@theMarket: Markets Mark Time

By Bill Schmick
iBerkshires Columnist
10:02AM / Saturday, March 13, 2010

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Bill Schmick

It was a quiet week in the markets. All three averages barely budged on a daily basis although the bias was definitely upward. Underlying this becalmed action, however, individual stocks had some eye-popping moves to the plus side.

Take Citibank, for example. Over the last six days its shares were up over 22 percent. AIG, the government controlled global insurer, also had a good week. The same could be said for a number of low-priced technology and bio-tech stocks. It appears that investors' attention over the last 12 months has moved from buying asset classes (equities) to focusing on specific sectors (i.e. financials, materials, etc.) to individual company stocks, mainly in the small stock arena. This trend has become even more apparent as volume continues to dwindle.

I believe part of this move toward riskier (smaller) stocks and those securities like Citi and AIG that have had to take huge government bail-outs just to survive is a move by some professional money managers to "catch-up" as the markets continue to climb. These are institutional investors who were reluctant to enter the market in a big way fearing a double dip recession. Although some pundits still believe there is a risk of a double dip economy, it appears that many pros are throwing in the towel on that strategy and placing big bets on small companies. As a result, the Russell 2000 index of small capitalization stocks hit 2010 highs again this week while the overall market barely moved.

This anemic volume during most of this year-long rally indicates the absence of retail investors in the markets. It is one reason that even the bulls have been looking over their shoulders as the markets continue to creep higher. Every week or so another story pops up that reminds us that the individual investor is still not participating in any meaningful way in this rally.

New money coming into stock mutual funds has been negligible, according to Thursday's Wall Street Journal, although there have been sizable inflows into bond funds. From March, 2009 through January 31, 2010 only $21.22 billion flowed into stock funds, compared to $328 billion in bond funds.

Over the last few decades, both here and abroad I have noticed that retail investors have been late to the party once markets have under gone a major correction. Evidence indicates, at least in the U.S., that over every downturn since 1987, retail investors did not re-enter the markets in a big way until the second year of a rebound. If this sell-off/rally follows a similar pattern, then we can look for volume to broaden in the coming months. In fact, there is some early evidence that mutual fund inflows are picking up as you read this.

And who can blame investors for taking a more cautious approach to the stock market. Most of us have been too busy "de-leveraging" our balance sheets, that is, reducing debt, saving cash and cutting spending. It seems to be working since overall household debt fell for the first time since 1945 by 1.7 percent.

However, the paltry returns investors are presently receiving in safe investments like money markets, CDs and Treasury bonds is another reason that retail investors are going to be forced back into the stock market.

"I'm not even keeping up with inflation," laments one prospective client from Hinsdale who I'll call Mary.

Mary has been invested in CDs and money markets over the last year.

"Now my CDs are expiring and I can't get a reasonable return for my money anywhere."

Although she is still cautious and worried that the stock market might resume its decline, she concluded that only stocks and/or bonds could give her a reasonable return thanks to record-low interest rates.  That decision led her to me. 

I reminded her that there were plenty of ways to invest in the markets without taking undue risks or suffering the same declines she experienced in 2008. In the end, she agreed. As time goes by, I think many more investors like Mary will come to the same conclusion.  

Bill Schmick is a registered investment adviser and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for Americans in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or at wschmick@berkshiremm.com. Visit www.afewdollarsmore.com for more of Bill's insights.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM.  The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM.

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