They rush to sue everybody! The investment banks who were midwifes to the birth of FB into the public markets weren’t playing fair, they say. They gave their best clients more and better info than they fed to the public.
Well, what…you mean…could you be saying…that the insiders have an edge?
“The thing about this IPO,” said a friend at lunch, “was that the whole world was watching. That’s why this was so important. It showed everyone how Wall Street operates. Everybody got burned. And they blame Wall Street…because they can see that the pros were being only half honest. And the other half was incompetent.”
Yes, dear reader, our hunch seems to have been right. The FB launch was a disaster for shareholders…for Wall Street…and for the whole cult of equities that has ruled the investment world for the last 3 decades.
“…a six-decade passion for equities has come to an end,” reports The Financial Times.
“Stocks have not been so far out of favor for half a century,” continues the report… “with equity returns virtually flat for more than a decade, the incentive for investors to take risks by funding smaller, more entrepreneurial companies has declined — eroding a process that has traditionally given managers the flexibility they need to grow. Capitalism with less equity finance would follow a much more conservative model.”
In the US, pension funds allocated as much as 70% of their funds to equities 10 years ago. Now, they’re down to 52%.
Everyone is turning his back on stocks…at least, that’s what the FT says. And analysts are already comparing this FT article to the “Death of Equities” cover story in BusinessWeek in 1979…just before a huge new bull market began.
Relative to bonds, stocks haven’t been this cheap since 1956. That was the year when George Ross Goobey announced he was switching the entire portfolio of Imperial Tobacco’s pension fund into stocks.
Goobey turned out to be a genius. Stocks began a great bull market which continued, aside from a countertrend between 1966 and 1982, for the next 56 years!
And now a lot of people think this is another Goobey moment. Stocks are cheap, they say. Get ready for another grand bull market!
What do we say? Nah…
The problems are:
1) This ain’t 1956…this is 2012. The US is no longer on top of its game. It’s no longer in full expansion. It is slipping…sliding…burdened by high costs…zombie industries…and corrupt governments. Growth rates are low…lower than the rate of debt build-up… There is no reason to think America’s capital structure — either stocks or bonds — will become more valuable.
2) Stocks are not cheap. They are only cheap when you compare them to bond yields. But bonds yields are suppressed by a Great Correction…about which more below. In order to be absolutely cheap, US stock prices will have to be cut in half — at least. That would put yields and P/Es near where you can get a 5%+ yield and buy a dollar’s worth of earnings for $5…not $12. Then, stocks will be cheap.
3) Bond yields fall in a correction because people do not want to increase their debt levels; they want to reduce them. They also reduce spending…which lowers business sales and profits, thus making stocks less valuable, not more valuable. As the Great Correction intensifies (and it appears to be doing so now) we can expect stocks to follow the Japanese example. Japan has been in a Great Correction for 22 years. Its stocks have lost 3/4 of their value. They’re still down 75% — nearly a quarter century after the correction began.
Goobey moment? We don’t think so. It’s time to sell stocks, not buy them.
for The Daily Reckoning