Surprise: Investor Sentiment Isn't Even That Bearish Yet

Given the recent volatility you might think that we’d be seeing very negative signals in the sentiment data, however, the data continues to be mixed. The most recent Investor’s Intelligence survey showed bearish sentiment hold steady at 41%. This is a relatively mild level bearishness given the current environment. Previous major market bottoms have occurred at substantially lower readings.

Small investors, on the other hand, are exhibiting a bit more fear. According to the AAII small investor sentiment plummeted in the most recent week:

“Bullish sentiment, expectations that stocks will rise over the next six months, plunged 9.8 percentage points to 24.7%. This is the lowest bullish sentiment has been since November 5, 2009. The historical average is 39%.

Neutral sentiment, expectations that stock prices will remain unchanged over the next six months, edged up 0.2 percentage points to 33.3%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall, jumped 9.6 percentage points to 42%. This is the eighth consecutive week that bearish sentiment has remained above its historical average of 30%.”

Charles Rotblut at AAII detailed the move:

“The ongoing volatility in the market continues to affect individual investor sentiment. While there had been some hope two weeks ago that a short-term bottom was being established, the continued downward movement of stock prices has further frayed nerves.”

http://www.businessinsider.com/surprise-investor-sentiment-isnt-even-that-bearish-yet-2010-7

Steering a Retirement Portfolio Through a Market Storm

By Mary Rowland

I've always considered myself a big risk taker. When I was a kid, I jumped out of second-story windows and drove in stock-car races. In 1996, we bought a home in the country, even though we hadn't yet closed on our apartment in New York. Our family of four lived in a rented cabin with no heat for six weeks while I went on a book tour. Give me a risk and I'll take it. Some people call it thrill seeking.

When the stock market headed higher, higher, higher in 1987, I had to get in on it, right? But I'd never bought stock before. What should I choose? I attended a press luncheon at Drexel Burnham Lambert (remember the junk-bond king?), and an analyst told us there was plenty of room for more growth in American Express. I bought it—right before the market crash in October 1987.

How many mistakes can we count there?

1. I invested for emotional reasons, afraid that I might lose out on getting rich, like everyone else.

2. I didn't know anything about specific companies, but I thought buying an individual stock was more daring, and more rewarding, than buying a mutual fund.

3. I bought on a "tip."

4. Perhaps worst of all, after the crash, I refused to sell American Express until it got back to what I paid for it. This is a timid saver mentality, not an investor mentality. As an investor, you should look at what the stock is worth and whether you believe it will get there. I didn't know how to do that.

By the late 1990s, I was writing a weekly online investment column for MSN Money, and I knew quite a bit more about investing. I bought the hot tech stocks and doubled my money. In early 2000, I thought the market was toppy, and I sold off the tech stuff. This was my best call. On Mar. 10, 2000, the Nasdaq hit its high of 5,048 and then tumbled to just over 1,100 on Oct. 9, 2002. I was mostly in cash. But I congratulated myself far too much for having some secret sixth sense that steered me in the right direction.

So now we move ahead to 2008. I have my son Tom's college account invested aggressively in health care and international. My own account is a bit more conservative with some value funds like Dodge & Cox Stock and Longleaf Partners, both of which I've held for a long time. Both took a terrible drubbing in 2008 and 2009.

When the market began to retreat in September 2008 and then go into free fall in October, I felt concerned about Tom's college account. But I'd finally learned my lesson, finally discovered that buy and hold was the way to go.

Yes, I was buy and hold. I am self-employed, so I have an IRA rather than the 401(k) plan that many employees have. I'd last looked at the account, which I keep at Charles Schwab, when it contained around $450,000. The best way for me to discipline myself is not to look, and I decided not to look again until the market stopped falling and started climbing. But here I am writing another book on 401(k) plans and investing, and I can't even face my own losses in the worst bear market we've seen in 70 years? That's bad.

So, on the morning of Mar. 6, 2009, the day after the market dropped another 300 points, to 6,594.44, I called up my online account at Charles Schwab.

The result? My account balance was $245,335. I'd lost $50,500 in what I consider my "core holding," the Standard & Poor's Index of 500 Stocks, which trades as an exchange-traded fund (ETF). I've used SPY as a portfolio core because it represents the overall market. I figure if the market goes up, SPY will ride along with it. Same goes for down. I'd started buying SPY in 1998 when it traded at $98 a share, buying in when it dipped. Now I saw that the 52-week range was 68.17 to 144.30. So I bought 100 shares of SPY at 68.80.

Did I do the right thing? I don't know. I guess I did the hopeful thing, showing my belief that the entire world economy would not collapse, that all the stocks in the S&P 500 would not be reduced to zero. Most important though, I think I did a rational thing. I didn't jump on or off the bandwagon. I didn't sell off all my stocks. I didn't throw what cash I had left into the market. I bought what I thought was the most solid investment in a time of market crisis.

Reprinted from The New Commonsense Guide to Your 401(k) by Mary Rowland, with permission of the publisher, Bloomberg Press.

http://www.businessweek.com/investor/content/mar2010/pi20100310_551495.htm

A dismal first half isn't always followed by a bad second half

ANNANDALE, Va. (MarketWatch) -- Is the past prologue?

We had better hope not, since the stock market over the first half of 2010 has been a disappointing performer -- falling far short of its long-term average pace of around 10% a year.

Following Thursday's decline of 146 points, for example, the Dow Jones Industrial Average is now down more than 2.6% for the year to date. If the second half of the year is just as poor for the stock market, the full year will sport a loss of more than 5%.

Fortunately, a disappointing first half does not automatically doom the second half of the year.

A clue to this comes from just anecdotal evidence. Take 2009, for example, when the market lost ground for the first six months. Yet the second half of the year witnessed one of the strongest rallies in recent memory.

To be sure, poor first halves have not always been followed by such pleasing reversals. There have been plenty of other years in which poor first halves were followed by poor second halves as well.

But the historical record shows there is a largely random relationship between the market's performance in the first and second halves of each year.

To show this, I looked at the correlations between the stock market's first-half and second-half returns for all years since the Dow was created in the late 1800s. What I found appears in the accompanying table.

At first blush you might think that these results are impressive enough to support a bet that the second half of this year will be a below-average performer. But they are not; given the wide variability in the year-by-year results, the deviations from the overall average are not significant at the 95% confidence level that statisticians use to determine whether a pattern is genuine.

	% of time Dow rises in second half of year
When Dow falls in first half of year	59.1%
When Dow rises in first half of year	71.0%
Average of all years	66.4%

This finding should not come as a big surprise, given what Economics 101 teaches us about efficient markets. If it were the case that the market's return in the first half of a year were a reliable predictor of its return in the second half, then investors would rush into the market on June 30 to buy or sell, depending on the direction of the market's year-to-date return. Investors would soon learn that they could jump the gun by acting even earlier than June 30. Eventually the historic relationship would disappear.

Though some of you might find it disappointing that the first half of this year provides very little guide to the second half, it is in fact something to celebrate. That at least is the argument made by Lawrence Tint, chairman of Quantal International, a firm that conducts risk modeling for institutional investors. In an interview, he said that the market would be "subject to unnecessary and unhealthy turmoil" if the market's return in one period were correlated with its return in the previous period.

"We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns, and do not include history in the calculation," he added.

So, as you lay out your financial plans for the rest of 2010, make sure to keep things in perspective. And make sure you realize the consequences!

Stocks may still decline over the next six months. But if they do, that will have nothing to do with its poor performance so far this year.

http://www.marketwatch.com/story/first-half-says-little-about-second-half-2010-06-25

Investment business is losing a generation of investors

That's the question the head of the world's largest mutual fund company asked in a speech last week. William McNabb, president and chief executive of the Vanguard Group, told an audience at the Morningstar Investor Conference in Chicago that a growing number of Americans are unwilling to invest in stocks or stock funds because their faith in the financial system has crumbled.

"We are on the brink of losing a generation of young investors," McNabb said. "As I talk with young people, I hear it. They don't like this volatility." And their belief in the system has been shaken by everything from the collapse of Lehman Brothers in 2008 to the "Flash Crash" in May.

The stock market started the second quarter on a strong footing but it's ending with a whimper as investors cope with less government stimulus and the prospect of slower global growth. Where does it leave the outlook for markets in the third quarter?

In truth, every generation has moments when it suffers through a crisis in confidence. But past generations lived in a different environment, and typically were able to see events that brought them back from the edge. That's why the current situation is so alarming: nothing on the horizon appears to have the potential to attract young investors to the market.

After the market malaise of the late 1960s and early 1970s, interest rates moved to double digits, which attracted savers and brought assets into money-market funds. By the 1980s, as rates were returning to normalized levels and savers were looking for a little more, the market entered a long bull cycle that barely was disrupted by Black Monday in 1987, the build-up to the Gulf War in 1991 and other life-changing events. Even the bear market that popped the Internet bubble was answered with a mid-2000s rebound.

Moreover, the last time a generation stayed mostly out of the market, a life's work was rewarded with a pension. Now people are largely responsible for their own retirement through 401(k) plans and other savings vehicles. That makes the danger of losing a generation of young investors bigger than in the past, because it's hard to see how they will adequately grow retirement savings without a lifetime of the long-term benefits of investing.

The issue, of course, boils down to capturing the long-term benefits of investing at a time when the short-term picture is ugly and emotions are dominated by current events.

"This is a generation with a very short attention span," said Herbert Daroff of Baystate Financial Planning in Boston. "They're used to changing the channel whenever they don't like what they see. A 10-year time horizon, for them, is very long-term, when in fact they need to be investing for 20 or 30 or 40 years or more.

"This is also a generation of six-digit college loans, where many people start off their financial life in a deep, deep hole," he added. "If what they understand right now is that they will be better off paying off their college loans than putting something into the 401(k), at least they will be making progress. But there must be a way to give them hope for their future."

There's not a lot of good feeling and hope in the market right now.

The last decade's stock market performance has been rough and flat, so there is plenty of talk about how people spent 10 years earning nothing, which seems right, but probably isn't.

For starters, market indexes don't factor in dividends, which have generated some income despite the decade of doldrums. Secondarily, diversified investors had big chunks of money invested outside of the Standard & Poor's 500-stock index (MARKET:SPX) , which is the proxy for "the market" in these discussions.

"Only the S&P 500 was flat for 10 years, nothing else," explained Judy Shine of Shine Investment Advisory Services in Lone Tree, Colo. "But since no one who really invests and diversifies had a portfolio that was all S&P 500, you don't actually know people who lost a decade. They may feel like it -- I always say if you poke our clients in the right place, they still scream over the pain of the tech wreck -- but they have done better than they think or feel."
Dividend drivers

Many experts believe the next decade will be more about finding solid dividend yields that generate consistent returns while the market is waffling and direction-less. With interest rates at historic lows, dividend yields can be a way to goose a portfolio's returns, although they can be hard to hang on to when there is no capital appreciation -- or even near-term downturns -- to go with them.

What's more, dividend yields are attractive at these levels only for as long as Congress keeps taxes low. Qualified dividend income is taxed at a maximum rate of 15% under current law, but unless there's an extension or new rules are enacted -- the Obama Administration has proposed a 20% tax rate -- dividends will be taxed at ordinary income rates in 2011. That will make dividend yields much less attractive, further confounding investors on what to do now and next.

McNabb's point in Chicago is that the financial services industry can only win back investors by proving that it's trustworthy. That's increasingly difficult at a time when the long-term investor feels like the corporate community is skinning him a penny here and there every day. In fact, the only thing that historically wins investors is strong returns.

While I do believe the market will reward long-term investors, I can't blame younger generations for not being able to see it. Their experience suggests that they are better off on the sidelines than in the market.

http://www.marketwatch.com/story/story/print?guid=24FC3883-1C40-4B4F-9616-3BCDCB5C5BA9

Do Hungry People Take Bigger Financial Risks?

Forget the Volcker Rule, a Tobin tax, bonus caps and other Washington proposals intended to make our financial system more stable. Maybe what Wall Street’s risk-loving bankers really need is a better diet.

That is one possible implication of a fascinating new study, which finds that people who are hungry are more risk-seeking, and people who are sated are more risk-averse.

Researchers put study subjects on different diets to affect their metabolic states, and then week after week gave them options to participate in different kinds of lotteries. Some of the lotteries were riskier than others, in terms of their expected and potential payouts. Generally speaking, when subjects were in hungrier states, they chose the riskier lottery options, and when they were full, they choose safer lotteries.

The authors suggest that this means metabolic states, and the hormones associated with them, can affect our appetite for all sorts of risks. From the study:

Changes in metabolic state systematically altered economic decision making …

A direct comparison can be made with Prospect Theory, where changes in wealth below a reference point induce risk-seeking behavior, while earnings above a reference point promote risk-aversion. Similar reference-dependent change in risk attitude for food rewards has also been seen in animals.

The study is based on a small sample — about 20 students — but it seems destined to inspire further research on the evolutionary advantages of financial risk-taking.

http://economix.blogs.nytimes.com/2010/06/29/do-hungry-people-take-bigger-financial-risks/?pagemode=print

Dividends Are Back

We are just months removed from one of the worst years for corporate dividends on record. Uncle Sam is expected to take another big bite out of that income in 2011 in the form of sharply higher taxes.

And yet dividend investing has rarely looked better.

This year through mid-June, there were at least 135 dividend increases or initiations among the companies in the Standard & Poor's 500-stock index, up roughly 55% from the first six months of last year.

If the economy continues to gather strength, analysts say, many more companies will likely gain the confidence to boost dividends this year.

So what has changed? Corporate balance sheets, which were squeezed during the recession, are once again brimming with cash. S&P 500 nonfinancial companies had a record $837 billion in cash at the end of the first quarter, up from $665 billion a year earlier, according to S&P.

Of course, there are plenty of headwinds. The tax rate on qualified dividend payments, capped in 2003 at 15%, is set to expire at the end of this year along with some other Bush-era tax cuts. Absent congressional action, the top dividend tax rate will jump to 39.6% next year. It also could end up somewhere in between.

But for investors looking to generate steady income, the alternatives to dividends don't stack up well. With the Federal Reserve keeping its key interest rate at a historic low, the roughly 2% average dividend yield of the S&P 500 looks attractive relative to many bond and cash-like investments. The average taxable money-market fund, for example, offers a paltry seven-day yield of 0.04%, according to iMoneyNet, which tracks the funds. Bonds carry risks of their own, and must be rolled over and reinvested when they mature.

The long-term case for dividend investing, meanwhile, remains sound. Some research suggests that companies tend to boost these payments ahead of significant increases in cash flow. And dividends often provide a cushion when stock returns sag. That can be especially valuable for income-focused investors like those looking to cover regular living expenses during retirement.

Wall Street Journal

Personal savings increased 29 percent in Jacksonville since 2007

Pay cuts, layoffs and mounting debt have made it difficult for many local families to make ends meet, but research shows that they have started saving more.

Personal savings, known in banking circles as nontransaction account totals, increased for the 17 community banks based in Northeast Florida by 29.4 percent from $3.4 billion in the first quarter of 2007, before the economy’s downturn, to $4.4 billion in the first quarter of 2010, according to the Federal Deposit Insurance Corp. Nontransaction accounts are those typically used as savings vessels, such as money market accounts, savings accounts and certificates of deposit. Personal savings totals also increased 1.1 percent from the first quarter of 2009 to the first quarter of 2010.

Jacksonville Business Journal - 25 June 2010