Thursday, September 3, 2009

Bullish Investors, Government Money... and What It Means to You

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September 3, 2009  

From birdie to bogey and the meaning of life…

"Fly baby! Fly!" I pleaded as my well struck six-iron shot came up short of the green and buried itself in the bunker.

"Should have hit the five," I said to my partner DJ, whose ball had also ended up in the sand.

"It's amazing how clear everything gets in this game with the benefit of hindsight," he replied.

"So true," I agreed.

When it comes to golf, the knowledge gained from hindsight always arrives too late. It can't change that bogey into a birdie. But in the investment world, I am happy to say, hindsight can be useful.

With the benefit of hindsight we all know now that we should have sold our stocks when the Dow hit its high of over 14,000 in October 2007. By the same device, we know that we should have bought stocks in March of this year when the market hit the current bottom of around 6,500.

In fact, if you were reading IDE you were amply prepared for the general trend, but as to the tops and bottoms?

Who knew?

Hardly anyone, according to the Daily Sentiment Index (DSI) run by Jake Bernstein. Bernstein says that only 2% of investors were optimistic in early March when the market started climbing upwards.

And today?

Almost 90% are bullish.

The last time we had a bullish sentiment this high was – guess when?

Right, when the market topped out in 2007.

Why are investors so bullish?

Investor sentiment is usually a good reverse indicator. Data shows it gets more reliable the stronger the sentiment grows.

There are all kinds of interesting reasons why this is true, but one of the most obvious is the role that the major media plays in the game. Television and the Internet have decreased attention spans. Even newspapers are reformatted for shorter pieces. (It's rare today to find an essay whose length extends beyond a single page.)

The modern mania for meaningful morsels (Sorry!) has transformed us into an impulse-driven culture, as the popularity of shows like Cramer demonstrate. Worse, journalism itself has changed from a profession that prided itself on objective analysis to one that measures its success on instant ratings.

What that means is that the reliability of good advice decreases in direct proportion to how many people become interested in it. (You can quote me on that.)

In other words, news is not so much about what is true as it is about what is hot.

Thus, today, after more than five months of rising stock prices, it's not surprising that our media gurus our aping headlines such as the following:

  • Unemployment numbers appear to have stopped rising
  • Home sales are up
  • Germany and France report quarterly GDP growth
  • Auto makers are gearing up to replace inventory
  • Uncle Sam makes a profit on some TARP "investments"
  • Euro recovers and tests recent highs

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What's the real story?

That is exactly what most investors are hearing. And it's exactly what they want to hear.
It would be nice to think that things are, indeed, getting better and that the world-wide government stimulus programs are gaining traction.

Thus we hear that the "Cash for Clunkers" program (Germany, France, and U.S.), the $8,000 credit for first time home buyers (U.S.), and the trillion dollar loan program (China) are working. They are "green shoots" that will turn this swampy marketplace back into the Garden of Eden.

Green shoots?

More like government-sanctioned payday loans. You've seen the ads for these stop-gap loan services on TV.

"Why wait for payday?" they exclaim. "When you can get cash today!"

Payday loan programs are bad deals for consumers. And government-backed payday loan systems are bad for citizens.

Guess who the borrower is in a government stimulus programs? Go to the head of the class if you answered "the taxpayer."

Governments around the world are simply shifting future demand into the present. Government programs don't create wealth. They redistribute it.

So how is the redistribution of wealth working out?

Last week the preliminary figure for the 2nd quarter Gross Domestic Product was announced. Despite an increase in government spending by 5.6%, the GDP was negative 1%.

Think about that for a minute.

Massive spending programs were put into place (at taxpayer expense) and we have nothing to show for it. Sure, the numbers would have been worse without the government taking out a "payday loan" on your behalf. But GDP was still negative.

Why? Because consumers aren't buying. Consumer spending fell another 1.2%.

Allan Nossa knows that, by law, he's set to collect $28,867.25 on March 30, 2012. No magic, crystal balls, or guesswork involved.

Despite the headwind, the consensus is that GDP will finally tick positive in the third quarter. But what happens when the circus leaves town and the tents are folded up?

The economic "recovery" so far has been propped up by massive government spending. But the circus may be over soon.

  • Cash For Clunkers just ended after the allotted $3 billion was spent
  • The Fed's purchasing of Treasuries is slated to end in October when the $300 billion runs out
  • The $8,000 First-Time Homebuyer Tax Credit ends in November
  • The Fed's mortgage-backed securities buying program ends around the first of the year after the $1.25 trillion runs out.

The recovery has been helped along by automakers, banks, and housing. And all three have received substantial government financing. But where there hasn't been government help (retail and jobs), there hasn't been improvement.

So what's the economy going to do when there is no more government money floating around creating a false sense of financial stability?

We double-dip, that's what we do.

Eventually the jig will be up and the so-called recovery will sputter. This will start a double-dip recession. Corporate earnings still suck and job growth is negative.

But that just means that the government will "double-dip" into its imaginary piggy bank and take out even more "payday loans" with your name on the dotted line.

A sell signal from God?

Unlike in golf, hindsight can help when it comes to investing.

That's why you should be extremely wary right now. With so many fundamental flaws in the market and the economy, it is a wonder that investors are so wildly bullish. But they are. And that tells us that a decline is likely. Warren Buffet said it best: "Be fearful when others are greedy and greedy when others are fearful."

So, is the fact that most investors are now bullish a sell signal from God? Maybe not from God, but our own Steve MacDonald says that this is no time to be wildly bullish. It's a time for caution. It's time to upgrade your portfolio...

Get rid of your dogs while the getting is good, he says. And consider increasing your allocation to high quality corporate bonds.

This is also the time to consider the importance of dividends. Over the long term, reinvested dividends have been responsible for over 90% of the return of the stock market! In addition, dividend-payers typically weather bad markets better than non-dividend paying stocks.

It also makes sense to look at energy and precious metals. More on that later this week.

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

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Market Window

Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Consulting Editor


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