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Streetside Chat: Robert Robbins, Chief Investment Strategist at Robinson-Humphrey
By Christopher Edmonds
Special to TheStreet.com
Originally posted at 10:33 AM ET 12/23/00 on RealMoney.com
Robinson-Humphrey Chief Market Strategist Robert Robbins says this may have been his "most difficult year." Since joining the Atlanta investment firm in 1986, he has seen -- and predicted -- his share of peaks and valleys, but this year has confounded the best pundits, including Robbins.
Robbins has consistently ranked in the top-five market gurus in annual surveys of strategists, including the top ranking in both 1997 and 1998. He is well known for coining the term "Superbull," when referring to the recent market run that he says began nearly 18 years ago. His mixture of both technical and fundamental analysis in predicting the direction of the market has gained him a reputation for both insight and accuracy.
TheStreet.com Contributing Editor Christopher Edmonds caught up with Robbins recently to ask him about his methodology, his outlook for the markets in the coming year and whether or not he thinks, after a year of carnage in technology, the Superbull market remains intact.
Edmonds also elicited Robbins' predictions on interest rates and his favorite stock picks going into the New Year.
We hope you find Robbins' insights enlightening and, as always invite your feedback.
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Christopher Edmonds: Robert, as Chief Investment Strategist at Robinson-Humphrey, you have developed a rather unique analytical style, one that combines fundamental and technical analysis. While the combination of the two disciplines has always made sense to me, many firms still segregate the two. How did you come to blend two sometimes disparate disciplines together and how has that worked for you?
Robert Robbins: I started out as a fundamental analyst in the business. But I had been fascinated with the stock market all along and had been head of my investment fund in business school. And the logical place to start in the business in 1973 was in fundamental analysis, because technical analysis was of almost ill repute, you know, somewhere between wizardry, witchcraft and sorcery. So I started out with fundamental analysis. I would have done it that way to begin with, anyway, because the final driver of stocks, I think, are the fundamentals.
So I had always been interested in the market and its dynamics and I was frustrated with fundamental analysis. I realized that there were bigger factors that determined what stocks did. Everybody calls it market psychology, but when you get into it further, you realize that when you're analyzing a stock, you're analyzing the subgroup, the group, the sector and the market.
I realized the importance of technical analysis in my first years of researching stocks in the computer industry and then energy and a lot of different sectors. When I focused only on the company or just the fundamentals, it was just really very frustrating. Using technical analysis reduced my frustration by keeping me away from many stocks that declined.
That's one of the reasons I became a strategist. I thought I could contribute more as a strategist when I saw one of the consulting studies by William O'Neil showing that 80% of a stock's performance is not a result of its unique characteristics, but its shared characteristics. That is, its subgroup, group, sector and market. It seemed to me that is where you want to spend 80% of your effort, if you believe you can be equally successful at any of those tasks.
As the chief investment strategist at Robinson-Humphrey, that's what I've tried to do. I focus very heavily on the subgroup, group, sector and market dynamics, because that is an 80% predictor of movement in any particular stock.
Christopher Edmonds: That's very interesting. Can you break down the effect of each of the areas -- subgroup, group, sector and market -- and their average impact on price movement?
Robert Robbins: The subgroup is the largest single predictive component -- it represents 37% of what a stock does. The market is about 31%. The group and sector don't seem like they count for much, but that's after you've included the subgroup, which is within them. If you didn't have the subgroup, the sector would be key. If you just said how much is the sector against the market and the stock, the sector would be around 50%.
And you can see that in terms of the actual dynamics of our research department's performance or anyone's performance. If you pick the right sector, as you saw for two years, you do very well. For example, until this year, tech was it. There wasn't much other action in the marketplace. Well, that's the extreme of it, that it happened for two years. Since then tech has been out. Now you want to be in finance or health care.
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"Being contrarian is critical as a factor in my methodology."
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Christopher Edmonds: What about "bigger picture" issues? Don't the economy, broader market trends and economic policy play a big part in your market thesis?
Robert Robbins: I picked up a lot of the things along the way, especially an appreciation for the big picture. The market has a tremendous tendency to look at the end of its nose and to look at what happened yesterday and say that is what will happen tomorrow. But, I've found it quite helpful to go back, and, especially in terms of the critical factors in the stock market, to look at everything that is and could be relevant.
Especially, I want to look at the whole century of investing and find the most significant, most important dynamics of what works and what makes stocks go up and down. That's how I came up with this Superbull thesis. If I hadn't used the whole century chart and looked at the other Superbull stock markets, then I wouldn't have known how to identify this one right from the starting gate.
But I did. I was looking in advance for a Superbull market. That is especially the case because I saw what happens after previous Superbear markets and how they end. Something breaks the back of inflation. And you could see, in 1980, 1981 and 1982, that the fiscal and monetary authorities were starting to hammer inflation. And if you can do that after a Superbear market and get inflation in control and have disinflation, then you can have another Superbull stock market. So I was looking for it beforehand and was readily capable of identifying it and I've been super bullish for 18 years as a result.
Clearly, then, the big picture has been extremely important to my work. And to take a practical view of the big picture has also been very important in my analysis. A lot of people want to build something, build a reputation on a particularly fascinating insight and win the Nobel prize for developing some new indicator, or get equivalent recognition.
Christopher Edmonds: When developing your strategy and building your portfolios, what is your key focus?
Robert Robbins: I'm just trying to get performance. I'm just very performance-oriented. Hence, I just want to take a practical approach to using what works, and not try to develop some sort of indicator that I can hang my hat on. That's helped me a lot. That is, not to think that I'm going to be some sort of an inventive genius, because I'm not and I won't.
And I think my approach also is keeping it simple. That strategy rang home one day when one of the professors in business school at Dartmouth said, "Keep it simple." And I thought, gee, that sounds really great from the start, on everything. Why work harder? Why not work smarter? And, for me, I wasn't going to be able to do the kinds of mental gymnastics that some of the brighter, MENSA-like people would.
So far, that has worked extremely well. Many of my competitors who are much brighter will build a mountain or a skyscraper on a little molehill and then everything else is a wasteland in terms of their analysis. And many times, that leads to far-off forecasts that don't work. So looking for the critical factors in a practical way and a common sense way has been far more successful than trying to venture out and develop extremely creative or original ideas that, in many cases, aren't as reliable or accurate.
Christopher Edmonds: Taking a contrarian view of the markets has also been important in your analysis in the past. Why?
Robert Robbins: Being contrarian is critical as a factor in my methodology. You've got to listen to and look at the surveys of the market. Look at the bull-bear surveys and there is no question that the majority of people are bearish at every bottom of the market. And so you have to concentrate on forcing yourself to go out on a limb and to take a chance of looking really stupid.
Look at the current market, at the recent lows only 25% of futures traders were bullish. That means 75% of those trading the S&P futures were bearish. That was three bears for every one bull. That leads me to think, from a contrarian view, that the market is poised to rise.
So, I think being contrarian is important. I would also say having a respect for all of the broad consensus of views is key, because if I have a view, it's not worth anything if it's the consensus view. If it is the consensus view, it's discounted, and, in the marketplace, it's worth nothing. So I have to have my antenna out and be listening to what other people are thinking and have a pretty high respect for other people's views.
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"I think the probability of a recession is only one chance in 12."
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Christopher Edmonds: Let's wrap up the philosophical part of this discussion by returning to the fundamental vs. technical discussion. So often, there seems to be a real fissure between "fundamentalists" and "technicians." To you, which, if either, is more important?
Robert Robbins: The use of both tends to give the best results over time, at least that's my experience. The reason that tends to work is, again, a practical, humble insight and that you can't be right all the time on your fundamental views. There are so many bright people in this business, which is probably the most competitive business in the world. And, with so many opinions, you're fundamental analysis isn't always going to be right. You need a check.
Technical analysis tells you when your fundamentals are wrong and it gives you a double check. And, importantly, it gives you a way out before it becomes too costly. For example, if you're expecting something to happen, and the technicals -- supply and demand -- say the majority of investors think you're wrong and they're pushing the value the wrong way vs. your expectations, then you have to listen, and you have to say, at least for now, "I'm wrong." And you also have to consider that you could be completely wrong, are missing something or need to re-evaluate.
And that's what I've done recently, with the most frustrating time for my market forecasting in the last two years. I feel like my forecast has given people excellent guidance on every market move of more than 5% where we have either said, "Slow down, don't buy into the top, it's probably going down 5% or 10%." Or the opposite at the bottoms in the market. But now, we've been bottom-spotting, after the market was down 9% to 11%, and I've been asking myself, what's wrong. Well, it was technical analysis that helped me figure it out. I took a careful look at the Morgan Stanley High Tech index, which has dropped significantly and represents one-third of the market. When a third of the market drops three times as much as the broad market, it accounts for the entire market decline.
Christopher Edmonds: So, to your mind, technology is the key to deciphering current market trends?
Robert Robbins: Basically, but that is clearly a big portion of it. I figured I'd better start figuring out what tech is doing and I'll figure out what the market is doing. It's analogous with what happened in 1990 and the Persian Gulf War. I established that oil prices were the single event driving the stock market. So I concentrated on forecasting -- from a fundamental and technical viewpoint -- oil prices in order to try to get to a bottom in the stock market. The top of the oil prices would be the bottom of the stock market. That worked incredibly well. For me, today's challenge is when will the tech wreck stop wrecking the stock market? Even in the last few days, the decline in tech has been about three times the decline in the stock market. Tech has dropped to about 30% of the market, meaning tech represents almost all of the recent decline in the stock market.
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"Over the next 12 months, I think tech could be up only two-thirds of what the market is up."
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Christopher Edmonds: If there has been any period in the 18-year Superbull cycle, as you term it, that has challenged your thesis, 2000 must be among them. Yet you have remained steadfast in your bullishness. What are the characteristics that make you think 2000 has been a cyclical move or a "bull market correction" rather than a more fundamental slide from a bull to a bear market? It sure feels that way for a lot of investors.
Robert Robbins: Your question is well taken, because the decline has come so far and looks to be so close to the end of the year that it will be the first year in this 18-year-old Superbull stock market that both the S&P 500 and the Dow, including dividends, will be down. That's never happened before. In 1987, with the crash, one was up, the other was down; 1994, one was up, the other down.
My confidence is based primarily on the critical drivers of this Superbull market, which are monetary policy and fiscal policy. And monetary policy, in terms of the Superbull, is still disinflationary and that is key. That's the most important, critical factor to a Superbull stock market.
Second, we still have an anti-recessionary monetary policy. In contrast with what happened for decades, before 1982, when this Superbull started, when we had a cyclical or recessionary monetary policy that caused bear markets and recessions or growth recessions every four years. But I can't imagine the Federal Reserve would give up on either the disinflationary policy or the anti-recessionary policy.
So things are on track for the Superbull. Now, there have been bear markets along the way and this classifies as one of them in the Superbull context. If we look at the 43 years of Superbull stock markets in this century, we see that a decline of more than 11% is infrequent. It happens only an average of every three and a quarter years. So this decline now has been more than 11% and constitutes, therefore, by that definition, a bear market decline.
And we've had many deeper ones. As you know, the last one in 1998 was 19%. The one in 1990 was 21%, the one in 1987 was 36% and the one in 1983-84 was 17%. All those happened within the context of a Superbull market, so even if you have a much deeper decline, it doesn't necessarily mean that it's the end of the Superbull. It could be just another bear market decline.
So if Fed policy remains on track, then the logical question is, what other big problems have historically caused a Superbear market? Three of the four Superbear markets were a result of big tax and spend government policies. Fiscal policy. So, you ask, is fiscal policy in good shape? I think fiscal policy is in great shape. Actually, with the outcome of the election now known, it turns out the presidential candidate that's going to do less spending and less taxing is the one that won. He wants a tax cut, not a tax hike. And he wants less spending. So that's better on both counts for disinflation as a critical factor for Superbull stock markets.
Now, the Superbears were the big spending of World War I, the big spending of World War II and, of course, taxes go along with that, and the big spending of the Vietnam War and the War on Poverty, the Great Society spending programs. So those are the illustrations of three of the four Superbears we've had in this century.
The fourth Superbear was essentially caused by undeveloped and negative monetary, fiscal and trade policies. The Great Depression was caused by a one-third contraction in the money supply; we didn't understand how to manage the money supply back in the 1930s. It was caused by a tax hike that kicked the economy while it was down and stomped on it one more time. And then, to add insult to injury, you had a trade war. So the economy was hurt by less world trade. So all three engines of the economy were essentially cut off. And you had the Great Depression.
That explains the four Superbear markets of modern markets. Well, how can something that significant go wrong today? The easiest way that I can see something going wrong is not monetary policy, which I think is a lock. And it's not fiscal policy.
However, it is oil. That is our Achilles heel. We don't control our oil destiny. So if something happened to our relationship with Saudi Arabia or we acted militarily and there was retaliation that cut off our oil supplies, you could have $100 oil, a depression and the end of the Superbull. Then you would, no doubt, see a Superbear market.
Christopher Edmonds: Would it really take a $100 price tag on a barrel of oil to end the Superbull market?
Robert Robbins: Oh, it might be only $60 or $70, because, actually, once you start in a depression, energy demand declines and so it may not get quite that high. It might be about $70, it might not be as high as $100. But I think it is probably well over $50.
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"I think the S&P 500 is going up 25% over the next 12 months based on my estimate that the Morgan Stanley High Tech Index goes up 15%."
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Christopher Edmonds: How likely is the risk of an oil shock?
Robert Robbins: Well, I would say the risks of an oil cutoff of that magnitude are very low, because we fought the Persian Gulf War and the Saudis owe their independence to some degree to us. And, remember the war against Saddam as against the third largest army in the world at the time.
I guess the risk, to me, is maybe one chance in 10 over the next five years -- relatively low risk. That is certainly a lot lower than historical risks that we've had of monetary or fiscal policy going amok long term and causing a Superbear market.
Christopher Edmonds: In retrospect, though, this year, hasn't the increase in energy prices -- oil and, especially, natural gas -- weighed heavily on the economy and markets?
Robert Robbins: No, I don't think so. I think that's been more of a tertiary factor. The reason is that energy prices really haven't gone anywhere over the very long haul. And so when we bounce around like this, we haven't gone to incredible new highs. Second, because of the growth of the economy and so forth, energy is a relatively small portion of all prices and inflation.
And the popular notion that energy tends to be, in and of itself, a huge negative is not correct. That perception remains because of the horrors of the 1970s energy crisis. People still associate energy with the worst things that happen in the economy. But that's a generalization, as there were all kinds of other causes to that negative environment than just oil prices.
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Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds .
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