Friday, May 25, 2012

CNBC "Stocks Unloved," Is it Time to Buy?

When the mass media gets overly optimistic or pessimistic about the stock market, its usually a good contrarian sign that things will turnaround soon.  Traders have even coined the phrase “Magazine Cover Indicator” about the phenomenon.  The most famous case was the 1979 BusinessWeek magazine with the cover title of “The Death of Equities.”  The timing of the article was just as US stocks hit their lows and went on to rally for the next 20 years.

Currently, the botched Facebook IPO and subsequent fall in its share price has put equities back in focus.  Media analysts are once again questioning the safety of investing in stocks and whether the long term benefits are worth the risks.  Off all the recent negative commentary towards stocks, the most interesting one comes from CNBC.  The Business Cable giant has often been touted as the biggest cheerleader of equities, therefore, for CNBC of all people to headline their website with the story “Is “Equity Cult’ Dead? Stocks Most Unloved in 50 Years” its worth noticing.

The article points to the growing interest from professional investors in bonds with plenty of quotes from money managers of their disdain for stocks and how pension funds have changes their holdings.
Allianz Investment Management managers were prominently quoted in the article with Nikhil Srinivasan, AIZ’s Chief Investment Officer, “the man who decides where one of the world’s biggest insurance funds places its assets, wants to know why he should invest in stocks. “We are delivering what policyholders want,” says Allianz Investment Management’s chief investment officer, speaking from his Munich base. “So there is no need to get aggressive about equities.”  Also included was Andreas Utermann, whose quote “no natural flow into equities” for the next five to 10 years. “The rules of the game have changed” ended the CNBC writeup.

On the other hand, the article did report that bond prices were above their historical norms which ultimately could lead to higher equity demand when bond prices begin to drop.  However, with global central banks actively purchasing bonds, the answer of when demand could return in equities favor is unknown.

So is the CNBC article an indicator that equity pessimism has peaked? Only time will tell.  But what is certain is that if the global economy does pick up and usher a move to raise interest rates, bond prices would be vulnerable to a sharp selloff which could than trigger another long term move back towards stocks.

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