: NUE), have also been weak as more investors question the economic recovery.

  • The International Monetary Fund recently cut its U.S. 2011 GDP estimate to 2.5 percent from 2.8 percent as more evidence of a slowdown emerges.
  • Last month, 28 states lost construction jobs versus the 22 that added them.

Should the recovery falter, it’ll be particularly painful for steel companies, as construction is a bellwether of economic activity, particularly new homes.

And the folks who are buying steel are losing their optimism. The Steel Market Update’s Steel Buyer’s Sentiment Index, while still positive, is at its lowest level of the year due to concerns about price erosion and weakening demand.

“Even those involved in segments of the steel industry which have been doing relatively well since the beginning of the year – such as automotive – were displaying signs of concern about lack of strength in the overall U.S. economy,” said John Packard, Publisher of The Steel Market Update.

Responses from the survey included:

  • “Still not fully recovered and manufacturing does not exist in a lot of markets to aid in any recovery.”
  • “Still no significant uptick in the backlog. Extended commitments are not happening.”

Citigroup Expecting Steel Industry to Have Negative EVA

And Citigroup is not a big fan of the sector, expecting steel companies to have negative EVA (economic value added) in 2011 through 2013. EVA is a measure of profitability over cost of capital. Citi expects aluminum and uranium companies to also have negative EVA during that period.

The weakening of the entire steel sector is analogous to the following chart of Market Vectors Steel Index ETF (NYSE: SLX)…

Market Vector Steel Index ETF (NYSE: SLX) Analogous to Whole Sector Decline

Allegheny Technologies: A Vulnerable Steel Company

One steel company that I think looks particularly vulnerable is Allegheny Technologies (NYSE: ATI).

  • The company trades at 53 times earnings, higher than the industry average of 41.
  • Yet, at the same time, its return on equity is lower than its average peer.
  • It generates a significant portion of its revenue from the aerospace and defense sectors, which up until now have been healthy. In fact, on Monday, companies announced more than $20-billion worth of airplane orders at the Paris Air Show.

However, those robust assumptions are baked into the share price. Allegheny’s stock jumped yesterday on the news. Any slowdown in orders from those customers would have a profound effect on Allegheny’s top and bottom lines.

And with the budget deficit a political football, I wouldn’t be surprised to see some defense funds cut, particularly for things like new expensive planes.

Allegheny Technologies (NYSE:ATI) Chart

When Allegheny popped yesterday on the news, it rose above a key resistance level. If it drops back below $60, it looks like a great shorting opportunity, or a spot for longs to cut their losses.

I think Allegheny has risk to $49, which would put it more in line with its peers on a price-to-earnings basis.

  • For speculators, shorting steel companies looks like an interesting short- to intermediate-term opportunity.
  • Those who want to get long should wait a few months to pick shares up on the cheap.

Good investing,

Marc Lichtenfeld