This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Wednesday, September 15, 2010

No One Rings a Bell…

In the markets, there’s an old saying: “No one rings a bell at the top.” Or, we might add, at the bottom.

In August there was growing concern that the market would fall apart after technical traders documented what they refer to as the “Hindenburg Omen,” which had “never been wrong.” Fortunately for us all they were wrong, and the Hindenburg proved slightly less than foolproof.

Before the Hindenburg Omen there was major uproar over the “Death Cross” back in midsummer. The Death Cross is a technical indicator where a particular moving average crosses another. Once again, the technicians got it wrong, and the markets staved off “impending” disaster.

The fact is that as the market’s post-crash rally has continued, investors have grown increasingly skittish on fear that stocks will fall a second time.

So strong is this fear that the many stock prices are becoming irrationally depressed. In fact, right now approximately one-third of stocks in Standard and Poor’s 500 Index have dividend yields that are higher than the interest rate on 10-year US Treasury bonds. (This means that investors in those stocks are effectively being paid higher interest than the 10-year Treasury, plus they have the potential for growth if stock prices rise – though they also have increased risk in the event of a decline.)

Lately many investors have been allowing their heightened concern to impact their investment decisions in ways that will ultimately prove detrimental to their financial well-being. As just explained, one example is the manner in which funds have been flowing away from yield.

Despite the fact that so many stocks have higher yields than Treasury bonds, assets continue to pile into government debt. However, even more concerning is the amount of money being invested in gold and precious metals, which produce absolutely no yield whatsoever.

Admittedly many of these commodities have their advantages, primarily as insurance in the event of economic calamity or political upheaval. However, neither of these is altogether likely to occur in this country in the near future.

Lately gold is being paid a particularly large amount of attention, largely because it recent reached a new all-time high. While obviously we can’t say whether gold has reached its top, neither can anyone else.

Investors can rest assured, though, that when the metals market finally reaches its apex, there will still be people forecasting that it will continue climbing higher, that “this is only the beginning.” This was true of real estate several years ago, and tech stocks before that.

It is safe to say that lately precious metals, especially gold, have begun to exhibit classic topping signs. It’s almost impossible today to pick up a newspaper or magazine without finding an ad for gold; and you can forget trying to watch TV without seeing G. Gordon Liddy or that guy from Law & Order pushing the stuff.

[As a quick side note, the fact that people are willing to take investment advice from an actor and a guy who went to prison over the Watergate scandal is simply mind-boggling.]

In fact, in the process of writing this very article our office received a call from a solicitor trying to get us to buy silver. Now, when an investment firm that has been in and out of metals for more than twenty years, and is constantly studying the intricacies of these specialized markets, starts getting calls from telemarketers with little more than a script to go from, something is just not quite right.

Unbeknownst to many fearful investors, over the past several months the economy seems to have begun staging a fairly well-founded recovery. Currently automotive acquisitions (supplies buying one-another) have been occurring at the fastest pace in nearly a decade. Many more companies, which have been sitting on substantial cash, have been putting their reserves to work in expansion products and stock buybacks.

Sooner or later investors will become aware of the recovery that’s underway, and market prices will certainly reflect this realization. The only question is whether investors will be benefiting from prices changes or reacting to them.

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