Thursday, July 26, 2007

Mutual Fund Managers Have Enormous Appetite For Risk

"Despite recent jitters in global credit markets, institutional investors are fully invested in equities with a strong cyclical bias," said David Bowers, independent consultant to Merrill Lynch.

Finfacts reports Merrill Lynch's survey of mutual fund managers shows they are invested to the hilt in cyclical stocks. And, mutual funds have left themselves with the lowest cash levels in the study's history. Isn't that a bit of cheery news to end the day? This is obviously based on the premise that global growth is unstoppable and the business cycle has been repealed. How else do you explain such disregard for risk so far into this expansion? Group think?

Why should you care? With weak mutual fund flows in the U.S., that means the good boys and girls in mutual fund land need debt-driven M&A, debt-driven private equity deals and debt-driven corporate buy backs for the party to continue. Does it appear the global debt markets are in a happy mood lately? Ever heard of fundamentals? Oh, yea. I remember those.

How about a visual of the last time Wall Street was so bullish. See that blue vertical line on the S&P 500 chart? Right about there was the last time Wall Street was as consensually bullish as this year. And, what were they bullish about? Technology stocks. And what happened? That's right. 80%+ dump in the technology laden Nasdaq. And what are they bullish about now? Cyclicals. And why are they called cyclicals? That's right. Because they go up and down like a yo-yo as do their earnings. And should mutual funds be invested in these stocks? Don't worry. You'll get an opportunity to see first hand if mutual fund managers are correct. Remember that many cyclical asset classes have seen the biggest runs in the last one hundred plus years in this cycle. Or put another way, mean reversion is still a reality of all asset class valuations.

By the way, if you run a mutual fund, I'm for hire. Especially if you are located in California. Enjoy the weekend.

posted by TimingLogic at 9:38 PM

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