Retail Panics and Yell Sell Sell Sell!

Nervous investors bombard advisers

STEVE LADURANTAYE
Wednesday, October 08, 2008

Investment advisers are being bombarded with questions from panicked clients, as each passing day makes it more difficult for the average investor to understand what's happening to their money.

“You have all these retail investors who just want to get out of the market,” said Andrew Pyle, a Peterborough, Ont.-based wealth adviser for Scotia McLeod. “They look at what's happening, and they see bailouts that aren't working, nothing seems to help. They don't see evidence of recovery in the markets, and they are just literally asking to get out.”

The credit crisis, which had been simmering for more than a year but exploded in September with the U.S. government's takeover of mortgage lenders Freddie Mac and Fannie Mae, was initially perceived as a U.S story that wasn't likely to spread into the wider global economy.

But since then, the U.S. government was forced to rescue insurer American International Group for $85-billion (U.S.), Lehman Brothers Holding Inc. declared bankruptcy and national governments around the world are bailing out their banks.

Now, less than a week after the U.S. government passed a $700-billion bailout package for the country's ailing financial sector, central banks around the world cut interest rates in a co-ordinated effort intended to get banks lending to one another again.

Yet, the Dow Jones industrial average and S&P/TSX have fallen more than 20 per cent each since the beginning of September, despite the heavy government intervention. Canadian investors, rattled by the rapid decline of their key index, pulled a record $4.6-billion from mutual funds last month.

“You're seeing all of this volatility, and retail investors need to deal with that,” said Mr. Pyle. “And they don't want to deal with it. They're willing to sell, because they aren't worried about missing out on a big rally. They think that's a small price to pay for the sanity of sleeping well at night.”

David Baskin, president of Toronto-based Baskin Financial Services Inc., which manages client assets of about $400-million (Canadian), has heard a lot questions over the course of his career, but never had a client ask him whether markets could go to zero. That is, until last week.
“It's a pretty incredible indication of how negative the market psychology is,” he said. “We're heading to a recession. But a recession doesn't mean barefoot hobos hopping trains and selling apples in the street, it means slower growth.”

He said retail investors have largely gone on what he termed a “buyer's strike,” refusing to get involved in day-to-day trading until three or four days of solid gains on major markets. Before they are interested in putting up money, he said, they want to see large institutions step up and snap up big stakes in beleaguered companies.

“Nobody wants to take a chance on stock just to watch it erode out from under them,” he said. “I have a sense that might be starting to change a little bit, but I have no great evidence and may be whistling in the dark. But clearly, they want to see some buying action out of institutions before jumping back.”

More to come
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