The New Smart Money?

In a world where those who allegedly know best are doing dumb things like betting on V-shaped recoveries, buying overvalued stocks for all the wrong reasons, and generally repeating the mistakes that helped bring about the worst financial crisis this century, its ironic that, as the Associated Press reports in "Main Street to Wall Street: We Don't Buy the Rally," at least some ordinary Americans are looking like the real "smart money":

NEW YORK – Edward Shook can't resist a bull market.

He rode the one in the late 1990s and lost $350,000 in the dot-com collapse. Shaken but optimistic, he bought into the bull market that followed — and lost another $350,000 from his portfolio's peak when stocks fell to a 12-year low in early 2009.

Now the 65-year-old roofing contractor from Raleigh, N.C., says "he's getting smart for a change." Even though the Standard & Poor's 500 has climbed 68 percent since March, Shook is largely leaving the stock market "to the crooks that run" it. He's sold shares and bought bonds instead, with no regrets.

Millions of other Americans are steering the same course. After being key players in bull runs of the past, small-time investors have not only stopped buying, they're selling. The question for the new year: If the man on the street doesn't jump back in, will stocks continue to defy gravity?

So far, the market's comeback is almost entirely due to buying by professional investors at hedge funds, pension funds, banks and other institutions.

"We've never seen this before — such a huge rally, and the little guy is out," says Vincent Deluard, a strategist for TrimTabs Investment Research, a Sausalito, Calif., firm that tracks mutual fund flows to get a sense of what individual investors are doing.

Mutual funds are a good proxy for such investors because more than three-quarters of fund assets are held by individuals, both directly and through retirement plans.

Small investors yanked a net $14 billion from stock mutual funds from the beginning of last year through mid-December. That's on top of a net $245 billion withdrawn in 2008, according to TrimTabs.

The firm says most of $592 billion taken out of money market mutual funds last year has gone into bond and bond-hybrid funds instead.

Some bulls say ordinary folks are likely to start buying again soon, given the encouraging economic news lately. Others are not so sure, and fear that if investors drag their feet much longer, stocks could flatline.

According to the Federal Reserve, individuals held 80 percent of the $19 trillion in stock in U.S. companies, both private and public, at the end of September. That means they can have a big impact on the market whether they own the stock directly or through mutual funds.

There's also a third view, a decidedly bearish one that's sure to delight anyone who's ever felt taken by a pushy broker or an optimistic analyst report or cheerleading by financial journalists: Maybe, just maybe, the little guy is right to be shunning the market now, and it's the experts who are wrong.

"People have been lured into two bubbles seven years apart, and for a lot of them it's over," says David Rosenberg, chief economist at Toronto money manager Gluskin Sheff. "The bulls say if the market is up this much without retail investors, just watch when they come in, but it isn't going to happen."

Rosenberg says investors who have not been spooked or angered by the market are probably too poor to buy anyway. The Investment Company Institute says 5 percent of the 24 million 401(k) investors it tracks stopped contributing to the plans through the first nine months of last year, 1.3 percentage points higher than in all of 2008.

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Comments

[roger]

Making good on Wall Street means the place is run
by good people, loosing one's shirt means the place
is run by a bunch of crocks

[DavosSherman]

Oh yeah, the small investor will take his money and:

1.) if in a 401k or IRA switch to cash or bonds and wind up giving it all to the demo-dictatorship http://market-ticker.denninger.net/archives/1830-401kIRA-Screw-Job-Coming.html
2.) Stick it in bonds and get his clock cleaned when that bubble pops

Both imminent.

[Sackerson]

The poor man! Bonds! And when interest rates rise?

[W.C. Varones]

Mr. Panzner,

I confess to not having read your book yet (I will!), but I'm puzzled by your dollar-up, stocks-down forecast.

Is the endgame Federal default rather than inflation in your view?

I'm still diversified across stocks (foreign and domestic), cash (AUD and USD), and gold and miners, and I'm even considering buying an overpriced house because I think they're going to print their way out of this mess. Bonds are a disaster I think, and taking out a 30-year fixed mortgage is a great way to short Treasuries.

W.C.

[Bill]

Buy the TBT.

[Matt]

There is inflation in the wage disparity and food prices...the dollar is in decline...1.444

[howard]

Can we trust that short and double-short ETF's will be trustworthy on the next leg down? I was burned when Paulson shut down financial shorting for 2 or so weeks with the double-short banking ETF SKF.
Howard

[Penny]

The dollar will continue to decline over the next 15 years and taxes are going to be at ridiculous levels.

www.pennystockdumpblog.info/

[Michael Panzner]

There are a number of variables at play, but the key point is that the outlook you cited is a one-year call. I am bearish on most assets in the short run because I believe we are in the latter stages of the deflationary phase. Theres also a large measure of leveraged speculation in most markets that will be involuntarily unwound. Longer term, I see bonds down, stocks down, and precious metals up.

[sharonsj]

I think this is great news. I will never invest in the stock market because it's a gambling casino and only the insiders win. Instead I buy antiques, jewelry, property--objects that I find priced below their real value. Generally I have not lost any money and I get to use and enjoy the stuff before I sell it.