Why is Market Cheerleading so Prevalent?

I'll admit it, I am a regular Kudlow & Company viewer, though not an everyday watcher. It may even be entertaining for the innocent bystander in the room with me to watch as my face gets red and veins start to swell and before long see me in a full blown debate with a tv screen cursing what else but the 1/2 hour to full hour of market cheer leading that is so infamous on the program. It amazes me how continually negative news keeps on emerging and Kudlow and his surefire pundits never miss an optimistic beat. Consider some key concerns on the long list of worries out there and ask yourself how this is possible:

• A housing market that could decline an additional 20%
• Estimates of up to a trillion dollars in write-downs for financial institutions
• Increasing unemployment, especially as Wall Street firms anticipate up to 25,000 in job cuts
• Deteriorating consumer confidence, with consumer spending possibly heading to minus two percent year of year. This is of course led by high debt burdens on consumers no longer able to tap into MEW's (mortgage equity withdrawls) because of declining home prices.
• Commercial real estate has already started to follow the housing market's lead; The Real Estate Epic Turns Another Page
• Major brokerage firms still cannot estimate how to value their "mark to market" assets
• Fed emergency lending programs Term Securities Lending Facility (TSLF), Term Auction Facility (TAF), Primary Credit Dealer Credit Facility (PDCF) have all failed to restore liquidity (solvency?) to markets

So why is it there are so many analysts and reporters that still remain so optimistic and ignorant? I referred to David Dreman's Contrarian Investment Strategies: The Next Generation to find myself some closure. What it comes down to is incentive, not necessarily ignorance. Let's take the example of what doesn't go into a security analyst's bonus calculation.

• Accuracy of profit estimates.
• Accuracy of performance estimates.

What is important to the analyst is effectiveness in sales force. The more commission business the analyst can soak up, the higher the analyst will be rewarded. "Buy" recommendations are given more rewards than "sell", but accuracy of predictions is not rewarded. Analysts that issue "sell" recommendations are faced with pressure from then banning him from future contact with the company. Even if the analyst is dead on, a sell recommendation can be costly to his/her career. The analyst is therefore advanced in his reputation by his marketing ability, not his forecasting ability. There is also a psychological "overconfidence" that analysts have. This is due to vast amounts of data that even though may not provide more accuracy, does provide more confidence in an analysts prediction. Furthermore, data can be mined to favor a one side of an argument while ignoring another. Take caution in "expert" opinion!

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