As market enters the last trading month of year, market participants begin to review the yearly investment result. Most of market participants are below broad market performance due to pessimistic sentiment in a strong market. Institutional and individual investors miss the year start rally and pass the buying opportunity on Euro zone debt crisis. Nevertheless, the calm reaction to the crisis is already better than the panic selling in previous year due to US rating downgrade. As a result, market manipulators cannot make as much profit as in last year when investors are dumping stocks on US rating downgrade.
Looking back on stock market performance in the last few years, the trend is as predicted which is a gradual upward trend with oscillations. After this round of selling, market should move up again in this cycle. Market manipulators effort to create panic selling becomes less effective as market participants have already dumped significant portion of equity stocks during the panic selling in previous years.
While investors are hiding in the safe haven of treasuries and bonds, market advances on improving economy and rising corporate profits. After the strong market rebound in 2009, many investors missed the rally and hoped for another market crash to re-enter market. Despite the widespread market fear of a double-dip, it was posted that double-dip in economy was very unlikely while a double-dip in stock market was not likely but still possible. It comes out that market has pullbacks but the magnitude was much smaller than many market participants would expect. Therefore many investors remain in the treasuries and bond market.
The following dialogue is found on the internet. It is representative of different investors attitude toward current equity stock market environment.
BEAR:
some of the guys even admitted there projections for this year weren't even close. Guesses is a better word for it than 'projections'. Nobody knows for sure, not even 'experts'. Far too many unknowns to have a hope of making an accurate projection a year from now.
But for me, until there's a major correction, i'm not going back into the stock market. Period. If i get left behind by some rally so be it, but there are so many negative influences about and so few positive ones, to my mind, the downside risk is far greater than the upside gain potential.
BULL:
I agree with you on the guesses. That's what they are but I think it's a mistake to be out of the market. It's also a guess as to whether they'll be a correction. The more substantive issue in your favor at this time is the decade plus struggle of the market. If you don't invest when things look bad when do you invest? If you invest when everything looks great it's too late. If that were how it works it would be a savings account. Nevertheless you sound like a reasonable guy. Good luck.
BEAR:
well, you're supposed to sell high and buy low, and right now in my view stock values are high not low They're puffed up on printed money and hope, and that isn't sound enough for me to venture back in, with a european recession just beginning, the huge US defecit and debt which will take its toll on the economy one way or the other, and the ghastly amount of central bank money printing which is going to have a big pricetag attached to it down the road..
BULL:
The thing about valuations is they can be a bit subjective and it's a poor timing mechanism.The great B Nygren sees the current valuations as very positive(see recent Barron's article) as do others. Sentiment from a longer term perspective is poor indeed with the average investor underweighted in stocks and overweighted in bonds. There's an indicator right there. A lot of people so certain in the late 90's that stocks would continue higher are no doubt the most bitterly resistant to this current bullish move(2009-2012). Once this tide turns and people come out of bonds into stocks it will be a major propellant. The darkest hours are always the best and the brightest should be times we reassess and consider leaving. Corporations are flush with money and once they pull the trigger to use it, it will be interesting. Working on the premise that poor investor sentiment is a good indicator for continued poor investment results will cost you a pantload as the Etrade baby says. Take a gander at the comments on this board and see how many line up bearish or bullish. The bears have been staying the course for going on four years ignoring a virtual double.
Smart Money? Hedge Funds Now Worse Than Mutual Funds
Hedge fund managers don’t have much to be thankful for these holidays, as failure to beat low-fee index funds will likely infuriate investors shelling out hefty fees for their services.
To make matters worse, hedge fund managers have crowded into the same trades, with turnover at a record low, according to Goldman.
“Many hedge funds turned into mutual funds — but with higher fees and worse performance — this year,” said Mike Murphy, who runs hedge fund Rosecliff Capital. “Hedge funds have underperformed because they have been hedging against a massive market correction as the memory of 2008 is still fresh in every one’s mind.”
It’s not just closet indexing leading to this underperformance. Record low interest rates globally have led to high correlations between stocks, bonds, gold and currencies, making it difficult for hedge fund managers to separate themselves from the rest of the pack.
Exodus From Stocks: 'Investors Are Turning Tail'
Fear of the "Fiscal Cliff" is causing the biggest exodus from U.S. stocks this year as investors essentially put their money under the mattress rather than trust Congress to come up with a compromise.
Some traders said the outflows may continue even if Congress comes to some sort of agreement before the end of the year. That's because any compromise is likely to include higher taxes on dividends and capital gains, at least for the highest earners.
"It's tough to pinpoint causation," said Stephen Weiss of Short Hills Capital. "Is it fiscal fears or concerns about dividends and capital gains increases?"
To be sure, others feel the retail investor could be getting out at just the wrong time with the potential for a big rally if Congress hatches a deal.
"The anxiety relating to the cliff is largely in the market," said Tony Crescenzi, market strategist for PIMCO. "Fear of the possibility is embedded in people's minds sufficiently enough to provide a cushion against some of the anxiety that is bound to appear before resolution of the cliff, which most do not expect until the week before Christmas."
Why Has Wall Street Gotten So Bullish About Next Year?
Even the bears are bullish for 2013, a year in which virtually every Wall Street expert believes the market will overcome its many headwinds and post a positive year.
While retail investors have been preoccupied with worries over fiscal armageddon, an election that is now past and a global economy nearing stall speed, strategists have been busy with projections that see sizeable stock gains.
Their reasons: A U.S. economy that is on the mend due to the nascent housing recovery and an expected surge in earnings, more cheap money from the Federal Reserve, and a general feeling that none of the various-worst scenarios out there will come to fruition.
"At first blush, it seemed like an inopportune time to commit to a year-ahead target and outlook, what with so many global uncertainties in our path," said Sam Stovall, chief equity strategist at Standard & Poor's/Capital IQ. "But most of these uncertainties have been with us for quite some time, and are now regarded by many as annoyances to resolve rather than obstacles to fear."
"History, global monetary policy, and the fundamental sweet spot of U.S. economic data argue strongly for better performance as we move...into next year," Canaccord's Tony Dwyer and Michael Welch said.
Deutsche Bank, meanwhile, remains bullish with a 1,500 call. The firm is "encouraged by the continued intention of central banks to maintain accommodative policy" and believes that "given current market pricing, equities continue to offer the best risk-adjusted return compared to other asset classes."
"We are cautious on the near-term outlook for US equities, but we remain constructive on the medium to longer term outlook," Savita Subramanian, equity and quant strategist at BofA, said in a note. "Given the S&P 500's attractive valuation and weak investor sentiment, we expect positive earnings growth to drive the market to 1,600 by the end of 2013."
Seller’s Remorse Will Drive Stocks Higher Through Year End: Kilburg
Bears leaning against stocks into the end of the year will rue the day according to Jeff Kilburg, founder & CEO of Killir Kapital Management. In the attached clip the CNBC Contributor and former member of the Notre Dame football team says sellers were caught offsides by last week's rally, leaving them scrambling to get long exposure.
But there are reasons to be cautious. Beyond the familiar question marks in Europe and China, dismal corporate earnings and tax changes likely to be implemented early next year as part of the Fiscal Cliff have investors trimming stocks. It may not make sense to sell stocks to avoid a higher capital gains tax rate, but high yield stocks will lose fundamental value should dividend taxes be increased.
Uncertainty can make traders of us all. Kilburg thinks the people selling ahead of last week's ramp are going to be driven back into markets as a function of remorse as much as anything else. Should a rally materialize those short stocks here will be forced to buy in not through regret, but to stop the bleeding in their trading book. Either way, there figures to be people buying stocks at higher prices.
Taxing Wealth Is the Answer for Boosting Long-Term Growth: Dan Altman
Taxes are going up for most Americans on Jan. 1 unless Congress and the White House agree to a new plan to raise revenues and cut spending. This plan would avoid the massive tax hikes and spending cuts lawmakers agreed to last summer.
At this point in the negotiations over how to avoid the so-called fiscal cliff, some Republicans are warming to the idea of raising revenues but they haven't committed to higher tax rates. President Obama insists on raising income tax rates for those earning more than $250,000 annually. Billionaire investor Warren Buffett favors higher tax rates on incomes above $500,000, and many in Washington and elsewhere are calling for an overhaul of the tax code that would eliminate or reduce common tax breaks.
Economist Daniel Altman is proposing something completely different on the tax front --- a system that taxes wealth rather than revenue. It's not intended to raise more revenues but rather to reduce inequality which, he says, threatens growth.
"Wealth inequality is making the pie smaller for all of us," Altman tells The Daily Ticker. It limits opportunities, which reduces productivity, and ultimately lowers "living standards for all of us in the long term."
Altman, an adjunct professor at New York University's Stern School of Business and author of four books, says wealth inequality in the U.S. has been rising steadily for the past 20 years.
"It's at a crazy high level that you only see in very poor countries, and it's starting to threaten growth," he says.
Bond Investor Gundlach Buys Stocks, Sees 'Kaboom' Ahead
It's mid-October, and Jeffrey Gundlach is giving a stump speech to a luncheon crowd of about 200 financial advisers and investors at Los Angeles's City Club. The renowned money manager's theme: the financial catastrophe on the horizon.
He recommends buying hard assets: Gemstones, art and commercial real estate are high on his list. And DoubleLine has been buying the stocks of Chinese companies, U.S. natural gas producers and gold-mining firms because it considers them to be bargains.
"I'm waiting for something to go kaboom," Gundlach says in his office a week before the L.A. speech. "If phase three takes two years, it's worth waiting for. The markets don't have lots of opportunity now."
"The only reason asset prices are up is because of all the liquidity in the system," says Luz Padilla, manager of the $707 million DoubleLine Emerging Markets Fixed Income Fund. "Our concern is that it can turn very quickly."
Republicans Have Lost the Tax Fight: Politico’s White
A major story in Friday's New York Times confirmed something that most Americans understand, which is that today's tax rates are low compared with tax rates in the early 1980s.
They're also low when you compare the United States to other developed countries.
And they're low when you include state and local taxes, which the New York Times study did.
The reality of this, of course, hasn't stopped a lot of Americans from complaining that taxes are way too high and, therefore, that government spending must be cut.
Importantly, the tax increases being contemplated still won't make the U.S. a high-tax country relative to many other developed countries. That's something that any critic of tax increases needs to keep in mind.
Politico’s Ben White: Get Ready for a Market Rally Because a Fiscal Cliff Deal Is Coming
President Obama presented his opening offer for fiscal cliff negotiations on Thursday. The offer calls for $1.6 trillion in tax increases, $50 billion in infrastructure spending, home mortgage refinancing and the power to unilaterally raise the debt ceiling. Republicans have yet to place a counteroffer but they have said they will accept $800 billion in tax increases -- a far cry from Obama's proposal.
"We'll probably have a few more freak out declines before the actual deal is signed," he notes. "But when a deal is ultimately made, there will be a serious December rally based on relief that...we're going into next year with an economy that can grow without the fear of all of this austerity."
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