Forecasts for the Mighty U.S. Retail Investor

by Addison Wiggin & Ian Mathias

  • Floodgates about to open… India hints at opening market to retail investors
  • Bond bubble expands: Investors rush out of stock mutual funds at record rate… and pile into Treasuries
  • SEC catches New Jersey cheating investors… fines state $0
  • An unlikely summertime bull market: The sudden resurgence of M&A


  Ease of access is a staple of market booms. It’s hard to imagine American stocks, for example, surviving these days without support from retail, institutional and international investors alike. In the same way, much of China’s incredible market boom is thanks to Hong Kong, whose exchange opens the gate to millions of investors who want a piece of the world’s hottest market.

Now it looks like ease of access is coming to India.

“India is planning to open the country's equity markets to foreign retail investors,” the Financial Times reported earlier this month. While there’s nothing definite yet, an Indian government panel recently recommended the finance ministry remove many of the barriers that currently prevent small international investors from buying Indian companies. (At present, only institutional-sized investors can have the full pick of Indian companies.)

According to the FT, Indian regulators are taking the panel’s advice and beginning to build an exchange capable of handling the rush that would likely ensue.

  “One of the biggest frustrations I have with India is the small number of stocks we can invest in,” Chris Mayer adds. “This is unlike China, which has a well-developed Hong Kong exchange, not to mention the many companies that trade on the NYSE and Nasdaq. In India, foreign investors like you and me can't buy Indian stocks, save for the small number that list in the U.S.

“While I was in India, I remember talking to brokers and money managers who told me it was only a matter of time before that changed. The big institutions have been allowed to invest in India for 18 years. But now it looks like the common fellow will be able to pick up shares soon, too.

“On my last trip to Mumbai, I spent some time with analysts who shared their favorite ideas with me. There are many Indian small-cap stocks growing 30-40% a year and still trading cheaply. But they've been off-limits so far. Maybe not for much longer.”

  India’s timing is serendipitous, as the average American has withdrawn from the U.S. stock market. Friday, we mentioned the record rise in “hardship withdrawals,” when American savers tap into their 401(k)s before retirement.

Today, a new statistic in a similar fold: U.S. investors have already withdrawn $33.1 billion from domestic stock mutual funds this year, says a new study from mutual fund trade group Investment Company Institute. If this trend continues through the rest of 2010, this will be the worst year for mutual fund withdrawals since 2008 and the second worst in at least 30 years.

Depending on how you look at it, 2010 could be the worst year of them all. It’s hard to blame investors for fleeing in 2008, when the Dow crashed 33% — the third worst year in its history. But this year, despite the near-record withdrawals, the market really isn’t doing that bad… the Dow is only down 2% year to date. Investors aren’t running out the door in fear. They’re forming a tired, orderly queue.

So what are you doing with your nest egg? If you want some advice, our income analyst Jim Nelson just released a presentation that’s caught the eye of many retirement savers: How to Legally Collect Thousands of Dollars Each Year… From the Other Government-Backed Retirement Program.

  Of course, there is no such thing as being “out of the market.” Investors have gone out of stocks and moved money into the new bubbles of our time: the dollar and U.S. bonds.

In fact, bond fund inflows over the last two years mimic that of the dot-com bubble in stocks. Bond mutual funds received $480 billion in new capital from June 2008-June 2010. That’s just $16 billion less than the most manic 24-month period of the dot-com craze.

Hence, bond yields continue to amaze. The U.S. 2-year note found yet another record low yield on Friday, a startling 0.46%. The 10-year offers an equally lousy coupon of 2.6%.

Of course, the U.S. government will ride this mania right up until the bitter end. The Treasury is scheduled to sell another $102 billion in bonds this week.

  Another reason to not join the bond rush: The SEC has accused the state of New Jersey of lying to municipal bond investors. Here’s the quick and dirty of the allegations, which the SEC announced late last week:

In 2001, New Jersey increased pension benefits for state employees without having the funds to cover new benefit expenses. For the next six years, at least, the state continued to underfund the pension system — but hid that information from municipal bond investors. On 79 separate occasions, the state sold a total of $26 billion in bonds while “withholding and misrepresenting pertinent information about its financial situation,” said SEC director of enforcement Robert Khuzami.

In other words, they lied so that the bonds they were selling would appear more attractive. It’s classic balance sheet fraud, committed by senior state officials working for both Democrat and Republican governors. And the state’s bond underwriters — JP Morgan, Citi, Morgan Stanley, Bank of America, Barclays, Merrill and (of course) Goldman Sachs — all probably lied too. At the very least, they all failed to conduct due diligence before vouching for the quality of the state bonds.

What’s the penalty for this outright fraud? Nothing.

The state of New Jersey will pay the SEC precisely zero dollars. Not one state employee or any of the bond underwriters will pay a fine, either, or go to jail…or even lose his job. In fact, the state didn’t even have to admit wrongdoing. “New Jersey agreed to settle the case without admitting or denying the SEC’s findings,” calmly explains the SEC press release. Essentially, the only provision of the settlement is Jersey’s promise that it won’t do this in the future. That’s it.

(For more on this story, your 5 Min. editor gave the full rundown in the weekend edition of The Daily Reckoning.) 

  The dollar index, another safe haven trade, is up half a point from Friday, to 83 on the dot.

“It's back to the same old grind,” Chuck Butler reports, “buying dollars, Treasuries, Japanese yen and Swiss francs.

“The "heat" is back on the eurozone's debt problems, which is strange in that there were two successful bond auctions by member countries last week. You see, to me, this is nothing more than the old saying about when the U.S. sneezes, the rest of the world gets a cold… coming into play right now.

“Everyone was just fine with forgetting about the eurozone debt problems, and focusing on the U.S. economic problems… But then a funny thing happened on the way to the forum, and suddenly, the U.S.' economic problems got too big, and nasty… So the mental giants of the markets decided that if the U.S. is going back to a recession (I say they never left it!), the rest of the world is going to have problems too, and… ‘What about those deficit problems in the eurozone?’ See how their minds work?”

  Gold remains a popular flight to safety, too. The spot price is in the higher end of its recent range today, at just under $1,230 an ounce.

  Stocks have gotten a kick in the pants from a suddenly revived M&A market. We wrote about the BHP/Potash deal last week… then came Intel’s bid for McAfee… now this morning, HP has entered a bidding war with Dell over 3Par.

All told, there’s been almost $200 billion in deals so far this month, the best August for M&A since 1999. In fact, should the pace continue through the end of the month, this could be the best August for deal makers ever… despite all the gloom in the marketplace.

The M&A resurgence is keeping the indexes above water today. The S&P 500 rose to a 0.9% gain within the first few minutes of trading this morning.

  By the way, that BHP/Potash deal just got even more interesting: Potash execs said today that it is not only rejecting the BHP bid, but are actively pursing offers from other potential suitors. Two names are at the top of the pile, a typical sign of the times… Sinochem, from China, and Vale, a Brazilian miner.

  Meanwhile, back in the States, more bank failures. Eight banks bit the dust on Friday, bringing the official tally to 118 for the year. As we mentioned last week, there’s been some dispute over the actual head count, but it hardly matters… considering last year’s total of 140, 2010 will likely be the worst year for banks since the S&L crisis.

  Last today, just in case you missed it…

That’s the new high school in Los Angeles that will officially open next month. The price: $578 million, the most expensive public schoolhouse in America.

Matt Drudge is on this story like white on rice, so we won’t beat a dead horse. But considering all the crises occurring in California state budgets and teacher pension funds, we can’t not mention it… boggles the mind, eh? We’re all for kids learning in inspired environments, but this is crazy. Maybe next time take $200 million out of the construction budget and buy smarter teachers.

Or, heaven forbid, pay off some debt.

  “I am in my early 40s and I cashed out my 401(k) and IRA and happily paid the taxes and penalties,” a reader writes, furthering our discussion on retirement and Social Security. “I sent the money to an account outside the U.S., since I believe there is a ZERO percent chance that that those funds will remain unmolested by the U.S. government by the time I reach retirement. Anyone who believes otherwise is a fool.”

  “Please consider that those withdrawing money from their 401(k) to pay mortgage and tuition expenses may be the remaining righteous soul of this nation,” another reader adds. “They signed a legally binding contract and are doing their best to uphold their end of the deal. They want their children to have a better future than they have. When those honorable and loving citizens are no longer praised for their morals and ethics and, instead, are labeled as stupid, what will be left?”

  “I resent all the help that a large part of the population receives, while people keep knocking Social Security,” our last reader writes. “My retirement went down the tube with my business. I had to close my doors while I could still pay off my suppliers. This forced me into retirement. I have cancer and I am 76 years old and cannot hold down a job. We have not had an increase in Social Security payments in two years, yet everything I must buy has gone up in price. I am being squeezed into the ranks of the homeless. There are those of us who did save and did plan, but the government decisions put our economy in a tailspin. I did not put us there. I say I am not alone. There are many like me, and we need the increases in Social Security to keep up with what it costs us to live.

“Enough of we ‘should have planned’ to get along without Social Security. I would be happy to get out of Social Security, just give me one of the federal workers' retirement plans. I advise anyone to forget about private business endeavors — just go to work for the federal government. Unless you are extremely fortunate, you will never be able to save enough to compete with a federal retirement plan.”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. If you’re saving for retirement, you should seriously check out Jim Nelson’s latest online presentation. He’s discovered a great way to supplement your retirement income by tapping into a foreign source of wealth that is far more stable and secure than the U.S. Social Security system. Like all investments, it’s not a sure thing… but it is an honest idea and absolutely worth your consideration. Listen to Jim tell the story, right here.


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