Five Reasons To Be Bearish

Aaron Hodson Sep 13, 2014

This article appeared originally in the National Post, Sept. 13, 2014. To see it in its original form, click here.

Investors still remember — painfully — the losses of 2008 and 2009 and most would not want to go through that again. Bears, meanwhile, have endured their own pain for quite some time, but every party has to end, and those selling now do not want to be the ones who are hung over the day after the current market rally ends.

Last month, we gave you five reasons why you should still be bullish on equities. Since every trade in the stock market has an opposite view, here are five reasons to be bearish and start selling.

Corporations are the only ones buying

Corporations are flush with excess cash, and interest rates on borrowed money are extremely low. The result: corporations are buying back massive amounts of stock.

Stock buybacks and cash dividends reached US$241.2-billion during the first quarter of 2014, exceeding the previous record of US$233.2-billion set in the fourth quarter of 2007, according to S&P Dow Jones Indices.

The amount of corporate buying is so big that many worry about the lack of individuals participating in the market or about what happens to the market when companies stop buying. Bearish investors feel that only one type of buyer is propping up the market.

Also note the date of the last corporate buyback record: just a couple of quarters before the market completely rolled over in 2008.

Interest rates

Many bearish investors are extremely worried about interest rates. With record-low rates and excess cash sloshing around the economy, these bears fret about what will happen to consumer spending, housing prices and corporate profits when interest rates rise — as they will surely do one day.

Investors right now are very, very unfamiliar with what higher rates can do to an economy, because rates have been low, and falling, for so long. Bears do not want to stick around for the first — inevitable — rate hike by the U.S. Federal Reserve.

The rally has simply been too good for too long

U.S. stocks have tripled since March 2009. Bears say this is not a "normal" market and so we are massively overdue for a big correction.

By stimulating the economy, the Fed has made stocks the go-to asset class. Investors are used to stocks rising, and will perhaps be very quick to sell equities when stocks reverse, since it will be such a foreign environment for them.

Fear may take over, and bears today are prepping their portfolios for that event.

Margin debt is at records

With surging markets and low interest rates, investors are, of course, going to borrow money to invest. After all, interest charges on debt incurred for investments is tax deductible.

There can be huge tax-assisted gains by borrowing money to invest since some companies are paying dividends of 4%. U.S. margin debt hit US$451-billion earlier in 2014, and has been at record levels for some time.

Bears say all that debt is going to cause all sorts of panic selling on even a small interest rate hike or a small market decline. It has been proven that investors with debt are far more likely to sell than those without debt.


Some bears say they are selling simply because valuations are excessive. The TSX is trading at 20x earnings and the S&P 500 is trading at 18x, so there is simply no more upside, based on expected slowing corporate earnings growth.

Corporations for the past five years have largely boosted profit by cost cutting, and that has run its course. Bears don’t see why you should pay 18 to 20 times earnings for a company that, on average, is not showing huge top-line growth.

Overlay that valuation multiple with an uncertain economy, and the bears get even more bearish.



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