Categories: General Date: Oct 9, 2012 Title: A Bull in a Bear HiveHow public pessimism affects buying opportunities
I had an epiphany after watching Jim Cramer’s Mad Money on CNBC. For those of you not familiar with this show, you are not missing anything - it’s the Jerry Springer Show of investing. The thought of people make financial or buying/selling decisions after viewing it causes me disbelief. But this is not my point.
My epiphany wasn’t actually related to the show’s content at all, but to the callers’ responses and the commentary that ensued. I rarely participate in this type of mindless financial media but I admit, this time I watched the entirety of the show. What was different? Why could I not stop thinking about what I’d heard?
Primarily, the show and callers were not just bearish; there was palpable feeling that neared hatred of the capital markets and everyone who participates in them. The comments ranged from “the whole stock market is rigged” to “everyone is a cheat or in it for themselves.” This is my profession they are talking about and I cannot recall hearing comments with this level of intensity ever before in my career - and every caller/blogger was in agreement.
To understand my perspective, you should know that I began my financial career in 1996, which marked the height of the .com era. Between March 2000 and September 2002, the NASDAQ dropped by nearly 75%, with the other major indexes falling to almost half their original value in this same period. Conversations among investors at the time generally concerned whether they should get back in and what they should buy. The basic underlying emotion was hope. Assuming the call-ins and bloggers on Mad Money to be reflective of the general investing public, the feeling of hope and questioning from a decade ago are in sharp contrast to the underlying emotions of despair and anger of today. And this is happening after the market almost doubled from its 2009 lows. Logically, the emotions should be reversed!
The public seems to hate and fear equities more than ever, even after a comeback in portfolios. In reviewing history and talking to others with more experience than I, the consensus is that the only time cynicism has been this high was during the Great Depression itself. It was a time when public hatred of capitalism and the capitalist was the pre-dominant talk of the day. What’s interesting to investors to note is that it was at this time, from a market low in 1932 through FDR’s re-election in November 1936, that the equity market went up three and half times. Basically, investors missed a lifetime opportunity, and I see history repeating itself right now.
Today’s market must be what the 1930s felt like from an emotional point of view. Common stocks are still being sold off in large quantities by the average investor, even with wildly attractive valuations and huge dividend yields in comparison to interest rates. As of this writing, with the S&P 500 in the mid-1300s, stocks remain more undervalued in relation to bonds than they have ever been in my career (if you want the chart send me a note and I will get it to you). The dividend yield of the S&P 500 is substantially higher than the 10-year Treasury note; even so, investors are still selling much more than they are acquiring.
True, in the last quarter the S&P 500 lost about 2.5%. During this part of the year, U.S equity fund liquidations soared to $35 billion, up from $15.5 billion in the first quarter 2012. Net purchases of bonds in the second quarter were $59 billion, compared to $32 billion in first the quarter. This drop was after a six-month 30% run up in the S&P 500. There is no way to explain this but absolute fear from investors.
Earnings, cash flows, cash positions, dividend increases and stock buybacks continue to move forward while most investors flee after a small 2% setback. This is beyond normal and I believe represents a huge opportunity to be bullish and different. While it has happened before, you don’t see these types of opportunities often. When pessimism is at its peak, the best buying opportunities are created. Yet investors are continue to be bearish, doing just the opposite of what history implies.
Apparently, the American public fears and despises equities, and anyone or anything associated with them, more than it has in two generations. If history truly repeats itself, when the spell is broken (as it surely will be), the new emotion will be one of lament, for it’s likely we will never see an opportunity of this magnitude again. My Mad Money epiphany then, leads me to wonder if I am bullish enough.
Thanks for reading, as always your feedback or questions are welcomed.__________________________________________________________________________
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