Unlike western Federal Governments of the world, both investors and corporations are awash in cash. Isn’t that an interesting dichotomy? Have you ever thought about it for a moment, seeing that we’re bedraggled by $20t in debt at a time when cash is freely flowing and hoarded by corporations on a global basis?
Bank of America is out with a note highlighting the fact that investor cash is now at levels not seen since after 9/11, at 5.8%. Smugly, they view this as a buying signal — since people are too stupid to identify risk, apparently. I’ve always loved the thought process behind ‘contrarian signals.’
In other words, you’re basing your entire investment philosophy on the stupidity of the masses. It is condescension, personified.
“This month’s cash levels indicate that investors are bearish, with fears of an EU breakup, a bond crash and Republicans winning the White House jangling nerves,” said Michael Hartnett, the bank’s chief investment strategist.
He furthers…
Elevated cash balances potentially sets the stage for a stock-market rally, according to the Bank of America analysts. “When average cash balance rises above 4.5 percent a contrarian buy signal is generated for equities. When the cash balance falls below 3.5 percent a contrarian sell signal is generated,” writes Hartnett’s team in Tuesday’s report.
On a short term basis, Harnett might be right. After all, November of 2001 was a short term bottom for the market — as it drifted into year end and then rallied hard in early 2002. However, let’s not forget the fact that markets continued to struggle for more than a year afterwards, with the Nasdaq plunging from 2,000 to the 1,200 level before bottoming.
I think people sense something is wrong, evident by the sheer numbers and lunacy of central bank overplanning. Perhaps if they’d stop meddling and let the business cycle live or die on its own merits, people would feel more confident in the legitimacy of the market.
I know I would.
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It may be condescending, but history has proven it to be true, no?
http://totalinvestor.blogspot.com/2011/02/mutual-fund-cash-levels-vs-s-500.html
It also makes sense logically – dry powder on the sidelines can fuel alot of upside.
Am I missing something?
I think I summed it up nicely.
Markets bottomed for a short while in November of 2001, but then slid lower by 40% over the year to come.