U.S. Investing: An Update on Investor Psychology
by Steve Hochberg and Pete Kendall
excerpted from The Elliott Wave Financial Forecast, March 4, 2005
“Don’t be fooled by reports of besieged corporate leaders; it is only a preview of coming attractions. The latest executive compensation surveys reveal that, by at least one key measure, the infatuation with corporate leadership reached record levels in 2004.”
A waning interest in financial affairs is manifest in CNBC’s viewership ratings, which continue to plunge. According to Nielsen Media Research, CNBC’s daytime viewership fell 21% in 2004, from an average of 184,000 viewers to 146,000. Since 2000, the total is down 61%. Yet while investors may be getting tired of the stock market, they are holding fast to their stocks. According to Sindlinger & Co.’s weekly poll of U.S. households, commitments to stocks have barely wavered since the all-time highs. Sindlinger’s survey shows that 57.4% of households are in the market. The figure is only slightly below the all-time high of 57.8%, from November 2000.
U.S. Investing: Attachment to Stocks
This attachment to stocks is extraordinary considering that until the 1990s, the highest percentage ever recorded was 36%, on September 7, 1987, within two weeks of a peak that led to the October 1987 crash. It took seven years for household ownership to climb back to a new high. In January 1994, it finally hit a new record of 37.4%, which was immediately followed by a one-year lull in the bull market. In April 1995, the figure roared to a new high once again, but this time, the market didn’t check the public’s involvement by correcting in any material way. The record reading came several months after the all-time highs in the major averages, which means that for the 20% of U.S. households that bought stock for the first time in the mania, the major averages have now been going down longer than they went up!
Investors continue to hold stocks because, as first revealed in a book called One-Way Pockets in 1909, that’s what investors do into early stages of a bear market. One important nuance of sentiment at the all-time high was the rejection of more experienced market voices for novices and man-on-the-street opinions. In June 2000, when the papers were filled with stories about the investment prowess of baseball players, plumbers and a wide assortment of young stock market mavens, Elliott Wave Financial Forecast wrote: “The bear market’s mission is to reveal the ignorance and naiveté that are the true source of their profits.”
The NASDAQ is down 60% over the last five years, but one recent ad illustrates that the bear market’s mission is far from complete. The ad reveals that the belief in easy money is alive and well. Even a 12-year-old soccer player, says the ad, can make 355% in six months. Another recent article offers investment advice from “once-fleeced” NFL players. “New York Giants quarterback Kurt Warner is investing in real estate, stocks and mutual funds. ‘I want as little risk as possible.'” Asked what will become of his Super Bowl winnings, one recent champ answered, “I’m a real estate guy.” As our special section and this quote from Wednesday’s Washington Post demonstrate, the property euphoria is just a late-cycle extension of the Grand Supercycle peak: “I had money in the stock market, but the market always seemed to be going down, down, down. I decided to take that money out and invest it in real estate.” From the frying pan to the fire, we say. Houses are far less liquid than stocks, and thus a more perfect final resting place for many investors’ mania-era ambitions.
U.S. Investing: Bull Market Reappearing
As the rally from March 2003 peters out, one key indication that the developing decline is a continuation of the post-mania slide to much lower levels is that the backlash against many of the stars of the old bull market is reappearing. In August, an outline of a new wave of attacks was identified, and it is now visible across the breadth of corporate America. From Fannie Mae, where federal regulators have uncovered still more accounting irregularities, to new revelations about conflicts of interest in the investment banking industry, the scandal mills are heating up. After several investments banks settled suits, Reuters reported that derivatives litigation is “Set to Explode.”
In December, when The New York Times insinuated that New York State attorney general Eliot Spitzer was about to relinquish his offensive against various financial giants, Spitzer quickly disavowed the notion. Since then, he has opened up a new line of attack against insurance giant AIG and issued subpoenas to major record labels and investment consulting firms. At the same time, post-peak revelations are spilling forth in the trials of former mania-era heroes at WorldCom, Healthsouth and Tyco. Still to come: the New York Stock Exchange’s case against its former president, Dick Grasso, and the criminal trial of Enron’s former principles. Krispy Kreme, Bally Total Fitness and OfficeMax are also in the seminal stages of accounting inquiries. Investigations of the accounting, insurance and medical device industries are also underway by the Justice Department, IRS, SEC and various state agencies.
U.S. Investing: Corporate Leadership
Don’t be fooled by reports of besieged corporate leaders; it is only a preview of coming attractions. The latest executive compensation surveys reveal that, by at least one key measure, the infatuation with corporate leadership reached record levels in 2004. According to Mercer Human Resource Consulting, the average CEO bonus rose to a new high of $1.14 million. The bonuses represent a 46% increase from 2003. Based on CEO compensation, the bear market has yet to begin. Some formerly beleaguered leaders, like Martha Stewart, are also back on the high ground of 1999. Even though she’s been in jail, Stewart’s star is soaring, with the landing of roles in two TV shows and a company stock that has soared back to heavenly heights. After collapsing to about $5 near the lows of October 2002, Martha Stewart Living Omnimedia shares rose to $37, right where they were one day after MSO came to market in October 1999. MSO’s price/earnings ratio cannot be calculated because the firm lost $7.5 million in the fourth quarter of 2004. It expects to lose more than twice that amount in the first quarter of 2005.
“Jail can give beaten CEOs and burned-out celebrities the martyr’s halo,” explains Thursday’s Washington Post. As long as the trend is rising, MSO can bask in its optimistic potential of the future. But Stewart’s smiling visage on the cover of the March 7th Newsweek suggests that another peak is near. A similarly beaming Martha appeared on a January 2000 cover of Business Week, just as the Dow was topping. Newsweek says Stewart will emerge from prison “thinner, wealthier and ready for prime time,” but the early celebration over her “recovery” is a sure sign that the countertrend rally is ending. As the bear market reasserts itself, Stewart will find her return to the business world a lot less accommodating than her jail cell. According to a February 11 story about the “Evolving Saga of America’s CEO,” CEOs took their lumps in January when 92 got the boot or retired, the highest figure since February 2001 when 119 CEO changes took place. “The CEO is on the hot seat,” says John Challenger, who heads a Chicago outplacement firm. “Mistakes aren’t forgiven.” That goes double for Martha Stewart because bull market favorites tend to get singled out for special attention on the downside.
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