MADISON, Wis. — As investors recognize that there might not be any quick fixes to the economy's woes, some may go on a "buyers' strike," according to one investment expert.
Bruce Ebel, managing director, portfolio manager for MEMBERS Capital Advisors Inc., said a buyers strike occurs in bear markets as investors step aside, reluctant to buy into deteriorating economic conditions despite "very attractive" valuations.
"Meanwhile, those that are selling, are often 'forced sellers' as a result of the need to reduce debt leverage within their hedge fund or corporate financial balance sheet," Ebel wrote in a MEMBERS Capital Nov. 19 MarketLine alert. "As forced selling occurs, without buyers stepping up on the other side of the trade, the market prices decline until a clearing price is reached and the seller can liquidate the amount of stock being sold."
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Ebel said the buyers' strike behavior can last for awhile, until most of the sellers have finished selling. Once selling pressure is relieved, sharp rally typically ensues.
"While it is impossible to predict the timing of the liquidation cycle, we do know that a large amount of cash has already been raised," Ebel noted. "In addition, U.S. Treasury interest rates continue to decline, with the ten-year Treasury bond yield now below some cash yields. This dynamic will also, at some point, motivate investors to move back into equities where expected returns dwarf the ultimate safety of the Treasury bond return."
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