Thursday, October 14, 2010

The End of the Equity Cult?

Robert Buckland, Citigroup’s global equities strategist, published an article on September 2, 2010, entitled “The End of the Equity Cult?” He was openly bearish on the long-term outlook for global stock markets.

He pointed to the popularity of stocks in US pension funds: “U.S. pension funds allocated just 17 percent to equities in 1952, according to Citigroup. By 2006, those same funds were putting 69 percent in stocks and just 18 percent into fixed income.” He described this 50-year invest-ment style change as an “equities cult.”

Those who follow my Fridge Notes ( will see the similarity between Buckland’s views and my own. There is a big problem in stock market investing: the long-term up-trend is over. More precisely, it was over ten years ago. We are in a different era now. For the past ten years, stocks have not been good long-term buy-and-hold investments. They provide great returns when they go up and big losses when they go down. The Golden Age of Mutual funds is over.

But there’s a big difference between Mr. Buckland and me. He is the chief equities strategist for the biggest bank in the world. I am some obscure financial philosopher in a small investment management firm in Canada. Buckland has credibility ― big credibility.

Hold that thought. Hold the thought that one of Wall Street’s giants has openly discussed the high level of risk associated with the stock market at these levels.

The following quotation is from my article on financial hangovers, which appeared in the June 2010 issue of The MoneyLetter):
“In June 2010, the investment manager Gluskin Sheff released their calculations of the 10-year rates of return of a variety of US investment classes. The 10-year rate of return for the US stock market was -2.3%. Big American pension plans have lost money in the stock market over the past ten years.
“What about the bond market? The ten-year return for US bond portfolios has been 11%.
“Based on the math, it’s clear that the big US pension funds should be heavily invested in the US bond market and only slightly invested in the stock market. On the surface, it seems simple and logical.”
I was warning MoneyLetter readers to lower their expectations toward stock-market investing and to sell a significant percentage of their stocks and replace them with government bonds because that is what America’s big pension funds will be doing until they get their giant portfolios in line. The stock market has a huge overhang of stocks waiting to be sold and replaced with bonds.

Question: When Ken Norquay writes his Fridge Notes, who pays attention?
Answer: His mother, a few clients, and a few followers.

Question: When the global equities strategist for the biggest bank in the world declares the end of the equities cult, who pays attention?
Answer: The biggest financial institutions in the world.

Does Buckland’s pronouncement mean that the bearish case for the stock market is receiving more and more credibility in big-money management circles? Will this result in an acceleration of the pension funds’ desire to reduce exposure to stocks and increase exposure to bonds? Is the jig finally up? Is the next stock-market sell-off imminent?

On August 13, 1979, Business Week published a famous article entitled “The Death of Equities.” It made the point that stocks were no longer a viable investment ― similar to Buckland’s view. Business Week is a credible resource in US investment circles. The Dow Jones Industrial Average closed at 875 that day. Exactly three years later (August 13, 1982), the 16½-year-long bear market finally ended. Long-term bear markets end with a huge wave of selling, moving prices even lower. Pessimism has taken over completely and investors, especially professional fund managers, have finally give up on the stock market. Those who once believed no longer believe.

Is this what’s ahead for today’s stock market? Will the long-term bear market that began in the year 2000 end in three years, now that big-money management can accept the obvious truth about their unfortunate situation? Will the secular bear market end in autumn 2013?

Academics and theoreticians can continue grappling with this interesting conundrum. But what should an ordinary investor do today?

Sell stocks. Buy even more government bonds. Whether you call it an equities cult or an overhang hangover, the game is over. The long-term up-trend in American stocks ended ten years ago. And the long-term bear market isn’t over yet.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit (Bullmanship Code = SS32).

Contact Ken directly at

Wednesday, October 13, 2010

Talk’s Cheap

When I was the manager of a small office of Merrill Lynch back in the early 1980s, my boss used to say, “Talk’s cheap. It takes money to buy land.” I never really understood the part about buying land, but I came to a true and deep understanding of “talk’s cheap.” As a stock broker in those days, I talked for a living. I would phone investors and offer them trading ideas. The extent to which I could talk them into buying was the extent to which I could earn a living.

It became easy to talk people into buying something. I was taught what to say. I learned the jargon. I became really good at talking people into buying. But I soon realized that cheap talk wasn’t really what counted. What counted was what my clients actually owned.

If my clients owned stocks during up-trends, I could make a really good living using my skilled cheap talk. And if they owned stocks during down-trends, no matter what I said, I couldn’t talk them into anything.

Most of us who invest get a certain satisfaction from talking about economic things. We love to read the financial press and follow the latest theories on what’s happening in the economy. We love the talk. And most of us have a viewpoint: we think we understand the economy and we might even have an opinion about what’s going on in the financial world. Most of us love to participate in the talk.

But here’s what we should be talking about: what investments do you own?

In my investing book, Beyond the Bull, I refer to the cycles in the stock market and how they relate to interest rates and the economy. But the most intriguing discovery I offer readers is how the talk changes through the cycle.

At the bottom of a stock market cycle, the talk is all gloom and doom. At the top, the talk is all optimism and enthusiasm. That’s how we identify the tops and the bottoms: we observe the talk. It’s called the Theory of Contrary Opinion ― and here’s how it works. When the talk is excessively negative, we buy. When the talk is inordinately positive, we sell. So the investments we own should be contrary to the talk about those investments.

For example, government bonds have gone up about 10% in the past three or four months. And the talk has been about the inevitable bankruptcy of the USA, about the fact that America can never repay her foreign debt, about the possibility of hyperinflation in the US, and about the US dollar being fiat money. As long as this negative talk persists, US bonds will continue in an up-trend. When the talk turns positive, as it inevitably will, bonds will be near a top.

A second example is gold: people love gold these days. An overwhelming majority of investment gurus are talking very positively about how the gold standard may soon return, how the currency wars that are developing will be positive for gold, and how all this talk of economic disaster is really positive for gold. And the more positive the talk is, the harder it is for the price of gold to go up.

The investments we own should reflect these two examples of economic cheap talk: we should own a lot of bonds and little or no gold.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit (Bullmanship Code = SS32).

Contact Ken directly at