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Missing a reason to buy

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by Peter Switzer

Wall Street’s stock market players clearly don’t have strong reasons to buy and it explains why so much cash is parked in bonds at the moment, robbing shares of their support. On the other hand, there’s no commitment to selling off the market as well.

Monday in the US again told this story and it’s as though the investors who make or break a market — the big financial institutions — are just waiting for a reason to buy again. The Dow lost 39.21 points or 0.38 per cent to 10,174.41 and the S&P 500 fell 4.33 points or 0.4 per cent to 1067.36.

This becalmed status or sideways trading range comes as talk of more quantitative easing by the Federal Reserve is being spruiked in the US, at a notoriously bad time for stocks — August and particularly September as well as October.

The Investment Company Institute reported $33.12 billion had left US stock-based mutual funds in the first seven months of 2010.

Four positives

At these times it is good to search for some positives on the basis that negativity has many vocal supporters.

First, merger and acquisition (M&A) activity is on the rise. This, historically, has been a positive sign for the market. It means while the major investors might be 'on pause', major companies such as BHP Billiton think a company such as Canadian-based Potash is undervalued.

Second, corporate earnings in the US were unambiguously good and RBS Morgans’ chief economist Michael Knox says the US market is undervalued. He expects a late-year rally and that the economy will prove more resilient than investors are predicting.

Third, there’s neither enough data to prove the US is heading into recession, nor, unfortunately enough data to prove the opposite. This explains the becalmed position of the stock market.

Fourth, the return on bonds is so low that eventually the bond bubble will burst and there will be a quick exit for the stock market. However, we need to see a big, positive injection of positiveness.

Market triggers

This week Fed boss Ben Bernanke speaks at a famous conference at the strangely-named Jackson Hole, where he could say something about quantitative easing or giving more money supply to the US economy to get home loan and commercial interest rates down.

This could be the trigger to help the market, however, what we really need to see now are jobs being created in the US. When that happens the shares will be the place to be and that’s why it’s always easier to be an investor with a long-term focus.

For advice you can trust, contact Switzer Financial Services.

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Published on: Tuesday, August 24, 2010