Balance Junkie » Investing

Revenge of the Dumb Money

2 Cents — Wed, 08 Sep 2010 09:45:31 +0000

It takes two to lie. One to lie and one to listen.

~ Homer Simpson

Trust has rarely been so tenuous. More and more of us seem to be doubting concepts and people that we once trusted implicitly. I guess that’s to be expected at major turning points. You can call it growing pains or tectonic shifting or just plain chaos. When change is afoot, we’re bound to have a little pain and even more confusion. Discomfort is natural, and shouldn’t surprise us. But it does.

We’re starting to see some major shifts in socioeconomic paradigms that have been in place for decades. In the 1980s, it became quite fashionable to invest in stocks, especially via mutual funds. Cocktail party banter was abuzz with whisper numbers and hot tips – until the crash of 1987. Although the 1987 experience ended up registering as little more than a speed bump on the road to much broader participation in the equity markets, it did serve as a bit of a warning shot.

We have seen a few more crashes since then, with several of them clustering together over the past decade. The most recent bullet whizzed by as recently as May 6th, 2010 when the Dow Jones Industrial Average fell 1000 points in a matter of minutes before regaining a lot of its losses almost as quickly. Subsequently dubbed the Flash Crash, that incident seemed to serve as a bit of a last straw for retail investors with smaller nest eggs to invest.

According to many flow of funds reports, a lot of these investors are simply taking their eggs and going home. They don’t want to play the game anymore. They feel like it’s probably rigged, and even if it’s not, it just seems like the rules change too often – usually not in their favour.

When the Generals Bail . . .

Retail investors are often referred to as “the dumb money”. They are the lowest-ranked soldiers in the army of investors. Professional investors frequently profit from them, selling to exuberant retail buyers near the top and buying from them as they panic out at the bottom. Although smaller retail investors are notorious for chasing returns, some studies show that wealthy and institutional investors often exhibit the same bad habits.

Even seasoned investment managers are starting to find that the investing game is just too hard these days. This is not the same market they traded decades ago. Stanley Druckenmiller and Paolo Pellegrini are the most recent members of a growing congregation of professional investors who have decided to throw in the towel.

Likewise, surveys indicate that many millionaires did not put much money back to work during the massive market resurgence from March 2009 to April 2010. They missed the rally, and in spite of the predictable I-told-you-so chiding from long only/long always investors and advisers, they don’t seem to care. They favour return of capital over return on capital. Most millionaires have worked very hard to earn their wealth and they would rather preserve it than put it at risk, even if it means accepting lower returns. More recent surveys show that the wealthy have turned cautious once again, and that they are looking for transparency, simplicity, and safety in their investments.

Who’s Left Once the Golden Goose is Gone?

Average consumers have been the proverbial goose laying golden eggs for retailers, banks, financial advisers, and governments. But what if they really do take those eggs and go home? Who’s left to buy the SUVs, swag, and stocks on which our economic growth has depended? Governments incurred a lot of debt bailing out financial institutions and automakers. Where will the tax revenues to service it (not to mention pay it down) come from?

Increasingly, it seems consumers are answering “I don’t know, but it’s not going to come from me anymore.” A recent USA Today article outlined the case for a lost generation of stock investors. Zero Hedge took a victory lap, citing a Financial Times article confirming “dumb money’s” resilience to the Wall Street siren song. They have been warning for quite some time that our economy has become a Ponzi scheme. Indeed, a subsequent post asked Can You Hear Me Now? It reported on the 17th consecutive weekly outflow from equity mutual funds.

Investors don’t want to hear about how the market always comes back. They no longer believe in 7% annual stock market returns. They don’t care if they’re only earning 2% in their savings account or 3% in a GIC. They have debt to pay down. They need to save for retirement. They have kids to put through school. They’re tired of being left holding the bag and they’re passing that hot potato right back to those bankers, politicians and CEOs.

So if the golden goose is no longer willing to play, how will Wall Street continue to run the game? A recent Bloomberg article described how Wall Street Needs an Off-the-Charts September to Rescue the Quarter. It looks like the big investment banks will really need to turn some special dials on those computers if their algorithms are going to pay off this time. Perhaps the dumb money sitting in cash will have the last laugh after all.

Have We Finally Arrived at Enough?

During the course of the last decade, as we watched spending and debt balloon into the stratosphere, I can recall many conversations with my husband in which we both wondered: When will it ever be enough? With all of the negative views I just cited from so many sources, you might think that we’ve reached that point. Or you might take the contrarian stance that the time for bearishness has passed. With so much bearishness we must be due for a rally right? Probably. But how long will it last if the changes in consumer attitudes are not temporary?

Many financial advisers will continue to tell us to stay the course. Don’t be emotional. Keep spending. We all need to do our part to stimulate the economy. Deficits don’t matter. Whether or not consumers actually see these purported pearls of wisdom as lies, it seems they are no longer listening. If Homer Simpson is right and it takes two to sustain a lie, perhaps some of the economic delusions to which we’ve been subjected are about to crumble due to lack of participation by those who are no longer willing to listen.

Perhaps we have finally arrived at enough. We’ve had enough of big homes, cars, and televisions. We’ve had enough of financial geniuses who steered our economy into a ditch and then asked us to do all of the heavy lifting needed to pull it out. We’ve had enough of grown adults spending like teenagers without any sense of future consequences, and then blaming someone else for their problems.

We don’t want to stay this course. We don’t have to keep spending. We are not willing to mortgage our future for the sake of present economic growth. Deficits do matter. Whatever they’re selling, we don’t have to buy it. We can keep our golden eggs and hopefully, pass them on to our children someday.

Have you taken your eggs and gone home, or do you think it’s time to double down and put more to work?

Is the Market Headed for a Rollover Accident?

2 Cents — Wed, 25 Aug 2010 09:45:38 +0000

Accidents, and particularly street and highway accidents, do not happen – they are caused.

~Ernest Greenwood

Accidents in the financial markets do not just happen either. They often result from conditions that persist for quite some time before some seemingly insignificant bend in the road causes us to veer off course and wind up in a ditch. How long did a chorus of critics warn of a bubble in the U.S. housing and structured finance markets before it actually popped?

In traffic parlance, a rollover accident is one in which a vehicle ends up on its roof or side, usually as a result of one of these factors: excessive cornering speed, tripping, collision with another vehicle or object, or traversing a critical slope, such as when a vehicle crosses a ditch.

Rogoff and Reinhart, authors of the book This Time Is Differentobserve that “what one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble.” (I’ll have a full review of the book for you on Friday.)

Bonds Keep Rolling

When companies or governments issue bonds, they mature on a given date. Some are very short term, maturing in only 30, 60, or 90 days. Other maturities can range from 1 to 30 years. Once the bonds mature, the corporation or government must pay back the bondholders’ principal in full. Next, the borrower will usually look to “roll over” those bonds by issuing new ones in order to fund their continuing operations. It’s sort of like how you need to refinance your mortgage once your term is up.

This is the proverbial bend in the road. Accidents can happen here. One of the problems is that banks and governments will be vying for financing at the same time, and this could raise the cost of capital for everyone, including small businesses and consumers. If fewer investors want to buy those bonds for whatever reason, the price will fall and the yield will rise, raising the cost of capital. In extreme situations where buyers refuse to step up to the plate at all, we would have a full blown credit freeze on our hands. We’ve seen what that looks like already and I’ll go out on a limb and say that no one wants to go there again.

When the European sovereign debt crisis was coming to a boil a few months ago, many worried that European countries and their banks would not be able to roll over their significant debt issues. The New York Times reported: Crisis Awaits World’s Banks as Trillions Come Due. “Banks worldwide owe nearly $5 trillion to bondholders and other creditors that will come due through 2012, according to estimates by the Bank for International Settlements. About $2.6 trillion of the liabilities are in Europe.” U.S. banks will need to refinance about $1.3 trillion over the same period of time. That’s a lot of paper for the bond market to swallow.

China has traditionally been a huge buyer of U.S. debt, but they have recently sold some of their holdings. Some worry that this means there will be less demand for the massive quantities of debt the U.S. will need to issue. A recent article from The Daily Reckoning explains why that may not necessarily be the case.

Will Short-Term Gains Lead to Long-Term Pain?

One of the recent borrowing trends is for banks to borrow money for shorter periods of time. By accessing the next-to-free short term money made available by global central banks, many financial institutions have been able to work on improving their balance sheets. They borrow money at near 0% rates and lend it out to individuals and businesses for longer terms at higher rates. It’s a great racket, if you can get into it.

According to the New York Times article, “government bank guarantees extended in response to the crisis also inadvertently encouraged short-term lending. The guarantees were typically only for several years, and the banks issued bonds to match.” What happens when those government guarantees expire? Governments can extend them, but what if the market loses confidence in the balance sheets of those governments? Many of the countries offering such guarantees aren’t exactly swimming in black ink themselves. That includes the U.S. and the U.K..

Why the Infatuation with Bonds?

The European stress test results seemed to defuse worries about a rollover accident, although many (myself included) felt that those tests were less than rigorous, to put it mildly. In the meantime, it seems that investors, both retail and institutional, can’t get enough bonds. Many reports point to rivers of capital flowing out of equity funds and into bond funds. As long as this continues, rolling over debt may not be a problem.

A recent Globe and Mail article inquired Whither the Bond Vigilantes? (The title was later revised to “Where Are the Bond Vigilantes?”, but I much prefer the original.) Bond vigilantes are supposed to hold governments accountable for their debt loads by demanding higher rates in return for putting their capital at risk. Not only have the bond vigilantes gone missing in action, but there seems to be a mob of bond groupies forming that just can’t buy enough debt to sate it’s appetite.

Jeremy Siegel recently warned that the bond market is a bubble. Wall St. Cheat Sheet begged to differ. Regardless of who’s right, bubbles can continue to inflate much longer than anyone thinks they can. This particular bubble is backed by the full faith and credit of the U.S. government. The Federal Reserve recently outlined its own rollover plans: it will use proceeds from maturing mortgage-backed securities that it holds to buy U.S. Treasuries.

It would be folly for any trader to fade the Fed. So with fixed income short sellers on a leash, the Fed providing the incentive for investors to continue to buy bonds, and most investors turned off by the stock market, it seems that the U.S. government will have no trouble issuing the trillions of dollars of debt it will require to finance itself – until it does have trouble. I’ll leave you with one last quote from Reinhart and Rogoff in which they explain “why financial crises tend to be both unpredictable and damaging“:

“Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence – especially in cases in which large short-term debts need to be rolled over continuously – is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! – confidence collapses, lenders disappear, and a crisis hits.”

They admit that economic theory doesn’t provide very much insight into the exact timing or duration of such crises, but when all of the elements are there, it’s pretty likely a crisis will occur at some point. It’s doubtful whether even the Federal Reserve can hold off real market forces forever – if such forces have not yet been permanently been relegated to the realm of folklore and mythology.

Do you think the market is headed for a rollover accident?

Why the Economy Most Certainly IS Relevant to Investing

2 Cents — Fri, 20 Aug 2010 09:45:23 +0000

Torture numbers, and they’ll confess to anything.

~Gregg Easterbrook

Update: This article was featured in the Carnival of Financial Planning 08-27-2010 posted at The Intelligent Speculator. Thanks!

I hadn’t planned on posting today since I’m supposed to be on vacation. But I saw an article last week that I just had to comment on, so I decided to put up a little Friday Food for Thought today. The article in question claimed to explain Why the Economy is Not Relevant to Investing.

Some of you will read that title and immediately decide that the premise is ridiculous. Still, if you’re as curious as I am, it’s just ridiculous enough to make you want to read what the author has to say. I’ve written before that economic information is like a financial weather forecast and I’ve done my best to articulate Why You Should Care about Economics. This article didn’t change my opinion on any of these issues.

My aim is not to discredit the author here. In fact, he is a CFP (Certified Financial Planner) and CFA (Certified Financial Accountant) and is therefore theoretically much more qualified than I to discuss these matters. I just want to point out the other side of the debate. After that, it is (as always) up to you to decide where you stand.

It’s the Economy, Stupid

This catch phrase from U.S. President Bill Clinton’s 1992 campaign has bubbled up in the headlines again as elections approach south of the border. Many believe that the state of the economy will determine which party is more successful this November. But does the economy have anything to do with stock market performance?

I’ll quote some of the arguments presented in the article in question and offer a brief rebuttal for each:

“most investors buy and sell investments at the wrong times . . . because they base their decision on a mainly irrelevant factor – their outlook for the economy.”: I actually agree that many investors buy and sell at the wrong times, but I don’t think it’s because they’re using the economy as a guide. It’s usually because they are not following a robust trading system that includes a disciplined exit strategy – or because they are listening to people who tell them that buy and hold is the only intelligent investment strategy.
Next, the author explains that “there are 2 main reasons why the economy is not really relevant to investing”:

1. “The stock market is the head and the economy is the tail.” The idea here is that “the stock market forecasts the economy, not the other way around.” On the contrary, history is replete with examples where the markets have gotten it wrong. Markets rallied hard from 2003 to 2007 even as the U.S. housing market was beginning to implode. Perhaps it could be argued that the bond market got it right, but the stock market was way off the mark. It didn’t correct until the financial system became crippled under the weight of loans supported by fantasies and fraud.

2. “Expectations of how the economy will perform are already built into the price of stocks.” Again, that may or may not be the case at any given moment, but it is not always, or even often, true. Further, “expectations” and reality often diverge quite radically as we have seen repeatedly over the course of history. Was the 2007 stock market pricing in the calamity that befell the economy in 2008?

‘A “double-dip recession” probably won’t happen this year. How do I know? Because the stock market went up last year!’ Setting aside the potential conflicts presented by someone who claims the economy is irrelevant making economic predictions, I can offer another reason why a double-dip recession won’t happen this year: The first recession never ended. The “recovery” that we’ve seen over the past year or two was the result of unprecedented government interventions whose effects are now fizzling. The stock market went up in 2007 too. The economy sank into a near-depression in 2008.
“You can predict the stock market more accurately by simply always predicting it will go up!” Seriously? Here’s where the number torture comes in. The author says that “in the last 25 years, the Canadian and global stock markets have been up 76% of calendar years and the U.S. market has been up 72% of years.” The key here is to realize that he’s talking about the performance of calendar years in isolation. So any given up year may have been preceded by a year that was down enough that the market still does not recover its losses in the up year. That’s how the market can have very large moves over a decade and still end up nowhere at the end of it. (That’s called a secular bear market and that’s what we’ve got on our hands right now.)

David Rosenberg recently pointed out some of the reasons this type of thinking won’t work in today’s investing environment:

“What the bulls still refuse to see is that we are in an entirely new paradigm and that the old rules of thumb are rarely, or ever, going to be able to be relied upon, as was the case in the credit-expansion days of yore. There is simply too much debt overhanging the U.S. household balance sheet, the largest balance sheet on the planet. Despite the deleveraging efforts to date, the process of balance-sheet repair is still in its infancy”

I will grant that the stock market and the economy rarely move in lockstep. Economic information is definitely not the only information investors need to be successful, but to exclude it altogether is just foolhardy. I’ll leave it up to you to decide whether you want to trust your money to a professional adviser who tells you to ignore the economy based on arguments that are specious at best.

What’s your view? Is the economy irrelevant to your investing plans?

Investor Sentiment Survey: Ian’s Response

2 Cents — Fri, 13 Aug 2010 09:45:10 +0000

This is a guest post by Ian, who was kind enough to share his responses to our recent investor sentiment survey, in which I asked Have You Lost Faith in the Markets? These are his responses to the 10 questions I asked:

1. Do you feel differently about investing than you did 5-10 years ago?

Yes. I once felt that stock markets were too large to be manipulated – until the crash. The lack of enforcement of regulations means just about anything goes, especially in an environment where the self interest of the power players comes first.

2. If you are new to investing, are you reluctant to get started?

Not new to investing.

3. Have the market crashes of the past 10 years changed your view of investing?

Yes. I was amazed at the number of financial “experts” whose only advice was to “Stay the course!” That is until people suffered considerable losses to their life savings. Then the advice became,”It’s too late to sell now!” It taught me that Buy and Hold is, really, a marketing strategy and, by no means, an investment strategy.

4. Do you trust our government and corporate leaders to act with integrity?

The reason people don’t vote is because they don’t trust politicians in the first place. Why would this time be any different? Too many corporate leaders have already sold out. Not hardly.

5. Are you confident that the financial system is repaired and the economy will recover?

No, the repair has hardly begun. Borrowing is what made a crash out of what otherwise would have been a recession. I can not think of any time in history where anyone used more debt to solve their debt issues. You probably have seen those people on the reality TV shows who are in debt beyond all reason – its called denial. But yes, the economy will recover, eventually.

6. Do you believe today’s markets are structurally different than they were 20 years ago?

Totally. The use of computers to disseminate information, execute trades and create market derivatives has totally changed the structure of the markets. Today, prices quickly adjust to news from anywhere on the planet. They react more quickly than ever, reducing the window of opportunity while increasing volatility.

7. Do you think it’s realistic to expect average annual returns of 7% or better from the stock market, or do you embrace the New Normal paradigm of roughly 2% returns?

In spite of my answer to question 6, I still believe returns in excess of 7 percent are possible. There are products which make money in down markets as well as up. Even a market trading in a range for a period of years has uptrends and downtrends which, while going nowhere, afford us twice the returns.

8. Do you think bonds are any safer than stocks given the age of the current bond bull market?

I believe bonds remain safer, but if we get either hyper inflation or deflation all bets are off!

9. Have you changed your retirement plans based on your answers to the above questions? Will you do so now?

Yes.

10. If you are indeed feeling less confident in the markets, what would it take to restore your trust?

When somebody demonstrates to me they are more interested in me keeping my money than they are in taking it from me, I will begin to trust. Let’s just say I am not holding my breath. They say to keep your friends close, and your enemies closer. I will continue in the markets, but I don’t trust anyone to look after my money without my help.

I wonder how many of you would echo Ian’s sentiment that “Buy and Hold is, really, a marketing strategy and, by no means, an investment strategy”? Recently, Danielle Park of Juggling Dynamite has posted that trading volumes do not support price gains made in July and then asked Where Have All the Buyers Gone? It seems that buyers are either on vacation or purposely not participating in this market. Perhaps, like Ian, they have taken matters into their own hands and are waiting for a show of integrity.

My thanks to Ian for sharing his thoughts here. If you would like to do the same, leave a comment on this post or the original.

Investor Sentiment Survey: Marc’s Response

2 Cents — Mon, 09 Aug 2010 09:45:20 +0000

This is a guest post by Marc Saunders, who was kind enough to share his responses to our recent investor sentiment survey, in which I asked Have You Lost Faith in the Markets? These are his responses to the 10 questions I asked:

These are some good and thought provoking questions that everyone should answer for themselves before they ever get near a market. I could write book based on these, but I’ll try to be short and pithy:

1. Do you feel differently about investing than you did 5-10 years ago?

No. I feel like I always have. If you study the market (US market) going back to the 1800s, you’ll see it’s no different than it ever was… it goes up, down, and sideways. The only difference is that now we’re in a secular bear market, so we can expect a lot more volatility, and a lot more of the down.

2. If you are new to investing, are you reluctant to get started?

Been doing it awhile. Wouldn’t get in now if you paid me. A secular bear is not a smart time to gamble, and there are better ways to make more with less risk.

3. Have the market crashes of the past 10 years changed your view of investing?

No, this is typical secular bear behaviour. The secret is to use the market in a way that’s appropriate for the times you live in. If you invest now as though it was 20 years ago, you’ll get killed. History shows us that very clearly.

4. Do you trust our government and corporate leaders to act with integrity?

No. Never have and never will. The government is in it for power, and business is in it for profit. Neither are there for you or me. It’s a tough lesson, but one worth learning. However, I’m American, and your experience may be different.

5. Are you confident that the financial system is repaired and the economy will recover?

This problem has been building for a long time. What we are seeing now is the fallout and cleanup. The economy will recover, but it will not be the same as it was 20 years ago. We can look to Japan for an example of that. Times change… we can’t hold onto the past.

6. Do you believe today’s markets are structurally different than they were 20 years ago?

Not really. The market’s not different, the times are different. The market isn’t about numbers, it’s about people and the times they live in. It’s the times that have changed. Demographics and psychology plays a huge role in market behaviour.

7. Do you think it’s realistic to expect average annual returns of 7% or better from the stock market, or do you embrace the New Normal paradigm of roughly 2% returns?

No one knows, but if history is any indication, between 2% and 4% sounds about right. And who am I to argue with Bill Gross… he’s an investing genius.

8. Do you think bonds are any safer than stocks given the age of the current bond bull market?

Bonds are inherently safer than stocks. There’s just no comparison. That doesn’t mean they’ll give a better return, just that they’re safer.

9. Have you changed your retirement plans based on your answers to the above questions? Will you do so now?

No, my retirement plans don’t involve traditional market strategies, or necessarily traditional markets at all.

10. If you are indeed feeling less confident in the markets, what would it take to restore your trust?

I have complete trust that the markets are just what they have always been, and I have total confidence that the markets will act just like they always have. This is the way markets always behave in a secular bear market. Trust shouldn’t be the issue… education is the issue.

We’re starting to see more articles pop up lately about investor distrust in the markets, and I can certainly see how many investors may have lost faith in some of the people who regulate the markets. But perhaps Marc makes a good point. Maybe markets are just behaving the way they’re supposed to in a secular bear market and some of us just haven’t acknowledged the shift from a secular bull to a secular bear yet.

Thanks to Marc for sharing his ideas here. If you would like to do the same, leave a comment on this post or the original.

Why the Market Could Be Lower … But Isn’t

2 Cents — Fri, 06 Aug 2010 09:45:21 +0000

There’s a saying among prospectors: “Go out looking for one thing, and that’s all you’ll ever find.”

~ Robert Flaherty

Update: Thanks to PT Money for selecting this article for the Best of Money Carnival #63!

I’ve written a lot about how financial bubbles, socioeconomic bubbles, and over-leverage in the economy may have an adverse effect on markets in the future. My last article asked Have You Lost Faith in the Market?. (If you haven’t already, please take a look and respond to some of the questions raised in the comments section or via email.) I do tend to be pretty bearish, and I’ll probably stay that way until some of these excesses work themselves out and our financial system achieves some proximity to equilibrium.

But this blog is about balance, so I try to actively search out articles and viewpoints that do not match my own. It’s so easy to get drawn into the type of data mining to which the opening quote refers, so today I’m going to try to sum up some of the bearish arguments out there, but I’m going to make an extra effort to point out some arguments for the bullish case too.

Why the Market Could (Should?) Be Lower

The bearish case has received more attention than usual lately. Maybe we’re finally letting those grizzlies wear the white hats. In any case, here’s a brief summary of some of the reasons why the market could or should be lower:

Excessive Debt: I’ve written quite a bit about the tremendous problems we face in terms of servicing massive debt loads at all levels of the economy, so I won’t go into a lot of detail here. I would just like to point you to an article posted at Zero Hedge that described Nassim Taleb’s argument that government debt is becoming a pure Ponzi scheme.
Deteriorating Economic Fundamentals: About 80% of the economic data have either turned lower or disappointed compared to expectations over the past couple of months. Recent underachievers include U.S. GDP, factory orders, durable goods, and pending home sales.
Questionable Earnings Beats: One of the positives we’ll include below is the mainly good news out of the corporate sector during the second quarter earnings season. Skeptics point out, however, that many companies beat on the bottom line while revenues continue to disappoint. The results of the financials in particular have been called into question by Meredith Whitney and others on the grounds that earnings were padded by decreasing loan loss provisions. It’s possible that these banks may have to increase them again in the near future as they still hold loans on their books that should be marked much lower.
Political and Regulatory Uncertainty: Many corporations are reluctant to put capital to work expanding their businesses and hiring workers because they’re unsure what the regulatory environment will look like over the next few months, and maybe even years. Yes, the health care and financial reform bills passed in the U.S., but those bills only provide a rough framework with no real details on what the operating environment will look like down the road. Further, the continual debate over whether the Bush tax cuts will be allowed to expire or not only adds to the uncertainty. It’s pretty hard to make any decisive moves in a game where the rules are still on the drawing board.
Jobs, Jobs, Jobs: Even the most ardent optimist will usually admit that no one will feel really good about the economy until we see some decent job growth in the U.S.. This post will go live before the Friday jobs report, so we’ll see what kind of information that brings.

Why the Market Isn’t Lower

After reading the bearish case above, you may think that there are no reasons for the market to be exhibiting the relative strength that it has lately. But there are a few good things happening out there and we’ll focus on those in this section. Even David Rosenberg came up with 17 Reasons to Be Bullish about the Markets!

One commentator that’s usually pretty far over on the bullish end of the spectrum is technical analyst Leon Tuey. He believes that a secular bull market began in October of 2008, and often likes to taunt the bears with questions like Why Isn’t the Market Collapsing? Mr. Tuey (not surprisingly) played the bull in our last bulls vs. bears article back in April.

More recently, Wall St. Cheat Sheet has been doing battle on behalf of the bulls, offering 5 Reasons the Long-Term Bull Will Resume and 4 Huge Catalysts That Could Awaken Animal Spirits on Wall Street. I’ll sum up these bullish factors for your consideration here:

Europe’s Handling of the Recent Sovereign Debt Scare: The argument here is that the stress tests “were just harsh enough as not to be seen as a farce.” I happen to be one of those who did believe they were a farce, but the market’s positive reaction indicates that most participants disagreed with me and others on that.
Positive Second Quarter Earnings Reports and Improved Sentiment: Whether the reports were positive relative to easy comparables or not, earnings were indeed pretty positive overall, and that has contributed to a boost in confidence for some market players.
Downside Leaders GS & BP Have Stabilized: Goldman Sachs and BP seem to have recovered from the negative news spirals in which they were both caught for a while.
S&P 500 Traced a Higher Low: The charts show that the S&P 500 may be exhibiting the early characteristics of a change in trend.
Dr. Copper’s Economic Prognosis is Positive: The price of copper is widely viewed as a good mirror of economic activity and its chart has turned positive as well.
GM Rising from the Ashes: Recently announced auto sales were pretty positive overall, and GM is looking to raise money through an IPO. (I have issues with a taxpayer-funded bankrupt company accessing the capital markets, but there’s no disputing that auto sales have improved.)
Cheap Debt . . . Again: It’s definitely cheap to borrow money again. Whether or not that’s a good thing is very debatable.
Justice Served to Crony Capitalists: Although we haven’t seen a lot of perp walks in the wake of the financial crisis, the idea here is that they’re coming, and when they do, that will boost confidence in market integrity.
Job Creation May Surprise Sooner than Bears Think: We may find out whether this is correct or not when the U.S. Nonfarm Payrolls number is released this morning.
QE2: Many believe that no matter how difficult economic conditions become, global central banks can and will come to the rescue with as much Quantitative Easing as it takes to turn things around.

OK. So there you have some bullish bullets. There’s just one more outlook on the markets that I’d like to share with you. It’s ultimately bearish, but calls for a near-term rally. This one comes from Charles Hugh Smith, who offers this sunny prediction: Things Fall Apart, But Not Just Yet. This article explains the effects of feedback loops and cycles on the macroeconomic landscape and reminds us that states of disequilibrium can last for quite some time before “the sand pile suddenly cascades”.

Mr. Smith also offers some interesting thoughts on whether the stock market will crash before mid-term elections in the States. He points out that historical data show that markets are typically weak in the year leading up to the mid-term elections. But he thinks that we may actually see a decent rally as the administration needs the market to hold together until the elections are over.

If you think he’s talking about a few well-placed phone calls that somehow result in a nice boost that conveniently carries the S&P futures through some key resistance levels and triggers program buying by the machines, you’re right. I know a lot of people don’t want to think that this might be allowed, but I’m not certain that it’s entirely inconceivable. “After all, propping up the market as a proxy for the U.S. economy has been the strategy all along, and the worst time for the strategy to collapse in a heap is right before the mid-term elections.”

Whether you’re a bull or a bear, I hope the articles I’ve shared with you here help you think through your own views. As always, I’d love to hear them.

Have You Lost Faith in the Market?

2 Cents — Wed, 04 Aug 2010 09:45:15 +0000

Put not your trust in money, but put your money in trust.

~ Oliver Wendell Holmes

Our financial system operates on trust. When you put your money into a bank, you trust that it will be there when you want to take it out. When you put money in the stock market, you expect ups and downs, but you also expect that over a 20 year period you will have more money to take out than you originally put in.

There have been a number of articles lately indicating that the average investor is pulling money out of the stock market, and there are also a number of theories on why that might be happening. We’ll go through a few of them here, and then I’d really like to get your thoughts on some key questions as it’s not all that clear to me that this disenchantment with the markets is very widespread (yet?). I still read articles everyday reminding us that this economic cycle is no different than any other, and that we need to stick to our plan, ignore our emotions, and worship at the stocks for the long run altar.

Retail Investors Heading for the Exits?

A recent Wall Street Journal article announced Small Investors Flee Stocks, Changing Market Dynamics. According to the author, “[s]mall investors’ faith in stocks, which surged in the 1990s, has collapsed since the technology-stock debacle and the Enron and WorldCom scandals of 2000-2002. The 2007-2009 financial crisis only made things worse. Now, the pullback among ordinary investors means they are a declining force in a market that is increasingly dominated by professionals.”

A few of the reasons cited for increasing mutual fund outflows are:

disillusion with large institutions like banks, corporations, government, and political parties
worries about the enormity of the U.S. debt
poor stock market returns over the past decade, including two significant bear markets
increasing volatility
the May 6, 2010 flash crash, which reflects structural changes in the equities markets leading to a loss of confidence (I wrote about similar themes in Today’s Markets: Not Business as Usual and 5 Investing Challenges for the Next Decade.)

In short, an increasing number of investors have lost faith in the integrity of the markets and those who operate and regulate them.

What If It’s Still Broke?

I fully support the old if it ain’t broke don’t fix it model. But . . . what if we tried to fix it and it’s still “broke”? One article summed up the views of 3 prominent economists in its title: World Economy: That Sinking Feeling. The better part of the article is spent reviewing many of the ideas put forth by Joseph Stiglitz in his recently published book called Freefall. (Marc Faber and Nouriel Roubini are also quoted.)

Mr. Stiglitz argues that, leading up to the crisis “America’s financial markets had failed to perform their societal functions of managing risk, allocating capital and mobilizing savings, while keeping transaction costs low. Instead, they had created risk, misallocated capital and encouraged excessive indebtedness while imposing high transactions costs.” He further argues that, in spite of having averted a financial collapse for now, governments have done nothing to curb the practices that lead us to the precipice in the first place. In short, the system is still broke, in every sense of the word.

New Math for the New Normal

By now, most people who follow the financial markets are very familiar with the New Normal thesis, articulated by Bill Gross and Mohamed El-Erian of Pimco. They postulate that, for the next decade or more, we will experience a period of slower economic growth as we work off the many excesses that have built up over the past couple of decades. Many of us, including institutions like pension funds as well as individual investors, have yet to factor this new reality into our retirement planning models.

Pop from Pop Economics recently wrote about New Normal Math: How Your Investing Plans Must Change. The article goes through some of the investment return assumptions that were formerly taken for granted and now look utterly imaginary. He suggests 3 ways to deal with this reality check:

Save More: Most of us will need to boost our savings rates by quite a bit in order to make up for the shortfall in investment returns.
Retire Later: You can boost your retirement savings by working until you’re 70 rather than 65 or younger.
Earn More: This is the one that Pop thinks we’re going to be hearing a lot more about in the years to come.

In short, we need all to rethink our retirement planning models.

Who’s the Dumb Money Anyway?

Moving Out of Equities is Felix Salmon’s commentary on the WSJ article mentioned above. He argues that investors may not be leaving the stock market because they want to, but because they have to. Many are saddled with a lot of debt and are no longer able to draw down on their home equity. In fact, some investors are selling some of their equity portfolios in order to deleverage and get their personal balance sheets in order. (See Should You Take Money Out of RRSPs to Pay Off Debt?)

Many pundits refer to retail investors as the “dumb money” because they often lag the market, buying after a huge run and selling into big declines. But Mr. Salmon wonders if the supposedly smart institutional investors will be forced to become followers as individual investors liquidate equity positions, forcing funds to sell in order to meet redemptions. He further wonders if maybe we haven’t yet seen a true capitulation from equity investors as many still view stocks as “something which can and should return 8% a year, despite the fact that they’ve done nothing of the sort for the past decade.”

In short, the large institutions that dominate the market will eventually need to reflect the market sentiment of the average investor.

Your 2 Cents: Market Sentiment Survey

I’d like to get an informal survey of your opinions on some of the issues raised here. If you have a relatively short comment, go ahead and leave it in the comments section below. If you want to write something a little more lengthy and formal, please send me an email. I might even publish your thoughts as a guest post (with your permission). If you happen to have a blog of your own, go ahead and post your views there.

10 Questions for You to Ponder

Do you feel differently about investing than you did 5-10 years ago?
If you are new to investing, are you reluctant to get started?
Have the market crashes of the past 10 years changed your view of investing?
Do you trust our government and corporate leaders to act with integrity?
Are you confident that the financial system is repaired and the economy will recover?
Do you believe today’s markets are structurally different than they were 20 years ago?
Do you think it’s realistic to expect average annual returns of 7% or better from the stock market, or do you embrace the New Normal paradigm of roughly 2% returns?
Do you think bonds are any safer than stocks given the age of the current bond bull market?
Have you changed your retirement plans based on your answers to the above questions? Will you do so now?
If you are indeed feeling less confident in the markets, what would it take to restore your trust?

I hope that many of you will take some time to answer these questions and share your thoughts with us!

Cash: Is It Trash or King?

2 Cents — Fri, 30 Jul 2010 09:45:17 +0000

A nickel ain’t worth a dime anymore.

~ Yogi Berra

Update: This article was chosen for the Best of Money Carnival, #Sexty-Two at Budgets Are Sexy. Thanks! It was also included in the first ever Carnival of Wealth posted at Personal Dividends. Thank you!

When we looked at the current pros and cons of investing in commodities and real estate, it became quite apparent that there are some pretty good arguments on both sides of the debate. We often hear contradictory truisms. Cash is trash. Cash is king. Which is it?

The correct answer is likely “it depends”. There are times when it’s prudent to hold more cash, and there are times when it makes sense to move more money into riskier assets like the ones we’ve been discussing this week. Today, we’ll take a look at the case for each and hopefully help you decide where you want to be on the cash spectrum.

As in most debates, there’s a little truth in each extreme, but the greatest knowledge lies in the middle. Further, the best cash allocation for me may not be the best for you. A lot will depend on your unique financial situation and your views on the macroeconomic climate. With those disclaimers out of the way, let’s get right into the Trash vs. King debate.

Cash Is Trash

Here are the most common arguments for holding less cash, as opposed to other assets like stocks, bonds, real estate, or commodities:

By far the most frequent (and valid) argument is that returns on cash may not outperform inflation, leading to negative real returns.
You can achieve a much higher return on your money in just about any other asset class as long as the economy is performing reasonably well.
Cash yields (especially in money market funds) are particularly pathetic right now, running anywhere from a fraction of a percent to 2% for some high interest savings accounts.
If inflation spikes, the purchasing power of your cash will fall, so you will be able to buy less stuff for the same amount of cash.

Cash Is King

Here are the most common arguments for holding more cash:

Cash is the safest investment, and often comes with a CDIC (or FDIC) guarantee. (Money market mutual funds are not guaranteed.)
If deflation is the order of the day, cash is the place to be.
Economic slowdowns and volatility can lead investors to reduce risk by selling other asset classes, thereby driving their prices down significantly. Cash doesn’t usually experience these big swings.
If you don’t hold a decent amount of cash, you won’t be ready to buy when other asset classes get hit.

Royalty or Rubbish?

In the end, how much cash you choose to hold will depend on a few main decisions:

Your view on inflation vs. deflation.
Your views on economic growth.
Your risk tolerance.

There have been a number of good arguments put forth on the first two issues, with some arguing that the stock market is about to rally again, and others firmly staking their tents in the Japanese deflation camp. Your position on these pivotal issues will likely determine the percentage of cash that you will hold. But perhaps more important is your position on number 3.

Which is more important to you: preservation of capital or higher return on your investments? If we’re all honest with ourselves, we would probably unanimously agree that we really want both. Unfortunately, that’s not how it works. By determining your cash allocation, you’re really putting a number on each. Obviously, the older you are, the higher your cash allocation should be.

Regular readers already know that I favour capital preservation right now. I tend to be in the deflation now, inflation later crowd. I see the problems presented by high sovereign and consumer debt levels as a threat to the global economy and financial stability. I think it will take some time before we can work off the excess capacity and leverage in the financial system. While I definitely see the potential for reflex rallies in the markets, I still believe that capital preservation should be the order of the day until a) we understand the length and depth of the current deflationary turn and b) the global deleveraging process is closer to being completed.

The Ultimate Diversifier

I recently wrote that these markets currently offer no respite in diversification because of the increasing correlations within and between asset classes. That’s another reason I favour cash at the moment. It’s the ultimate diversifier. (I know that’s not a word, but if the President of the United States can say “decider”, I can coin the term “diversifier”.) The one certain way to reduce risk in your investments is to simply increase your cash allocation. Stocks, bonds, commodities and real estate can suffer large capital losses relatively quickly when risk levels are elevated, as I believe they are now.

I’ve heard the argument before that holding high levels of cash is actually riskier than holding a diversified portfolio of high quality stocks and bonds, but I’ve never been able to make myself believe it. Even if inflation rises, reducing the purchasing power of my cash, interest rates will rise to compensate for that. The interest rate-inflation differential would have to be pretty huge to compare with the 20% plus drop in stocks or other asset classes that is possible.

Now I’m not advocating a 100% cash position for everyone, although my personal accounts are close to that level at the moment. I’m just saying that there are some pretty substantial risks out there right now, so shuffling your mix of equities and bonds probably won’t offer the same risk reduction bang you can get by shifting more bucks into cash.

(Disclosure: I hold more than 90% of my money in cash at the time of writing.)

What’s your view on cash? Trash or king?

Commodities and Real Estate: Pros and Cons

2 Cents — Wed, 28 Jul 2010 09:45:00 +0000

No man acquires property without acquiring a little arithmetic also.

~ Ralph Waldo Emerson

Update: This article appeared in the Carnival of Financial Planning #153 at The Skilled Investor.

We continue our look at the prospects for various asset classes in the current market environment today with a survey of the commodities and real estate landscape. Both of these are usually considered hard assets. As Dennis Gartman always says, “if you drop them on your foot, they hurt”.

Generally speaking, hard assets like commodities and real estate tend to appreciate during inflationary times and depreciate during deflationary climates. So your view on whether to allocate money to these two may hinge on your position in the inflation vs. deflation debate. I tend to be in the camp that says we are currently in a deflationary environment, and likely will be for some time. But there is definitely the potential for inflation to rear its head down the road depending on the actions taken by monetary authorities.

Commodities: Will It Be the Elevator or the Stairs?

There’s an old saying on the trading floors that commodities take the stairs up, but the elevator down. Uptrends are usually gradual and orderly, whereas corrections can be fast and steep. Over the past decade or so, however, it seems like commodities markets are a lot more volatile in both directions. I’m not sure if it’s the number and complexity of ways to gain exposure to commodities or not, but the rise in volatility does seem to coincide with the proliferation of ETFs and derivatives.

Your choice of investment vehicle for your commodity exposure may determine your success as well. You can buy stocks in companies that mine or harvest various commodities like oil, gold, copper, or grains, or you can trade futures on the individual commodities. You can buy ETFs that can track a basket of commodity-producing companies, or a single commodity like gold itself. Just be aware that funds that track commodities don’t always track them as closely as you might like.

Here are some reasons that you may (or may not) want to put money into commodities right now:

Pros

Growth in emerging markets like China and India may fuel demand for everything from oil to potash.
If central banks monetize debt in order to avert a sovereign debt crisis, inflation could spike, taking commodities with it.
If the U.S. dollar (in which all commodities are currently denominated) falls, commodities usually rise.
If investors lose confidence in fiat currencies, they may flock to commodities, especially gold.

Cons

Commodities can be very volatile, and it’s easy to get shaken out of your positions.
If deflation takes hold for an extended period of time and the economy fails to recover sufficiently, commodity prices will fall.
If the U.S. dollar rallies because traders lose confidence in other currencies like the Euro, the Pound, or the Yen, commodities will likely suffer.
If there’s even a hint of growth slowing in China or other emerging markets, traders tend to sell commodities first and ask questions later.

It would be easy to spill a lot more pixels on each commodity individually, as each one has unique characteristics. These are meant to be generic guidelines for investing in commodities. Given my view that deflation is the main worry right now, I favour a cautious approach to commodities. Still, the longer term growth story for commodities is undeniable. The supply of most commodities is, after all, finite.

If you don’t mind volatility and are a pretty agile trader, you might consider a small core position in your favourite commodity companies or ETF (bought on a pullback, of course). You can always allocate some cash to trade the swings as well, but there’s no shame in sitting out for a while if you don’t have a trader’s disposition, or can’t afford the increased risk.

Real Estate: Location, Location, Location

It’s hard to talk about real estate as a single asset class, as prices can behave very differently depending on the specific market you’re discussing. As we all know, the real estate markets in Canada and Australia did not take the hit that the U.S. market sustained over the past few years. Whether those two commodity-rich countries will be able to escape unscathed or are merely trailing their American counterparts remains to be seen. (Update: Interesting article asking Just How Risky Are China’s Housing Markets?)

We can also make a distinction between the residential housing market and the commercial real estate market. I’ve always been of the opinion that my home is just that: home. It’s not an investment to be gamed. It’s literally the roof over our heads, and should be treated differently than a commercial property or even a vacation cottage.

Of course, there are numerous ways to gain exposure to the real estate market without moving every two years. You can buy rental properties, invest in commercial real estate, buy the stocks of home builders and related industries, or simply buy a REIT (Real Estate Investment Trust) or two and collect the distributions.

Here are a few reasons why you may (or may not) want to invest in real estate right now:

Pros

Home prices in the U.S. have already fallen so much that they may be ready to bottom.
Canadian home prices may correct a little, but won’t fall off a cliff.
Increased foreclosures may mean that you could find your dream home for a bargain.
If inflation takes hold, real estate prices usually rise.
Commercial real estate isn’t in as dire straits as some think. Securitization and financing are available.

Cons

U.S. home prices have further to fall and it may take another 5-10 years before they experience a meaningful bounce.
Canadian home prices are in a bubble and are due for a serious correction.
Many commercial real estate loans are coming due over the next couple of years and they may not be able to roll that debt into new loans.
The glut of homes on the U.S. market will only get worse as banks foreclose on more homes, driving prices down further.
The expiration of the stimulative home buyers’ programs that have supported the market will mean lower U.S. home prices.
If deflation really takes hold, prices in the U.S. could remain depressed for some time, and those in stronger markets could experience deeper corrections than many currently expect.

If you think it sounds like these two camps are looking at two different markets, you’re not alone. I’ve read articles and seen various interviews with pundits who have argued each of these conflicting points persuasively. Maybe the recent market gyrations actually make sense when you look at the cross-currents that seem to be present. So what’s an investor with available cash to do?

I tend to be very cautious, and there are enough concerns out there right now that I prefer to sit on the sidelines. As a result, I might miss the train as it leaves the station. But one thing I’ve learned about markets over the years is that there will always be another train and I’d rather catch the second than get run over by the first.

What are your thoughts on the current state of the commodities and real estate markets? Are you putting money to work, staying the course, or sitting on the sidelines?

(Disclosure: I don’t own any of the securities or investment vehicles mentioned in this article at the time of writing.)

Stocks and Bonds: Pros and Cons

2 Cents — Mon, 26 Jul 2010 09:45:30 +0000

A dollar picked up in the road is more satisfaction to us than the 99 which we had to work for, and the money won at Faro or in the stock market snuggles into our hearts in the same way.

~ Mark Twain

Update: This article was included in the Carnival of Personal Finance #268 hosted by Ultimate Money Blog. Thanks!

I was going to do a single article on the pros and cons of investing in different asset classes right now, but I decided that there was too much information there, so I’m going to break it up into 3 articles which I’ll post this week. Today, we’ll take a look at the two asset classes you probably hear the most about: stocks and bonds.

The idea of this series is not to provide recommendations about which asset allocation is correct, but to provide you with some information you can use to make the determination that’s right for your situation based on the current state of the markets and the economy. If you are in your 20s, your choices will be different than those in their 40s or 50s. The amount of income you earn, your risk tolerance, your market knowledge and opinions will also affect your choices.

Stocks

Before I get into the pros and cons of putting your money in various types of stocks right now, let me just reiterate some facts about stocks in general:

Money in stocks is money at risk.
Stocks can go up or down by a little or a lot at any moment for any reason or for no apparent reason.
Stocks can trade sideways for long periods of time too.
No one knows for sure what stocks will do in any given time period.
History is a guide, but you can crash and burn if you’re always looking in the rear view mirror.

For a more general look at the pros and cons of investing in stocks in general, see Should You Invest in Stocks?

Dividend-Paying Stocks

We discussed this a bit in Friday’s post on No Respite in Diversification, but I’ll try to make the pros and cons clearer here:

Pros

Companies that pay dividends are usually larger, more successful enterprises that have been around for a while.
You can earn anywhere from a fraction of a percentage point to 6% or more from dividends, depending on the type of business.
Because they are usually relatively stable companies, these stocks sometimes fall less during bear markets.

Cons

As discussed on Friday, markets can sometimes become highly correlated (as they are now). During these types of bear markets, dividend stocks can get hit just as hard as all the others.
Companies sometimes cut their dividends. This can happen if an individual company encounters problems, or if we enter a vicious bear market and/or a very poor economy. If the dividend is cut, you will lose some or all of your dividend income and the share price will likely get clobbered to boot. (The clobbering usually happens before the dividend cut is announced, and the stock price sometimes recovers after the actual announcement.)
Companies with very high dividend yields should be avoided as that’s often a warning sign of pending trouble.

Other Types of Stock Allocations

I don’t have the space here to go into a great deal of detail on all of the different ways you can split your equity (stock) allocation, so I’ll just go through some of the basics and a few pros and cons for each:

Large Caps vs. Small Caps: Some investors like to diversify their stock holdings by market capitalization (ie. how big the company is). Large caps have the advantage of a proven track record and more stable stock price, but sometimes lack the growth boost that you can get from small cap stocks. You may find the next Apple in the small cap basket, but you’re more likely to go through a few companies that don’t pan out or even go bankrupt before you find that diamond in the rough.
Growth vs. Value: Some investors like to buy stock in companies experiencing very high growth rates, expecting the share price to increase quickly. The trouble with growth stocks is that, by the time everyone realizes they are growing quickly, that growth is already reflected in the share price. If you’re a little late to the party, you can get hurt. Other investors prefer to invest in stocks that they perceive as undervalued according to whatever metric they might use. The problem with this approach is that companies sometimes trade at low valuations for very good reasons. Perhaps growth is slowing, or they are encountering an operational problem.
Sector Allocations: Some investors like to diversify according to sectors like energy, utilities, consumer staples, consumer discretionary, etc.. This can be an effective way to spread risk, unless markets become very highly correlated. The key to this strategy is to remember that diversification within equities isn’t total diversification: you still need to hold other asset classes like bonds, cash, etc. to be truly diversified.
Geographic Allocations: Some investors believe they can achieve diversity by allocating capital to different regions like North America, Europe, or emerging markets. While it’s true that investing in fast-growing markets like the BRICs (Brazil, Russia, India, China) can add a little kick to your portfolio, you also need to be aware that they can fall quite precipitously as well. You may not like where you get kicked if that happens.

These are just a few of the ways you can split up your equity allocation. But, as I mentioned on Friday, stocks are becoming more correlated lately, and it’s something to note if you’re looking to put money to work right now. Diversification within your equity allocation may be quite elusive until that correlation eases. You may want to lower your exposure to stocks for a while to reduce your overall risk.

Bonds

There are many ways to diversify within your bond allocation as well. Here are some general considerations in the current environment for bonds:

Pros

Currently, deflationary forces seem to be more prevalent, so there is still some room for bond prices to climb.
Bond prices tend to fluctuate less than stock prices.
Bonds provide interest income that is guaranteed, but only if the issuer doesn’t default and you hold the bond to maturity.
Even if bond prices are at or near a top, bond tops can last 2 – 14 years.
Inflation-protected bonds like Real Return Bonds in Canada, or TIPS in the U.S. can provide a good inflation hedge.
Although corporate bonds are often seen as more risky, some corporate balance sheets look a lot healthier than many sovereign balance sheets right now.

Cons

Bond prices have been rising steadily since the early 1980s, so the bull market may be getting a little long in the tooth. There may not be a whole lot left in the way of capital appreciation.
With very low yields, new bond purchases are not going to offer much income.
If inflation rears its head, bond prices may fall precipitously, causing significant capital losses.
The capital protection provided by buying individual bonds is at least partially lost if you buy a mutual fund or ETF.
Bond supply is huge right now, with sovereign and corporate entities vying for investors’ money. If bond traders start to demand more yield for their money, that would cause bond yields to rise and prices to fall. This idea of sovereign issuers crowding out banks and corporations that depend on the bond market to finance their operations has been a worry for quite some time. It hasn’t happened yet, as investors have become disenchanted with equities and can’t seem to get enough bonds. That may change at some point, and it could happen abruptly.

I’m sure I must have missed some of the pros or cons for stocks and bonds that are relevant in today’s market. Can you think of any others?