A Contrarian’s Dream

February 7, 2012

…is how Doug Kass refers to the stock market in a recent commentary. He talks about the large-scale asset realignment that has been going on for the past few years:

According to the Investment Company Institute, in 2011 retail investors liquidated $130 billion of domestic equity mutual funds, accumulated $1.7 billion of international stock mutual funds, purchased $120 billion of bond funds and bought $8.4 billion of high-yield funds. Since the beginning of 2007 (through 2011), retail investors liquidated over $450 billion of domestic equity funds, accumulated $130 billion of international stock mutual funds and purchased $930 billion of bond funds. The near-$1.4-trillion swing out of domestic equity mutual funds and into bond mutual funds is unprecedented.

Since 2001, as measured by stock holdings as a percentage of total financial assets, individual investors’ share of stocks has declined from 25% to only 18%. In the same time frame, stock mutual funds have dipped from 79% of total mutual fund assets (excluding money market funds) to only 65% at year-end 2011.

A re-allocation into stocks (and out of bonds) represents an underappreciated and potentially massive (and latent) demand that could easily be the catalyst for a move to all-time highs in the S&P 500in 2012.

In my view, retail investors have made this change because they are trying to reduce their risk profile after their experience with 2008-2009. By allocating so heavily to bonds at the lowest interest rates in 50 years, it’s possible they have unwittingly increased their risk profile. Mr. Kass suggests this change may only be temporary. Historically, after all, once the equity market begins to rip off good returns again, money that is stashed in mattresses often finds its way back home. He thinks it could even happen this year.

I don’t have a sense for when investor sentiment might change or what the catalyst might be, but he is certainly right about the potentially massive latent demand. Rising markets tend to stimulate demand and if this big train starts rolling, you might want to figure out how you are going to get on board.

All Aboard?

Source: London Telegraph

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Posted by Mike Moody

Market Timing

February 7, 2012

A funny take on market timing by J.J. Abodeely, echoing a similarly tongue-in-cheek assessment of whiskey by Noah Sweat in 1952. You can see the full article here. The relevant part on market timing follows.

My friends, I had not intended to discuss this controversial subject at this particular time. However, I want you to know that I do not shun controversy. On the contrary, I will take a stand on any issue at any time, regardless of how fraught with controversy it might be. You have asked me how I feel about market timing. All right, here is how I feel about market timing: If when you say market timing you mean the loser’s game, the fool’s errand, the speculator’s effort that separates savers from their capital, turns investors into gamblers, lines the greedy pockets of brokers, strategists, and newsletter writers, challenges the irrefutable logic of efficient markets, yea, literally plunders the wealth from widows and retirees; if you mean the evil action that disrupts the well counseled man and woman from the pinnacle of appropriate strategic asset allocation, balanced objectives, long-term orientation into the bottomless pit of fear, and greed, and meaningless noise, high expenses, and tax inefficiency, and short-termism, then certainly I am against it.

But, if when you say market timing, you mean assessing fundamental value compared to price, favoring undervalued assets while avoiding overvalued ones, always demanding a margin of safety and being in cash when none exists; if you mean being opportunistic and forward looking, buying low and selling high; if you mean the activity which saves investors from catastrophic and permanent losses of capital, achieving positive absolute returns, the endeavor that avoids following the herd up the mountain of excess and over the cliff of despair, favoring instead consistent compounding of modest returns, and the ability to sleep well at night; if you mean that undertaking which has provided capital as the gasoline for the engines of economic growth and prosperity, protected purchasing power and met future liabilities, funded robust retirements, sustainable wealth transfer, and philanthropic endowments, then certainly I am for it.

This is my stand. I will not retreat from it. I will not compromise.

JJ Abodeely, 2011

I guess it’s all a matter of perspective!

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Posted by Mike Moody

What’s Hot…and Not

February 7, 2012

How different investments have done over the past 12 months, 6 months, and month.

1PowerShares DB Gold, 2iShares MSCI Emerging Markets ETF, 3iShares DJ U.S. Real Estate Index, 4iShares S&P Europe 350 Index, 5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx Investment Grade Corporate Bond Fund, 10PowerShares DB Oil, 11iShares Barclays 20+ Year Treasury Bond

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Posted by Andy Hyer