America

The Investor Class Is Scared Out of Its Wits

The investor class is sitting on tons of cash, scared of market volatility, worried about the economy, about the high level of debt– and not especially sanguine about low interest rates making stocks still look cheap.

Forbes,

21 October, 2012

And this yellow light of caution is still prevalent despite the 14% rise in stock prices throughout 2012. According to Natixis Global Asset Management, 77% of Americans are concerned about outliving their assets in retirement, 64% don’t even know how much they need to save, 53% fear losing money from market volatility, and 22% believe the stock market is just ” a pure gamble.”

This extreme caution is signified by retail investors “ aggressively selling” stocks while mutual funds, ETFs, and other institutions “have been adding equities,” writes J. P. Morgan’s Michael Cembelast in a recent market comment.

“Fed policy has simply lowered expected returns in a lot of the alternatives(cash, treasuries, agencies, credit, convertible bonds, MLPs, REITs and dividend-paying stocks,” Cembelast wrote. He cites investors being alienated by the fact that stock market volatility is even higher than before the creation of the Fed in 1913, an era of recessions, depressions and widespread bank failures.”

JP Morgan and this week The Economist Buttonwood column emphasize that stocks have not really performed all the well in periods of rock-bottom low interest rates. Rather both cite the use of the traditional Graham-Dodd/Shiller model which makes “equities look a bit expensive, cheaper only than the 1990s valuation bubble.” And that’s really a mouthful when stock indexes are selling at what seems a reasonable price-earnings ratio of 14 times.

And that’s before the large declines in reported earnings that are starting to pop up in the face of a global recession and receding sales at chain restaurants, natural resource producers and technology manufacturing.

The Economist’s Buttonwood sums up expectations; ” In t he 33 years where real yields have been negative, the average gain from equities has been 2.3%; in the years when real yields were positive, the average gain was 6.2%.”

The conclusion” The American stock market looks more expensive than the historic average.” Low interest rates are not going to ignite a further bull market. Last Friday’s drop is a prelude for 2013. No wonder half of Natixis’ clients are holding large cash positions earning less than nothing. They don’t want to risk another 20% drop. And I agree with them.

More people buying food from dollar stores

Supermarkets are the main place U.S. consumers buy groceries, but dollar stores are gaining momentum as are drug and convenience stores, researchers say.

UPI,

October, 2012

Perception Research Services International said their annual shopper research survey found 91 percent of those surveyed said they purchased groceries in the past three months at a supermarket, down from 92 percent last year. Mass merchandisers were the supermarket's largest competitive threat, with 73 percent purchasing groceries there in the last three months, the survey suggested.

The survey found 35 percent said they shopped for food in a dollar stores in the last three months, compared to 32 percent in 2011, 47 percent said they shopped in a drug store for food in the last three months, compared to 46 percent last year and and 24 percent shopped in a convenience store for food, compared to 23 percent last year.

Consumers purchased beverages and food generally at the same rate across mass merchandisers and dollar stores, but cleaning supplies and personal care items were purchased more often at dollar stores.

This study was conducted among 1,500 U.S. shoppers age 18 and older last June. No margin of error was provided.

Food advocates often warn consumers to read the labels of food sold in dollar stores because many food items come from unregulated countries, which might not have the same quality standards as U.S. name brands and while they might not be expired, they might only have days left before expiration.

Drumbeat of Weaker Revenues

Mish's Global Economic Analysis,

21 October, 2012

For the first time in three years, US corporations are poised to report lower sales. From technology to fast food giants, Falling Revenue Dings Stocks

 America's largest companies are on track to report lower quarterly sales for the first time in three years, a broad and gloomy verdict on the health of the global economy.

The drumbeat of weaker revenue is particularly troubling to investors looking for a read on the health of the global economy because it reflects underlying demand. Companies have a lot of levers to pull to improve profits: They can sell assets, buy back stock or cut costs. But it is hard to improve sales unless consumers and companies spend more of their money.

The earnings reports are providing a counterweight to optimism triggered by a string of improvements in U.S. retail sales and home sales, data that pointed to an end to the slump in the housing market and a recovery in consumer confidence.

Several corporate chiefs said conditions worsened in the past month of the quarter and pointed to further weakness into next year. That means companies will be under pressure to cut costs and hold back spending to meet their profit targets, potentially putting a further drag on growth.

"I will tell you, one of the differences is it has been very rare that we've ever seen all of our major markets experiencing the impact of these kinds of global economies at the same time," McDonald's Chief Executive.

GE cut its forecast for revenue growth this year to 3%; three weeks ago it expected 5%. Chief Financial Officer Keith Sherin attributed the lower forecast to faster than expected downsizing of GE Capital.

Profit and revenues at the biggest U.S. companies have been expanding since the third quarter of 2009, a bright spot in what has been a lackluster recovery. But that run appears to be coming to an end this quarter. Growth in sales started decelerating in the second half of last year and ground to a near halt last quarter. Profits are expected to shrink by 1.8% for the third quarter, according to Thomson Reuters.

"You've got very slow global GDP growth," GE's Mr. Sherin said.

Belief in the Fed's ability to pull rabbits out of its hat is about the only thing this market has going for it, even though close scrutiny shows the Fed is not really in control of much of anything.

Stocks are priced beyond perfection, for growth that will not happen. When this matters no one knows, but it will matter.

Unless it's different this time (and it won't be), real returns in equities do not look good going forward.