Fool.com: Dead Sea Prophecies (Fool On the Hill) August 23, 1999

FOOL ON THE HILL
An Investment Opinion

Dead Sea Prophecies

By Yi-Hsin Chang (TMF Puck)
August 23, 1999

The cover story of the latest Weekly World News warns of a "Dead Sea Prophecy," one that it claims the government doesn't want us to know: "Bible Scrolls Predict 2nd Great Depression in October! 'A billion people will be penniless -- and the Earth will feel the wrath of God!' Warning: Rich people are already stockpiling canned food and cash!"

Inside, the admonition continues: "Banks will collapse, money will be worthless -- and chaos will reign!" The article says that the U.S. is "on the verge of a devastating economic collapse far worse than the Great Depression of 1929!" (Don't you just love the liberal use of exclamation points?!!)

The Weekly World News quotes "noted economist and Bible scholar Dr. Frieda Rastelle" as the source of these prognostications. According to Rastelle, the Dead Sea Scrolls accurately predicted the Great Depression, and they predict a coming crisis that will strike in late October and be "far worse than the first."

While it's easy to laugh at and dismiss the supermarket tabloid's doomsday exploits -- I found no matches for Rastelle's supposed book The 2nd Great Depression at Amazon.com -- I admire it in a way as a funny parody of the many market predictions we see day in and day out on financial TV shows and in financial publications.

Certainly, Rastelle's apocalyptic predictions are ridiculous and extreme, but they are no less valid than the predictions of so many analysts and money managers out there -- the talking heads who irresponsibly mouth off as if somehow they can see into the future. They ply the same craft as those call-in psychics you see advertised on TV with their zany predictions.

Case in point: Last Friday, Ed Peters of Panagora Asset Management in Boston appeared on CNBC. He said definitively that the Federal Reserve will raise interest rates when the Federal Open Market Committee (FOMC) meets tomorrow in order to slow down the economy.

As a result, Peters predicted a 20% market drop -- that was what he called the "optimistic" view. The decline could be "much more severe than that," more along the lines of 35%. Currently just 20% of Panagora's U.S. holdings are in stocks, while 80% are in bonds, he said.

Peters could turn out to be right about the Fed action, but that doesn't necessarily mean an automatic 20% to 35% drop in the stock market. Of course, he could also be right about both. The operative word here is "could." This is purely a guessing game, and historically no one's been able to predict the gyrations of the stock market with any degree of accuracy. That's why market predictions are inevitably all over the map.

Take perpetual bull Ralph Acampora, chief technical analyst at Prudential Securities, who in early July raised his year-end Dow Jones Industrial Average target level to 12,000 to 12,300. At the time, the Dow traded around 11,200, and Acampora reasoned that "interest rate concerns are behind us for a while, and now we have improved earnings expectations ahead of us."

Later in the month, Acampora reiterated his prediction even though the Dow had fallen to around 10,800. His assessment was that many stocks had been oversold, and therefore investors should "buy on the dips."

It is often said that analysts and strategists should make big predictions and reiterate their view as often as possible. The thinking goes that at some point, you're bound to be right, and with a little luck and finesse, the media will turn you into a highly marketable household name should you one day hit the nail on the head. After all, no one will remember all the times you were wrong, only that you made one brilliant prediction at an opportune time.

Back in April and May, it took just five weeks for the Dow to reach 11,000 from 10,000 -- the fastest 1,000-point move to date. In contrast, it took the index a year to surpass the 10,000 mark after it first closed above 9,000 on April 6, 1998, though it took less than five years for the Dow to double from 5,000 in 1995 to 10,000 this past March.

The Dow and other market indices are inherently unpredictable, and it's a waste of time trying to pinpoint future targets, especially in the short term. Time is far better spent researching and understanding individual companies. In the recent market "correction" or "stagnation," several companies' stocks have traded at or near their 52-week high -- in some cases, their all-time high.

Instead of wasting time predicting the market as a whole or in part, as is the case with the Dow, focus on individual companies and your individual portfolio. Pay no attention to Dead Sea and other market prophecies.