Investors Don’t Need Halloween for Frights

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Halloween’s traditional array of ghosts, ghouls, goblins, vampires, and other assorted horror figures will soon descend on us once again. Pretty scary for some, especially the kids.

Equally frightening for the grownups is a slew of potential investment horrors out there. Among them:

• The growing North Korean nuclear crisis

• The ballooning mess in Iraq.

• Threat of a slowing global economy.

• A standoff with Iran over nuclear issues.

• Increasing warnings from various Fed governors that inflation remains a significant worry.

• The knowledge that October has produced some major market declines, among them the crash of 1987 on Black Monday (a one-day Dow plunge of 22.7%).

Meanwhile, some scared investors — both individuals and institutions — are already exhibiting pre-Halloween fear. Indicative of this, individual investors are dramatically scaling back their purchases of American stock mutual funds.They’re now running about $100 million a day, versus $2 billion daily in the first four months of 2000, I’m told by liquidity tracker Charles Biderman. At the same time, institutional worryworts have become far more conspicuous, with cash reserves in mutual funds rising to 4.2%, their highest level in nearly two years. The last time cash, as a percentage of assets, topped 4.2% was in November 2004 when it stood at 4.5%.

But what excites Mr. Biderman, a former Barron’s reporter and now the skipper of TrimTabs Investment Research of Santa Rosa, Calif., is that in contrast corporate America, the so-called smart money is gobbling up common stocks like they’re discounted Van Goghs or Renoirs.

Some key examples of corporate America’s enthusiasm for stocks as noted by our liquidity tracker, who describes himself as “wildly bullish.”

Loads of companies are going private. So far this year through September, there has been $254 billion worth of cash takeovers of public companies. That’s nearly comparable to all of last year’s $257 billion of cash takeovers.

New stock buybacks so far this year total about $500 billion, versus $460 billion in all of last year.

Insider selling is subsiding. In 2006 so far, it stands at about $76 billion. If such sales continue at this pace, they will be as low as they were in 2002 and 2003 when the market hit bottom.

So what does it all mean for the market?

Mr. Biderman, whose clients include a third of the country’s biggest hedge funds, observes that the message from his latest analyses is, “The market is literally screaming that it wants to go higher.”

But what about the timidity at the mutual fund and individual investor levels?

Isn’t that a warning sign? Just the opposite, such fear is a solid contrary indicator, he points out, noting that in August, a month in which the S&P 500 rose 3%, individual investors pulled $4 billion out of stock mutual funds. Likewise, mutual funds at the end of August wound up with $13 billion less of stock investments than they had at the end of the July, thereby shortchanging themselves, as well, of a good part of the August gain.

Based on what he says are extremely positive liquidity trends, Mr. Biderman figures the robust market could easily climb another 10% before year end, which is more than double the average annual 6.448% fourth-quarter gain in the S&P 500 over the past 18 years. “At some point,” he says, “people are going to realize they’re missing the party and start to buy.”

Technology, he notes, looks most interesting. A key reason: “Everyone is ignoring it,” he says. “It’s the most unloved sector.” Mr. Biderman’s service doesn’t recommend individual stocks, but a clue to his preferences can be seen in a trio of stocks he owns personally — Google, Salesforce.com, and Taleo Corp.

A couple of veteran money managers from the east and west coasts share his bullish sentiment, though not to the same degree. For example, the head of New York’s Graham & Dodd Fund, David Rosen, looks for stock prices to rise another 4% to 5% before year end.

“I think third-quarter earnings numbers will look better than people think and that the economy is doing better than people give it credit for,” he says. Another plus: his belief the Fed is finished raising rates in the current credit-tightening cycle.

His favorite sector: energy. “The recent selling in these stocks has been overdone,” he says. His top picks are Tesoro Corp., Conoco and Occidental Petroleum.

Barbara Rosenblum, a principal of San Francisco-based Rosenblum, Silverman & Sutton, says, “I believe in a Goldilocks ending, another 3% increase by year end. Inflation is low, we’ll see good quarterly earnings, the bond market is behaving well, gas prices are coming down, the economy can live with $60-a-barrel oil and slow and steady growth is okay.” Her favorite stocks are Oracle, Cisco Systems, and Disney.


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