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Main Street has no love for Wall Street. Not the scruffy rabble of Occupy Wall Street but the stalwart middle class that Charlie Merrill once implored to own a piece of America. They want no part of the stock market.
"Invest in Stocks? Small Players Still Smarting" That was the headline of a page one story in Tuesday's USA Today. Not on the business page, but the front page of the main section, above the fold, alongside the lead story in the right-hand column of what supposedly is "The Nation's Newspaper."
Middle Americans, who had once counted on stocks as the best way to build wealth, no longer want anything to do with the market, according to the USA Today story (which has a wimpier headline online, "Invest in stocks" Small player still smarting".) After the brutal bear market of 2008-09, they want nothing to do with stocks -- even after they've doubled in the recovery from their lows.
For the investors interviewed for the story, who are mainly in their 60s, the frenzy over the Facebook initial public offering next week or the seemingly unstoppable (until recently) surge in Apple (ticker: AAPL) shares have no interest. They prefer the apparent safety of bond funds or, in one case, gold coins.
To a contrarian investor, media reports all but scream "Buy!" Observes Barry Ritholtz, the author of the insightful Big Picture blog (http://www.ritholtz.com/blog/) and who brought the USA Today story to my attention, "This is how bear markets eventually end."
Perhaps, but it's not certain the end is at hand. To find out, I rang up Paul Macrae Montgomery, who runs the Universal Economics advisory in Virginia Beach, Va. Montgomery should be quite familiar to Barron's readers for his original research, especially for his tracking of magazine cover stories and their implications for financial markets.
In his studies of Time magazine covers going back all the way to the 1920s, he found when a financial person or subject appeared on the cover of news magazine, the trend discussed was close to played out and was about to reverse. Which is just common sense. By the time magazine editors are of a mind to feature a trend on the cover, the markets have already discounted it.
Famous examples include subjects such as the "Interest Rate Anguish" cover story in the early 1980s, featuring a pained looking Paul Volcker, then Federal Reserve chairman, just before rates were about to embark on their long slide from double-digit levels. And Amazon (AMZN) chief executive Jeff Bezos was Time's Person of the Year in 1999 -- just before the dot-com bubble burst.
And the granddaddy of them all, BusinessWeek's "The Death of Equities" cover, appeared in 1979, just as stocks were bottoming after their long underperformance after peaking in the mid-1960s, after taking account for inflation. (http://www.ritholtz.com/blog/) Montgomery avers that he has not included newspapers in his studies, preferring to focus on weekly magazines whose lesser frequency of publication forces them to take a longer perspective on trends.
He agreed with my suggestion that the greater immediacy of the internet rendered daily newspapers into a role more analogous to the newsweeklies of yore. But without empirical evidence from investigating newspaper stories, Montgomery wouldn't say USA Today had published an updated version of "The Death of Equities."
He did point out that fundamentals, notably earnings, don't move stocks. It's buying that pushes them higher, Montgomery asserts, and that is what has been notably lacking.
In that vein, Ritholtz observes: "Most people misunderstand what drives secular bull and bear markets, focusing on prices along as the defining characteristics. I believe this is an error, or at least paints an incomplete picture."
The most important factor, he continues, is investors' increasing willingness to pay more and more for a dollar of earnings -- the basic definition of the price-earnings multiple. In the 1982-2000 bull market, P/Es mainly rose far more than earnings improved. Since then, P/Es have contracted as investors have been less and less willing to pay for earnings.
Ultimately, Ritholtz continues, "when the processs generates enough investor disgust, we can form a last market low, typically in the single-digit P/E ratios.
Conversely, investors are willing to pay more and more for income from fixed-income securities. As they bid up their prices or pour money into bond funds, they settle for lower and lower yields -- all in the quest for protection of capital.
In the process, they eschew stocks such as Intel (INTC), the maker of the brains of many of devices that set investors' and consumers' hearts aflutter. Yet it sells for just over 10 times next year's expected earnings while yielding 3%, nearly as much as the Treasury 30-year long bond. And that's before the dividend hike announced earlier this week, which is unlikely to be the last in the next three decades, while the bond's coupon remains static. And I feel certain Intel's shares will fetch more than $27 and change.
That isn't likely to persuade the dispirited investors interviewed by USA Today. And Intel could well trade back below $20, where they were late last summer, which would mean a loss of more than 20% -- the standard definition of a bear market.
Yet articles such as the one in USA Today suggest the stock market is close to a bottom, or at least closer to a bottom than a top. But it also should be recalled the bull market of 1982-2000 didn't begin until nearly three years after the infamous "Death of Equities" Busy Week cover. And it took plenty of time for the investors who were burned in the bear market of the 1970s to regain their taste for stocks.
It isn't likely to be different this time.
Comments? E-mail: randall.forsyth@barrons.com
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