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Don't Stop Believing in US Equities: This Time Might Be Different

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There are some different dynamics in place to sustain this bullishness longer term.

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Everyone it seems, from my view at least, is so bearish on equities. Yes, the Barron's cover last weekend may have read Dow (INDEXDJX:DJI) 16,000, but between the lines we read of corrections to bear markets. People even pointed out the history of Barron's covers as a contra-indicator. Well, those same people probably believe in the Sports Illustrated curse as well. I'm from Boston: Curt Schilling hopped on an F-150 in 2004 and put an end to my belief in curses.

Now, there can be an argument made that bull/bear sentiment indicators are contra indicators -- the thought being that by the time the sentiment reading is taken, bets have already been placed. We hear how the underlying economic recovery stinks. In fairness, recent data -- namely on jobs, retail sales, and consumer sentiment -- has shown a tepid recovery at best, as it has for the last few springs. We hear how the massive monetary stimulus wars that Japan, the US, and the EU are waging are simply helping prop up certain asset classes. We hear how social mood is terrible -- social mood is a huge driver of the market, and if it were not, 80% of MIT grads would be billionaires. Yes, we may in fact see a correction, but in my opinion the potential for a secular bull trend is still in effect.

Here's my humble take, for what it's worth:

1. Markets are geared to go higher, right? Two-thirds of Americans have some type of retirement vehicle, or another vested interest, in stocks. They want stocks to go up. This helps explain volatility as well: Stocks generally take the stairs up and the elevator down. According to a recent article in the Wall Street Journal, people are just starting to regain faith in the markets. We're seeing 5-year record equity/equity ETF inflows. Moreover, roughly 26% of American making $50,000 or less have little if any stock exposure. Remember, the individual investor has been stung by a plethora of punches: the tech crash, the housing crash, the mini crash, Knight's fat finger, and, more recently, the Facebook (NASDAQ:FB) IPO debacle and AP "Twittergate."

I work with Registered Investment Advisors (RIAs) and, from time to time, help them with strategy. As of late, they're not asking about duration on their bond portfolios and/or bonds that look attractive. Right now, they're asking about ways to find equity growth potential with income. What this rate environment has done is firm up corporate balance sheets in ways we have not seen in a long while, allowing corporations big and small to lock in cheap financing, and pay back shareholders through record buybacks and dividend increases. Capital structure is totally changing, making equities attractive for a long while to come from both a balance sheet and cash flow perspective. See Apple (NASDAQ:AAPL).

2. Investors big and small are really starting to embrace stocks on a larger scale, buying more equity exposure for income for the longer haul. We're not just talking utilities and select consumer staple names. For examples, see Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) this past week, as investors are in the process of rotating out of consumer staples and into select IT hardware/software on a relative value/income/growth play: illustrating the former, the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) is up 19% YTD while, for the latter, the Technology SPDR ETF (NYSEARCA:XLK) is up 4% YTD.

Thematically, this is what is happening: Investors are selling high-yielding consumer staple stocks with perceived stretched valuations, such as Procter & Gamble (NYSE:PG), McDonald's (NYSE:MCD), and Johnson & Johnson (NYSE:JNJ), and buying old horses like Microsoft, Intel, and Apple in the tech space. That's right. Apple. As I said to a friend, who was inquiring as to why I was hanging around the night Apple reported last, "It seems our life revolves around a fruit."

So, Apple bulls say shipments were fine even in the face of poor guidance, margin compression, and lack of innovation (the bar was very low; so low that I would have to limbo under it). Moreover, the buyback / dividend fans got their wish: Apple doubled the buyback to $50 billion and increased the dividend by 15%, and will do this by issuing debt! Remember, Apple had a clean balance sheet -- welcome to America! Lever up! The bears say it's the end of the last American growth story; the last bastion of innovation. Now, it's a value/income play for an aggressive retirement portfolio.

Remember way back at the beginning of the year, the proclamations of a man who frankly, given relative size of portfolio, is simply one the best: Will Danoff of Fidelity's Contra Fund. He's a leading indicator for me, period. Here's what Mr. Danoff said late January:

What could 2013 hold for stocks? No one knows for sure, but I believe that well-managed companies toughened by the challenging conditions of recent years are generating record amounts of cash and their free cash flow (FCF) yields look attractive; particularly when compared to bonds, dividend paying stocks are going to be the theme du jour…This will be one of the only ways retiring folks can supplement dwindling fixed income returns in a world deplete of yield.

So, will income-oriented securities be the new core of retirement portfolios? Remember, these boomers have had more exposure to stocks throughout their life than in previous eras; some may argue too much. These people have been watching CNBC while eating their Corn Flakes. They are not trained to cut coupons and most do not have nearly enough to retire, as pensions continue to go the way of the wagon wheel. Additionally, many have avoided stocks, getting out at the nadir in 2008.


We know that since 2011, approximately 10,000 baby boomers retire every day, a fair number without pensions and / or adequate funds. Does one think an investment grade corporate bond paying 2.5% at the core of a portfolio is getting it done? No, I believe they will continue to try and catch up, as more faith is restored in the markets: They will take the Fed's bait and continue to embrace more risk.
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