The Public Still Buys Stocks but the Love is Gone

The sun is staying in the sky longer each day now. But are investors starting to feel bullish with the added daylight? You know, a change in attitude to go along with the gradual progression of seasons? Well, it doesn't look like it. But that may be a good thing.

According to the Australian Share Ownership Study by the ASX, overall share ownership among Australians dropped to 6.7 million in 2008, or just 41%. That was down from 46% ownership near the top of the market in 2006. According to Chris Zappone in The Age, "The study shows risk-wary investors saying they "they preferred blue-chip shares'' amid falling confidence in the overall market."

The public's love affair with stocks began in doubt in 1982, became mundane with mutual funds in the early 1990s, only to reignite into a torrid infatuation with tech stocks at the end of the century. Then, nearly two decades into the affair, it faced a serious crisis in the bear market that began in 2000.

Enter monetary therapist and love counsellor Alan Greenspan. The "Greenspan Put" was a kind of relationship-aiding stimulant for the partnership between the public and stocks. If stocks got too low, Greenspan lowered rates to pump them back up again. This kept everyone happy, Wall Street, the stock market, and the stock buying public.

But there is a psychological element to markets. How else can valuations go from being absurdly cheap to absurdly expensive? It's the public's taste for risk and adventure that changes in the interim. Emotions swing from love to hate and back to love again.

It looks to us like we're swinging back into the hate phase. Right now, though, it's grudging indifference. The public still buys stocks. But the love is gone. It's more out of habit, familiarity. And you know what familiarity breeds.

Before the bottom of this cycle is truly reached, people will hate stocks. They won't talk about them. And if they do, it will be with scorn. But how is this a good thing?

First a note from NAB's Cameron Clyne. Clyne predicted that Aussie banks will have rising debt levels that affect results over the "next couple" of years. It will be worse if unemployment rises, he says.

The deleveraging of the credit boom continues, according to Clyne, speaking on ABC Television. "We are now very much in the same phase of the downturn and we saw that particularly, I think, in most banks' results, with an up-tick in the March half (year) with bad and doubtful debts...We think that's going to be a feature in the next couple of halves...Obviously, consumer default really is a function of unemployment so if unemployment trends (up) ... then that's going to drive consumer default."

That's the bad news. The good news, perhaps, is that once the bad debt cycle begins to really bottom out-households and businesses having scaled back their debts and written down asset values-balance sheets are going to be a lot more transparent. Valuing blue chip businesses is going to be a lot easier. And profit performance should begin to improve (not any time soon mind you).

That means that after the storm blows down all the houses made of cards, whatever's left may have a pretty solid foundation to build on (if you'll excuse the cliché/metaphor). We've been working on this with Swarm Trader Gabriel Andre. Gabriel believes that using a combination of charting, technical analysis, and a handful of fundamental analysis, you should be able to identify long-term entry prices for blue chip stocks.

"But what if they're still going down," we asked?

"The charts will show this too. Often you find stocks trading in a range. Neither bullish nor bearish. But even this is useful. You know what levels they must break out of to begin a new move up, or what levels indicate a new bearish move down."

We'll keep you posted on Gabriel's work. By the way, he's a regular contributor to Money Morning, edited by Kris Sayce. You can sign up for that or read the latest posts at www.moneymorning.com.au

Dan Denning
for The Daily Reckoning Australia

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