On The Call With Wally Forbes
When The Treasury Yields Are Low, Why Buy Bonds?
by Wallace Forbes, 08.02.10, 01:00 PM EDT
Forbes.com
Mercer Capital Advisers President Henry Mercer gives his stock picks for this environment.

Henry Mercer III, president of Mercer Capital Advisers explains why over the long-term, investors will be better served by certain stocks than Treasuries.

Henry Mercer III: The market had a strong recovery last year--which is somewhat typical following the panic situation that was in place at the market bottom. And now we're in a period where we've got a real wrestling match going on between the bulls and the bears.

Here in late July, the market is essentially unchanged for the year--at least in terms of the S&P 500. But we've had wide swings both ways. We had a severe correction in the May/June period, and the S&P fell about 16% from 2010s peak. Currently things are acting better, but in the background there's a wide range of worries from the sovereign debt mess in Europe to the oil spill in the Gulf.

Economists are talking about a double dip in the U.S. and investors are generally nervous. From our perspective here, and historically, the ideal time to buy has been when investors are fearful. And we just see a tremendous amount of pessimism, which to me is very bullish from a contrary standpoint.

And it just is so extreme that in our most recent quarterly letter to clients, we made note of the fact that a recent cover story in Bloomberg Business Week had a bear on the cover and the headline was "GRRRR! What we can learn from the endless pessimism of Wall Street's biggest bears." It highlighted the arguments and the very pessimistic views of the most prominent bears at this point in time.

Wallace Forbes: You seem to see this fight between the bulls and the bears almost every day in the press.

Absolutely. There appears to be very little long-term investing going on. We hear talk, and it's all somewhat controversial, about flash trading and electronic trading networks. And we had the early May flash crash. There are so many issues that investors are nervous about. To us, this creates value and creates opportunity.

That Business Week article was then followed up on Sunday, July 4, in the Sunday Business Section of the New York Times by an article entitled, "A Market Forecast That Says 'Take Cover,'" which highlighted the views of prominent bearish strategist, Bob Prechter, who made the outlandish forecast that the Dow would fall below the 1,000 level in five to six years.

To me, this extreme pessimism is more the trademark of a bottom than a top. Conversely, if you go back to the late '90s, early 2000 period at the peak of the Internet frenzy, it was the bullish strategists who were getting all the press.

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