JGus (30.16)

Throwing Caution to the Wind

September 14, 2009 – Comments (7) | RELATED TICKERS: NEXT , BIG , BOOM

I haven't been blogging much lately...it's been almost a month since my last post. I kind of wonder what the point is. The market will just keep rising on nothing more than a wing and a prayer...until it stops and comes crashing back down again. I've been sitting in cash and physical silver and gold for a LONG time now because I just can't bring myself to join this insanity-induced rally. I fear that the next crash may even be more violent than the last and I am almost certain that the 666 low will be taken out.

Anyway, the point of this post is to share some analysis from Chris Martenson. I've been following him for over a year and he has provided some of the best insights throughout the crisis. I can't recommend his CRASH COURSE highly enough! His latest article highlights some of the same concerns that I have - investors who are deciding to jump back into the market at this point and may be setting themselves up for financial ruin. Here's the link and an excerpt (you'll have to click on the link to see the charts and graphs):

Throwing Caution to the Wind

The number of articles out there in the mainstream press that are designed to create the impression that all is well practically constitute a deluge at this point.

One thing I like to do, especially when an article comes out in a reputable paper like the NYT, is to check their facts to see if they square up with the tenor and tone of their "it's safe to get back in the pool" articles.

Here's a perfectly fine example from today:

Cautiously, Small Investors Edge Back Into Stocks

Like millions of ordinary investors, Cindy and Eric Canup are still recovering from Wall Street’s big downturn. Their portfolio is off by 25 percent. They are mindful of their spending. And their dreams of buying land in Northern California or Oregon have been delayed five to 10 years, until they can rebuild their retirement accounts.

Yet with no guarantee they will ever be made whole again, individual investors like the Canups, who live in Oakland, Calif., are sticking with the stock market. Recently, with help from their financial adviser, they nudged some of their cash into mutual funds and took on riskier investments. They have even stopped tossing unopened 401(k) statements into a filing cabinet.

Comments:  So the framing being established here is that there are people out there doing well because they have stuck to their guns and even piled more heavily into equities.  Never mind the inconvenient fact that equities have returned pretty much zero for more than a decade, making them the worst investment of the decade.  That's not worth mentioning here, where dreams of an effortless future are being peddled.

What's important here is not how individual investors are faring, but whether or not money is flowing into or out of the market.  One measure of that adds up the inflows and redemptions to mutual funds and the NYT, then cites the ICI (a reputable tracker of such things) to bolster the case that money is flowing in!

Now, some of the money that fled stocks for safe harbors like money-market funds and government bonds last year is beginning to return. Even with trillions still sheltered on the sidelines, some $56 billion has poured into equity funds since April, according to the Investment Company Institute.

This all sounds very comforting, but the purpose here is to check the facts, so I went to ICI and found this:

While a good chunk of positive money may have flowed into equities since April, this has not been true for the past three weeks.  I consider that to be important and relevant information for an article such as this, which seeks to establish that people are getting braver, money is flowing in, and folks are getting richer as a result.  If it happens to have a good explanation, such as seasonality (college tuition anyone?), that should at least be mentioned.

The next bit of relevant information might come from the stock-selling activity of insiders.  While they are not infallible, their recent selling has been nothing short of extreme, and this is well worth considering when weighing whether now is the right time to become bolder in the stock market.

Insiders sell like there's no tomorrow

NEW YORK (Fortune) -- Can hundreds of stock-selling insiders be wrong?

The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized.

But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

While a wave of insider selling doesn't necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don't believe current stock prices are justified by economic fundamentals.

"It's not a very complicated story," said Charles Biderman, who runs market research firm Trim Tabs. "Insiders know better than you and me. If prices are too high, they sell."

Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn't the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007.

Silverman said the "orgy of selling" is noteworthy because corporate insiders were aggressive buyers of the market's spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.

"That was a great call," Silverman said. "They were buying when prices were low, so it makes sense to look at what they're doing now that prices are higher."

In the chart below, if insiders were being smart when they were buying in March, then what are they being now?

The NYT article continues on with some heartwarming tales of several small investors' rebounds towards riches.

Daniel Kelhoffer, 67, an investor in Georgia, visited his son in Germany this summer and cruised the lake near his house in his wooden 1959 Chris-Craft motorboat, encouraged by the steady rise in his monthly account statements. Joseph Fredrick, an investor in Cincinnati, exulted that, largely because of his financial adviser, his portfolio had fallen only 12 percent since the market tanked.

In North Carolina, a retired Wachovia executive, Robert Paynter, lost tens of thousands of dollars when his stock options and Wachovia shares hit the skids. In October, he told The New York Times that he felt as if he were witnessing his own death with each plunge of the stock market. This summer, he bought a year-old Corvette convertible. And while he and his wife canceled a trip to Europe, they are contemplating a Mediterranean cruise next year.

“I’m feeling a whole lot better,” he said. “As ugly as it got, I never got to a point where I thought I was going to have to go back to work or miss a meal. I can take a lot bigger hit than I thought I could.”

After the crash, Gil Livingston, a retired Hewlett-Packard manager from suburban Detroit, decided he would manage his own money instead of letting asset managers at UBS handle his portfolio. He missed the bottom of the market in early March, but has made money from well-timed purchases of technology stocks and investments in emerging markets.

“I’m slowly sticking my head back out of the ground,” he said. “I’m doing fairly well. My equities are up.”

It's entirely possible that these people will do well and the stock market will continue to advance. But I think they would do well to consider the potential risks and the rewards.  Most perplexing to me are those like Mr. Paynter, who described watching his holdings decrease as a form of death for him, but once they turned back up he bought a Corvette convertible.

If I were him?  I'd sell my stocks so that I could evade those nasty feelings of death and sleep easily at night, but that's just me.

A more prudent form of this story could be told from the ICI data table I posted above.  It tells a recent tale of people selling stocks and buying bonds - an entirely prudent reaction after a decade of going nowhere and witnessing the fraud, greed, and theft visited upon the equity markets by the scorpions on Wall Street over these past few years. 

But a significant source of Wall Street money comes by selling equity products to small investors, and so we get articles extolling the virtues of 'getting back into the pool.'

Caveat emptor.