This Sunday’s edition of the New York Times carried an article penned by Jeff Sommer, a masterpiece of uncertainty and contradiction, entitled “Jumping Aboard The Train, As If There Won’t Be Another”. What Mr. Sommer is referring to is his belief that a rush has begun on the part of individual investors to get into the stock market before it does some sort of Moon shot. If this is the case, it is not a good omen for the market. Generally speaking, when this type of enthusiasm develops for any asset class the game is over. And, if this is a stampede into stocks, it is certainly a very strange one.
Since the market began its decline back in 2008, according to Lipper Analytics, approximately $417 billion has come out of equity mutual funds. In their most recent survey on fund flows, Lipper reported that January broke a twenty-month losing streak with U.S. equity funds having a net inflow of about $14 billion. Compared to the huge outflows of the past four years this is hardly a drop in the bucket. One other interesting Lipper fact was the flow into equities last month was dwarfed by $34 billion in net new bond fund purchases.
In the face of this so-called “Rush”, the author asserts “The economy may be lurching into another crisis” (maybe The Dreaded “R” Word) all of this in the face of a market that is up 125% plus since the March 2009 lows. Predictably he throws in “The Dreaded Sequester” as a reason for caution. He then throws out the possibility “that $1.2 trillion in automatic government spending cuts might begin in just a few weeks, delivering yet another blow to an already lackluster economy.” He cites economist’s predictions as back up for his “lackluster” characterization.
The fact is, re. The Sequester, only $110 billion (six tenths of one percent of 2012 GDP) of the $1.2 trillion in cuts would come in 2013, if they come at all (for more detail on The Sequester see Kort Session #5).
Now, if you’re not already worried, Sommer goes on to refer to the work of Laszlo Birinyi. As an aside, from my perspective Birinyi has been around the street for decades and is a credible source. Birinyi’s work monitors volume (upside and downside) going into stocks and it has some interesting technical legs, but I digress. The author quotes Birinyi saying that his work shows we have entered the fourth and final leg of this Bull Market. How horrifying! This is the “Exuberance” phase (the others are “Reluctance, Consolidation and Grudging Acceptance).
- “A point where people say, yes, the economy isn’t going into recession right away, companies are making money, interest rates are not going through the roof, and all the concerns we have had for sometime perhaps were too negative.”
- (Thank you media for hammering away and making sure we were so concerned over the past four years–bk)
Anyway Birinyi predicts that this final leg could “last between one and three years”…a range you could drive a boxcar through and really a relatively positive note.
What our author has done in a few short paragraphs is take us from despairing a risk-filled, sluggish economy that is about to be slammed by The Sequester (totally getting the magnitude of the figures under consideration wrong), then he takes us further into the depths with comments that the game is about over as we are in the “Exuberance” phase…Exuberance, that he claims has shown up on the basis of some smallish fund flows into equity mutual funds after huge three year disintermediation. Ah, yes, the best was yet to come when he cited Birinyi’s “Bull” phase lasting another one to three years… great prognosis, if it were to come to pass! Give me a break, please.
Finally, at the end of the article, he gets a good answer from Laszlo on what is driving the economy and market?
“What is ultimately propelling the economy? It is the Fed, always the Fed.” “if you want to know where the market is going, “ he said,” Study the news, but always follow the money “
Following the money is in fact the best take away from this article. For as long as the Fed, Ben Bernanke, et. al. are willing to fight any battle, use any tool, and create new tools to keep us from disinflation, or worse deflation, we are probably okay. Be mindful, however, that down the road an expansive monetary policy coupled with expansive fiscal policy, weak-will and political dysfunction should lead to inflation. Ergo, on a positive note, it is a good time to own assets and to borrow money at low fixed rates that can be paid back over time with cheapened dollars. It would not appear to be a good time to be a lender.
In conclusion, the worst thing about this article is that it continues to play on the fears and emotions of investors (i.e. stay away, stocks are dangerous—the old tapes), then it zaps the reader with a confusing positive note, the potential of a one to three year duration to the current “Bull”. It does nothing to address the longer-term potential of a secular bull market developing a la 1982 to 2000 or the longer-term returns that have been historically available in stocks versus bonds, a return differential that should be magnified by the current low rates available in the fixed income markets.
Please let me hear from you on thoughts and questions.
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