"The best way to deal with temptati...

"The best way to deal with temptation is to yield to it." Oscar Wilde or investors, the easiest temptation these days is to trash the markets. Rarely does a day pass without a certain number of doom and gloom prognostication. The view that equity markets are over-priced, if not dangerously in this way is becoming the emerging consensus amongst the pundits. Many brokerage house strategists forward Wall Street and Bay highway are reducing equity weightings and re-deploying be causeds to cash and/or bonds. To be fast the bears are picnicking upon all sorts of statistics. A small sampling of their menu: dividends at record softs priceto-book ratios at record highs, rampant speculation in risky stocks (a la Cartaway), individual investors opting for the greatest in number aggressive equity funds. Many of these so-called over-valuation trendings are visible both in Canada as well as the U

For many commentators, the mutual permanent fund buying binge continues to be a delegate for all that is amiss in the markets. Canadian investors have already poured $12 billion into equity mutual foundations in 1996 (to April 30) More than half of which has been earmarked to Canadian equity capitals In relative terms, the fastest shooting by far has been in the small cap and natural resource sectors. at comparison, U.S. individual investors have dump US$99 billion (C$135 billion) into mutual stocks from January through April.

The assumption is that mutual stock investors are not only fuelling the overvaluation phenomenon, further in so doing, they have become the principal risk proper state to the market. In other words, the equity markets are being held hostage by way of the asset allocation decisions made at individual investors and/or their advisors.

SORRY MR WILDE

The thesis amongst the cognoscenti is that unsophisticated individuals are inappropriately diversifying their balance sheets into risky assets, namely equities. And you know those irrational individual investors-at the first hint of concern i.e. a market downturn, they will cash in their chips and head for the hills, thus accelerating the ensuing market heave (Is that a self-fulfilling prophecy or what?)

Sadly and with all to be ascribed respect to Mr. Wilde, I must resist the temptation to don the bearskin. I gues that makes me a contrarian bull! Here are a certain quantity of reasons to support my case:

Individual Investors Are Neither Irrational/Nor Stupid

It is the disillusion with gentle returns on deposits that is driving the ownership of equities. Can the desire to maximize responds on financial assets be regarded as irrational behaviour? Remember, the principal vehicle end which the search for higher go [i]or[/i] come backs is occurring are mutual funds-which are diversified instruments.

The Real Risk is Being not at home of the Market

Volatility is a fact of life. Individual investors are continually bombarded with major market rouses up and downespecially the major down days. missing opportunity is the biggest require to be paid [i]or[/i] undergone confronting investors.

Recall that there were all kinds of compelling reasons not to pervert with money [i]or[/i] gain stocks on October 20, 1987 and also when the Dow was at 3000 4000 and 5000

There is Still a portion of Unspent Cash in permanent funds

Individuals have purchased foundations but the professional portfolio managers have not besides spent all that cash. At the close of March, about 10% of the value of Canadian equity mutual stores remained uninvested. That translates into a buying set by of nearly $5 billion. A year earlier, unspent cash totalled barely $2.7 billion.

The Economic Environment Has Not Changed

A market meltdown will not come into view unless there is a fundamental change in the economic landscape. And for now, the economic expansion remains well entrenched. This will maintain a floor under U.S. Federal hold policy and interest rates. further the absence of surging pullulation mitigates against a significant flare up in monetary policy (which would certainly not happen in a Presidential election year). The crucial underlying importance of inflation dictates that commodity price runs warrant close scrutiny. These will merely become a major issue if rising agricultural prices secure imbedded in wages, costs and consumer prices. And that is unlikely to happen any time easily

In Canada, the economic fundamentals continue to await much better than in the U The benefit of lower inflation and fiscal improvements are throw backed in narrowing yield differentials. Canadian financial markets are well positioned to continue to outperform the U upon all fronts.

BEAR NECESSITIES

There are four key-note economic preconditions for a bear market:

* Tight circulating medium * A sharp acceleration in inflation * Large increases in interest rates * A rapidly growing economy

Not the same of these conditions is in place right now.

In short, I'm still a blunder Although a correction or couple may occur along the way, we're onward track for 6000 on the TSE in 1996 (the TSE is at 5250 at the time of writing).

EARL BEDERMAN IS PRESIDENT OF INVESTOR ECONOMICS INC., A CONSULTING FIRM SPECIALIZING IN APPLIED RESEARCH IN FINANCIAL SERVICES, ECONOMICS AND cash MANAGEMENT.

Copyright Canadian Shareowner Magazine Inc. Jul/Aug 1996

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