Thursday, June 14, 2012

Retirement Blues

From 1979
One of the ways to tell if we are approaching the end of the secular bear market for stocks is to gauge investor sentiment.

Market bottoms are never made when sunny optimism abounds.  It is only when investor sentiment is approaching utter despair, and when all hope seems lost, that opportunity for serious gains arise.

I don't know whether we're at that point yet, but anecdotal evidence suggests that we are approaching bearish sentiment levels that often mark an important inflection point.

First, money continues to flee domestic equity mutual funds, as it has been doing for the past 5 years. Here's what  Bloomberg noted yesterday:

Investors withdrew $7.2 billion from American equity mutual funds during the five days ended May 23 after $178 billion of outflows in the previous 12 months, data from the Investment Company Institute in Washington show. 

 http://www.bloomberg.com/news/2012-06-10/wien-unbowed-by-u-s-equities-slump-joins-birinyi-seeing-rally.html

Bond yields are at historic lows, and the possibility of capital loss on longer maturity bonds is very real.

For example, a buyer of a 10 year Treasury note at 1.6% yield will have a negative total return for the year if rates "soar" to 2%.

Yet the stock market continues to scare investors, despite rising earnings expectations, reasonable valuations, and dividend yields that in many cases are far higher than bonds issued by the same corporations.

I think this article written in Toronto's The Globe and Mail newspaper sounded just depressing enough to merit attention from a contrarian standpoint.

Titled "The Sad End of Saving and Investing", the article reflects the utter despair being felt by investors around the world. Quoting a 55 year old investor named Murray Eastwood, the article notes the following:

Mr. Eastwood has a background in risk management and underwriting, which means he’s well equipped to understand why the global economy is in such bad shape today. His main points are as follows:
  • Bonds and guaranteed investment certificates offer returns below the inflation rate, and the differential has grown in recent days.
  • People who try for higher yields with longer-term bonds could get hurt if interest rates rebound.
  • The stock market is being pounded by the European banking crisis and a poor global economic outlook that has reduced demand for the resources so important to Canada.
  • Our energy industry is under pressure as a result of rising production of oil and gas in the United States.
  • Tax relief, at least in Ontario where he lives, is unlikely.
“It is very hard to remain positive about the magic of finance with this experience and the current outlook,” Mr. Eastwood wrote in his e-mail.

(The author noted that he contacted Mr. Eastwood to tell him that his thoughts were among the most depressing that he has read recently).

My contention is that eventually investors who are parking their retirement assets in bonds will realize that they are being played for a sap by governments around the world.  Low interest rates have allowed deficits to balloon with only a modest budget impact.