July 11, 2012 – When to Buy

FINDING THE POINT OF MAXIMUM PESSIMISM

It is hard to find anyone optimistic about the stock market anywhere these days. By “anywhere” I mean find an optimist anywhere who is optimistic about any stock market anywhere. What we do have are plenty of stock market warnings, downgrades, estimate reductions and general gloom along with girding of loins and gnashing of teeth. It is ugly out there and the consensus forecast is that it is going to get worse.

We have to be careful here. The temptation is to quote the old proverb “It is always darkest before the dawn” but that does not work with stock markets. Stock market patterns are not as distinct as night and day. With stock markets, it can keep getting darker and darker still and, when faced with the troubles we face today, there are times when it seems that we will never see any light ever again.

And there is the rub. Because investors currently do not believe that stock markets will rise, they won’t invest and, of course, that means that the stock market will not rise. Moreover, the longer the gloom continues the more depressed stock prices become as investors continue to pull money out.

At some point the stock market actually does stop falling. I have seen this before on several occasions. In fact, this period reminds me of October 1992 to March 1993. Back then we had just gone through a downturn of about 30%, there was a banking crises in the US, and talk of the endless recession in North America. (Source: In Short:  SUCCESSFUL INVESTING DURING TURBULENT TIMES )The unemployment in Canada  peaked in 1993 at 11.4%, (Source Statistics Canada)  so that was really ugly. The US rate was a lot lower, though you could not tell that from the media during that time. The stock market had bounced around for some time and seemed directionless and gloom was in the air (Source: Globe and Mail).

The next thing you knew, the stock market went up 43% in six months. The gain came like a thief in the night. There was no single trigger and there were still plenty of worries during the gain. There is another old saying “ the stock market climbs a wall of worry” (Source: TIME Magazine, Feb 17, 2012 Is This Stock Market Rally for Real) and that is exactly what happened then. So, it was not a case where dawn broke and suddenly there was light. It was more of a decrease in bad news coming in but not by much.

While the current gloom continues, the amount of cash that has moved out of the stock market and into short term investments is absolutely huge. The amount that has gone into bonds is even more. In both cases that cash is earning the lowest interest rate in history. As well corporate North America has piled up a record amount of cash. Corporations normally abhor cash because a corporation usually can earn more by using the cash in its operations than the overnight interest rate. But the corporations have been caught up in the uncertainty too and we are talking about hoarding close to $2 trillion (Source: Tech Talk, Monday July 9, 2012 edition). If that is unleashed it will create jobs, improve housing starts, increase the overall level of business, increase the amount of taxes that governments collect and generally go a long way to moving North America back into the healthy profit zone.

Markets move in anticipation of that so the market will move up first and then the positive economic results and investors who were on the sideline will pour in.

I do not know if things will get gloomier now before that happens but I want to be invested before those waves of cash hit. I do know that the risk of the stock market falling further is very much diminished from where the market was in February. See page 52 of the book for more details and remember the pessimists are already out of the market. Watch out when they become optimistic.


This article was prepared solely by Larry Short who is a registered representative of HollisWealth™ (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth™ Trademark of The Bank of Nova Scotia, used under license.

 

This article was prepared solely by Larry Short who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC).The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth®