by Alexander Green, Investment U Chief Investment Strategist
Monday, January 02, 2012: Issue #1677
Investors are scared right now and it’s not hard to see why.
Economic growth is anemic. Unemployment is high. Banks are saddled with toxic assets. Problems in the Eurozone continue to fester. Residential real estate is sinking in a mire of short sales and foreclosures. And both federal and state governments – not to mention consumers themselves – are drowning in a sea of red ink.
We have all heard these negatives repeated daily and cycled endlessly in the national media.
However, these reports often leave out or play down the good news: Inflation is low. Short-term rates are near zero. Energy and food prices are declining. Emerging market economies – which are end markets for the developed world – are still booming. Corporate profits are at an all-time record – and have been for seven quarters now. And stock valuations are low. (The S&P 500 has historically traded at an average of 16 times earnings. Today it’s less than 14 times earnings.)
Last year I shared another key insight with you. It has always been a positive indicator for stocks when the Dow yields more than Treasury bonds.
This makes sense when you think about it. Shares are riskier than bonds. Investors should demand a higher yield. Yet almost never since 1958 have stocks yielded more than Treasuries. Today they do, however. The 10-year bond yields just two percent. The Dow yields 30 percent more.
If you’re still not convinced that equities are a good place to be in 2012, let me draw your attention to one of the strongest indicators of all…
Contrarian Investing Works
It’s a truism that no one consistently predicts the stock market. (That’s why money manager and Forbes 400 member Ken Fisher calls it “The Great Humiliator.”) However, there’s a straightforward system that offers a reasonable prospect of timing the market reasonably well in the future.
A 25-year study published last year in The Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills.
In other words, contrarian investing works. This system would have you do the very inverse of what the great mass of investors is doing. (It turns out they have god-awful instincts, so it pays to buck the consensus.)
Bear in mind, if you’d followed this system, you wouldn’t just have earned higher returns than being fully invested. You would have done it with far less risk, spending nearly half the time in riskless T-bills.
I mention this because the Investment Company Institute recently reported that investors are yanking billions out of equity funds virtually every week and pouring the money into ultra-low-paying money market accounts. The Wall Street Journal further reports that “investors have continued to consistently pull money from U.S. equity funds since August.”
I’m trying to contain my glee. Who says no one rings a bell in the stock market?
The fear and pessimism about both the economy and the stock market are way overdone and fully discounted in current stock prices. If you can’t be stirred by low interest rates, low inflation, low valuations and record profits, you really should ask yourself two important questions:
1. Is logic or emotion governing my decision making about my portfolio?
2. If I don’t invest in stocks – the greatest wealth creator of all time – how am I going to meet my long-term financial goals?
We’ll talk more about these issues in the weeks ahead. But, for the record, I think 2012 will be a good year for the stock market and – although virtually no one expects or believes it – perhaps even a barnburner.
Good Investing,
Alexander Green
Related Investment U Articles:
- Here’s a Hot “TIP” You Shouldn’t Buy
- The Best Buy Signal in 53 Years
- How to Beat “the Mania of Pessimism”
- TIPS Are the Proof of The Fed Distorting the Financial Markets
- U.S. Treasury Bonds: Why the Safest Investment is Now One of the Riskiest
12 Responses to “The Best Buy Signal of 2012”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
THANKS FOR THE OPTIMISTIC ARTICLE. MY E-MAIL BOX IS GETTING FULL EVERYDAY WITH “DOOM & GLOOM ” ARTICLES, FROM “END OF AMERICA” B.S. AND COMING WAR WITH IRAN —DIFFERENT NEW IDEAS EVERYDAY.I DON’T KNOW WHO’S GOING TO END BEING RIGHT, BUT IT’S GOOD TO SEE THAT SOMEBODY STILL BELIEVES IN THIS COUNTRY .
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I agree. I think 2012 will be a much better year than the majority anticipates, thanks to the continual drone of the scare news by our media.
When we close the doors on 2012, the market will be up double digits, and the real estate story will be different than the picture we continually are now seeing in the press.
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The reason I have not invested a large inheritance last year in November 2010 is due to the corruption on the street and couple that with Legal? insider trading on the beltway. How unfair can it get. Then my broker wants 12,500 (their percentage of my portfolio) to take the money and put it in formula accounts. I want an active money manager who knows when to move to to the right or left, up or down in a nanosecond. I don’t believe in buy and hold except for J&J and PG, not even CVX these days is a buy and hold. The retail investor puts up a pool of money and the sharks come in and take it away. I have not made 10Cents with any broker since 1993, pretty sad. I make more on the pathetic returns of CDs but at least I am not getting phone calls saying “I’m sorry but your account is down x amount, but thats not so bad considering how much you have”. That was the last straw and that was in October 2010. The idea in investing is to make, not lose money and I don’t think brokers should get paid if I am losing money. I think they should take a percentage of what they make but the whole industry is out of whack. I am afraid of the fed because there is no transparency. I don’t want to be part of the Euro contagion, but I have no choice due to greed of the financial industry. No one has gone to jail except Madoff and one guy from Enron. When Merrill lost 6trillon of American wealth with their lies about the dot coms, one ceo after the other left with millions, none of them went to jail. Remember Henry Blodget? Komanski and Kowalski, I think Kowalski went to jail but Komanski from Mer just kept cashing in. Then the last CEO John Thain, brought down the NYX, went to MER and leaving their got another multimillion payout after only a few months. That is not fair or is it right to shareholders, yet NO ONE does anything. I remember Rudy Guilliani saying that we cannot lose Wall Street (NEW YORK REVENUE STREAM) and he defended the lies at MER. NO ONE GOES TO JAIL. I don’t get it. The only good thing is that Wall Stree will never ever be what it was, a money making machine for a very few compared to the amount of investors. Pretty sad Oops, I almost forgot the CDO scandal that no one has gone to jail for, it was created at one brokerage, I think Bear Stearns but everyone got on the bandwagon, sellling mortgages and splitting them up all for fees and profits for THEMSELVES. This got so bad for my little sister that from one month sometimes, to one year she did not know who her new bank was going to be. This created the 2008 collapse of the realestate market due to Freddie & Fannie and every other greedy banker or mortgage banker who could get their hands on a piece of the pie. While people who worked all their lives can no longer rely on their equity for retirement because it has gone down so much, yet again, no one is on the perp walk. The biggest mistake anyone can make is to put their money in the market unless you have inside information. Then you make money. So sad but so true.
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Your analysis misses one important fact.
DEBT and the ability to pay.
The economy is like a chain of debt.
If one link breaks and people (or banks) do not pay,
what happens to the chain (the economy and stocks)?
Or if the govenment(s) can not pay and just print money, what happens?
Or worse yet conflicts that erupt in WAR.
I hope your are correct. Keep your eye on the to big to fail banks and the middle east.
Happy 2012
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Good piece. It raises the obvious question, however. If one wanted to follow an investment strategy that uses fund flows, where can one find this composite information on a daily, weekly, or monthly basis?
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Want the answer to your questions too; email to me please if you got.
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“Energy and food prices are declining, inflation is low”….did Santa bring you crack?
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Right on the money
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What is the best way to shop for a mortgage refinance? It is a good idea to contact at least three to five lenders for input on mortgage programs and rates. Also search online for 123 Refinance they found me 3.32% refinance rate really fast.
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Stay with me Alex. You have proven to be savvy over the years in the investment discipline. Since my basket only has one egg, prudence seems to be the watchword. Keep them coming.
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You stated that “inflatioin is low and utilities and food prices are declining”. What planet do you live on? Pull your head out of the sand and go visit a grocery store.
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The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months.
As of 1/4/2012 the results are as follows:
Bullish 48.9%
Neutral 34.0%
Bearish 17.2%
I would not call buying the market now contrarian investing, would you?
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