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Buzz and Banter


Here is my take on Tony's travels. The money managers that Tony met with are for the most part run by very smart and experienced people that study the same things we do day in and day out. They look at the numbers objectively, with no spin from TV broadcasters or pundits. They, like me, have the right to look at the glass as half empty and to be concerned about the course we are taking to reflate the economy.

Even though money managers may be concerned and skeptical, as far as sentiment indicators go, it doesn't matter. If money is coming into their fund, they are going to put it into the market, period. If the market goes down they are not penalized for losing commensurately with the market, but if the market goes up and they do not perform in line, they are severely penalized. Mutual fund cash is only 4.5%, an all time low. They know that they compete with the indexes, so when money comes in, they do not increase cash levels even if they are bearish.

The only thing that matters in determining whether the market is going higher or lower and where it is in the spectrum of accumulation or distribution is whether money on the margin is coming into the market or is going out. When investors are becoming bullish, money comes in and the market goes up. When most investors are already bullish, the money inflows that have been driving the market higher may begin to slow down. As inflows slow down, distribution begins to take over. Sentiment numbers do a good job not of timing the market, but of giving us an understanding of what people who have the ultimate control of the money are thinking. When those numbers are extreme it signals that a cycle of inflows versus distribution may be ready to change.

The primary sentiment polls are based on retail investors (AAII) and institutional commentators or newsletter writers (II). Both polls, as already commented on, are at very high levels. Another sentiment number (I consider very important) is calculated by Richard Bernstein, Merrill Lynch Strategist: currently the average stock allocation recommended by wall-street firms is 68%, one of the highest on record. Another indicator, which is not really a sentiment number, is Lowry's buying Power index, which is at a five month low. This also is currently indicating a lack of buying interest at these levels.

As Kevin and Tony have said, this just gives us an idea of where we are, not what will happen or when. This is not in dispute. What Tony and Kevin are trying to determine is, "are investors really doing what the polls indicate or are they really just talking and not buying (yet)?"

The fact that money managers are skeptical is irrelevant because they are going to buy if money comes in and they are going to sell if money goes out (they have to because they have no cash). So in my mind the only important factor in determining where we are in the cycle is what the retail (the ultimate) investor is doing and thinking.

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