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Smart Money Newsletter- Small Investors Feed Sharks

Small Investors Rush Back In 

- New age of prosperity, or a feeding frenzy for shark week?

Written by Keith Springer | 2.1.13

Well it had to happen sometime. The average investor, the little guy….you, me, and everyone we know, is finally feeling brave enough to tip their toe into the shark filled waters. It certainly took long enough. Over the last four years, money poured out of stock funds practically every single month with over $250 billion leaving stock funds, and over $500 billion being added to bond funds. But that started to change a few months ago. In the first week of January alone, we had an inflow of over $15 billion going into stocks, the most in 5 years. The question begs: Is this the beginning of a new age of prosperity, or just a feeding frenzy for shark week?

Of course some of the money is new (typically seen in January), and some is coming from year-end tax loss selling, but there is no question that a larger chunk is now coming out of bonds. The message is loud and clear, it’s time to get out of bonds. With rates practically zero and negative after inflation, who can blame them? Stocks are the only game in town, which is exactly what Bernanke and the Federal Reserve has been hoping for, the wealth effect.

There is one other little caveat causing stocks to rise that you haven’t seen in the papers– the new global currency war. Essentially, the race to the bottom for currencies is a race to the top for equities. Japan is the latest to kill its currency, as earlier this month their government announced a $226.5 billion dollar stimulus package. Relative to the size of their economy, this is the equivalent of over 5 times the size of all the stimulus and quantitative easing’s in the U.S. combined! Many feel that this is the final nail in the coffin for Japan, which has worse demographics than we do( there is a whole chapter devoted to it in Facing Goliath – How to Triumph in the Dangerous Market Ahead). Japan is truly a bug in search of a windshield. However, the reality is that in such a competition, global trade booms and everyone wins. Just look at the Japan market where the yen has plunged 17%, while the currency hedged ETF (DWJ) has soared by 31%.

Of course all this is doing little to actually help the economy. Look no further that yesterdays announcement that the Q4 GDP was negative .01%. Imagine that. Over a trillion dollars in Fed stimulus a year, which will top $4 trillion by December, and all we get was this. In fact the only good news is that with no economic growth, we’re definitely going to get more stimulus, which is all the market really cares about anyway. What’s going to happen when the Fed can’t print any more money to throw on the market? I’ll tell, but I think you already know. What was the name of that movie with Bruce Willis with the meteor hurtling towards earth?

Investor Strategy

Stocks are likely to continue to rise as this trend continues, and nimble investors can do well, albeit with enormous risk. However the main thrust of the story is a double edged sword. The average investor typically gets in near the top in the market as the savvy institutional traders sell to the unsuspecting little guys. As I have said repeatedly, the market never crashes when the majority of investors are not in and everyone expects it to. Complacency is the last straw that breaks the camel’s back, and as mom and pop get back in, the risks rise exponentially.

Watch for complacency. Bullishness is definitely becoming more prevalent. Both the Investors’ Intelligence and American Association of Individual Investors (AAII) polls showed over 50% bulls last week (53.2% and 52.3%, respectively), and relatively low levels of bears (22.3% and 24.3%, respectively). The Bullish Consensus and Market Vane polls exhibit similar levels at 64% and 68% bulls, respectively. These are all the highest percentages of bulls in many months. Short-term traders also appear to be growing more enthusiastic about the rally, as indicated by the recent Int’l Securities Exchange call/put ratio, which has climbed from 91 on Jan. 22nd to 130 yesterday, suggesting a steady increase in bullishness.

Now I’m not saying a crash is going to start the morning of the next ½ moon when it’s raining out. I actually expect the market to go higher from here. However, my 29 years in this business of managing money for clients has taught me that bad things are never announced. There is no bell that rings at the top or tsunami warning alerts, and crashes nor corrections come when anybody expects it.

This market environment is precisely why I built our powerful Investment Management Strategy which is intended to manage risk and deliver returns. It is a properly structured, disciplined, tactically managed approach to managing money designed to capture much of the markets upside returns, with much less of the downside risk. Unlike any buy and hold scheme, mutual fund program, or many other money managers, we utilize an active style to managing our client’s assets with a hands-on, “tactical” approach, that can change quickly between strategies and go to cash during dangerous times.

If you would like to learn more and/or get a free second opinion on your portfolio, simply reply to this email, click our Appointment Request Form, or call for a no-cost no-obligation consultation today at (916) 925-8900.


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