I was reading an interesting article about the U.S. JOBS (Jumpstart our Business Act) which in effect begins to unwind some of the so-called “investor protection” constraints imposed by the excessive reactionary measures contained in the Sarbanes-Oxley and Dodd-Frank laws. It seems a recessionary and jobless environment is the only way for cool heads to prevail.
In effect, emerging growth companies, defined as having less than $1 billion in revenues will be exempt from an outside audit of their internal accounting controls for up to five years after they go public (IPO). There are a host of other rules being relaxed in favour of corporate America as well.
Why this sudden enthusiasm to bolster public markets? A combination of low interest rates globally to fight a depression, investor timidity and an overbearing regulatory burden have created a bit of a conundrum for government:
- Companies don’t want to go public (too expensive, too constraining, ridden with volatility and potentially harming publicity)
- Investors don’t want to buy stocks anyway (emotionally damaged from the financial crisis)
Since the beginning of the year, stock markets have performed well enough, but despite the ‘facts’ investors remain shell-shocked. Global funds have flowed into the bond market; in fact we’ve had 19 straight weeks of inflows to investment grade bonds. Commodities have been getting some cashflow as well, but likely from professional hedge funds. US equities have suffered (in terms of fund flows) their longest losing streak since Jul/Aug’11.
Corporations have enjoyed improving business and incentives galore it seems, with a declining tax burden resulting in generous profitability and even dividend yields (click on image to enlarge it).
Indeed ballooning corporate profits bolstered valuations (stock prices) but have not motivated investors one iota to put money into stocks. One might argue that strong profits are temporary; interest rates will nip them in the bud over time.
And although unemployment is better than it was a year ago, in March alone employers took 1,273 mass layoffs involving 121,310 workers, seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month, the U.S. Bureau of Labor Statistics just reported. It would appear that not a whole lot of those profits are finding their way into consumer pockets or the broader economy.
Even during the normally robust RRSP season in Canada, mutual fund sales remain skewed in favour of funds holding bonds.
The Canadian mutual fund industry recorded net sales into long-term funds of $3.2 billion in the month, and total net sales, including money market funds, of $2.8 billion. The 2012 RRSP season reported long-term fund net sales of $12.7 billion versus $13.6 billion in the 2011 season. While flows were down from last year, 2012 was one of the more successful RRSP seasons in the last 14 years. We believe the banks were the main beneficiaries of the strong RRSP season flows. Balanced funds were the top-selling funds in the month, reporting net inflows of $2.3 billion. Equity funds remained in net redemptions ($731 million) in the month.
If you feel that extremely low interest rates for bonds and robust corporate profitability should encourage investors (retail and institutional alike) to throw money into the equity markets, then you’re not alone. Reversion to the normal may still take some time, but it will inevitably happen despite government initiatives.
The problem is that governments are using policy measures to combat psychology rather than economy. Humans may or may not respond as expected to policy – it depends upon recent experience and the convoluted way the experience influences our behaviour – we are not a rational species.
This passion for bonds will diminish abruptly once interest rates are allowed to find their own way (higher) based on the supply and demand for capital rather than suppressed for the benefit of financial institutions and bankrupt governments. Fear of risk will also lessen once enough time has passed us by. The strangest thing about our species is that if it didn’t kill us, we’ll most assuredly do it again.