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$50 Billion Left Equity Mutual Funds, Now What?



September 22, 2011 – Comments (3) | RELATED TICKERS: GMO , EXAS , CRME

Over $50B left equity mutual funds this year so far, more after today I'm sure.  In talking to colleagues, much of that money was people who got close to even from a few years ago, saw smoke and ran for the hills happy to have back about what they had in 2007.  What do they do now?  That's a very interesting question.

Those with advisers should be nibbling back in even now.  Are they?  It doesn't seem like it.  Will they get back in before we pass the recent highs?  I doubt it.  History is that people don't trade well.  Emotions are too strong.  Heck, sometimes math doesn't even work.  The trading models that worked for decades were defeated by the machines in August handing even pros a 10% loss for August.  Me included.

In talking to a relative who used to have a seat in Chicago, he made a pretty simple statement I'll paraphrase. "'The big guys start the market down and scare the little guys out, then nibble in, create a rally and get the little guys to buy in late.  Suck 'em in, flush 'em out.'"  

I don't know how much the little guy has left to sell here.  I think it's the big guys who are in too deep.  But not too deep into equities, but in credit- which should be obvious by now.  The only way the big guys can save themselves is massive intervention.  Yes, there will be some selective partial defaults, but 2/3 or more of the issues will be solved by money creation.  As much as that will make a trendy Austrian economics quasi-student cry, even the Germans are starting to understand there is not much choice.  Not intervening will cause a massive collapse in Europe, one that is so big that everybody suffers more than what the cost of inflating would be.  

Here's a note, and it is important, the inflationary impact of printing is almost completely offset short term by deflationary pressures.  We lost a lot of shadow bank money the past four years, there is room to fill with real money, especially if it is balance sheet money that leaks rather than floods into economies.  That gives governments and big institutions time to adjust in front of an inevitable reintroduction of global growth.  

How does this effect us lowly equity investors?  It's the redo.  We get a second chance to buy on the cheap.  While I like small-caps in general, this is a better chance than I think I will get again IN MY LIFE to buy blue-chip energy and materials producers. I'm not sure when the equity markets bottom, but I think it is above the 2009 lows.  If I had to pick a spot, I'd say the level right above the final plunge down in 2009.  S&P 900ish.  And, there is a good possibility if the pols get their act together, we only see 1050ish.  We'll see. 

So, will the little guys get back in below where they got out?  A few will, but not many.  I'd love to be wrong, but history says I'm not.

We are closer to the bottom than a lot of people think.  Dust off your rifle, find your dry powder, asset your targets and get ready to buy hard asset stocks you will hold a long time.  Don't forget to sprinkle in some agriculture, alternative energy, engineering, water and biotech/pharma plays.

3 Comments – Post Your Own

#1) On September 22, 2011 at 12:36 PM, griderX (97.60) wrote:

We have no more money to small investors already went all in ;(

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#2) On September 22, 2011 at 1:41 PM, Option1307 (30.53) wrote:

Good thoughts, I've started to dip my toes into the water already as a few lowly set limit orders have triggered the last few days. I'm not rushing to buy things, but rather carefully watching and happily picking up shares on the cheap of my most desireable companeis.

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#3) On September 30, 2011 at 7:35 AM, omamdouh (< 20) wrote:


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