Interesting market observations in today’s marketplace.
March 8 (Bloomberg) — Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.
Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.
Click link for full article:
http://www.bloomberg.com/apps/news?pid=20603037&sid=aPidmY6Nga30
And…….
The Rubber Hits the Road
John P. Hussman, Ph.D.
“Despite the high level of bullishness here, the market has gained only a few percent beyond its September highs. Most of what we are seeing now is a tendency to make marginal new highs, back off slightly, and then recover that ground enough to register another marginal new high. As I’ve noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, overbullish sentiment, and upward yield pressures, the market’s tendency is exactly that – to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere. Being defensive in that situation can make each slight new high feel excruciating, even if the market is not making much net progress. I remember that my own patience with this process was tested in mid-2007, when I quoted Wallace Stevens – “Does ripe fruit never fall? Or do the boughs hang always heavy in that perfect sky?”
What then?
The simple answer is that we will respond in line with historical precedent. A deleveraging cycle is much like a secular bear market in that the market experiences a great deal of volatility, but tends to establish a sequence of troughs, each at lower levels of valuation (even if not at lower absolute prices). In that environment, there is significant risk of abrupt spikes in risk aversion (which implies abrupt price spikes to the downside), so you can’t trade with “hot” valuation or market action criteria. It should be no surprise that Graham and Dodd wrote Security Analysis following the post-credit crisis period of the 1920’s and 1930’s. If there’s one lesson from those environments, it is that valuations and the idea of a “margin of safety” takes precedence over all other considerations.
It’s unlikely, given the seriousness I place in being a fiduciary to shareholders (in some cases to their life savings), that I’ll ever completely submit to the idea of relying on the speculative impulses of investors, but I do recognize that we can probably accept a greater level of speculative risk going forward than we were willing to adopt coming off of a valuation bubble and a credit crisis with a latent second-leg still looming. I expect that clarity about the underlying economic conditions here will be helpful in striking that balance.
Click link for full article:
http://www.hussmanfunds.com/wmc/wmc100308.htm
