Wednesday, February 22, 2012


Good Morning. I continue to get questions as the reason behind the current run for the roses in the stock market. What about Greece, they ask. Aren't there huge problems with the bailout deal that was finally arranged on Tuesday? What if the private bond holders don't go along with the debt swap? Isn't there a risk that the Germans won't approve the deal? And won't we eventually see a default? What about the rest of Europe? And what about those big problems in Portugal? And on and on and...

Unfortunately, the answers to the questions make those asking them even more befuddled. Yes, there are problems with the bailout deal. Yes, there is a risk that the private bond holders might just walk away after taking it in the shorts yet again. Yes, there is the risk that the Germans and Fins may vote no when asked to approve the money for Greece's bailout loans. And yes, there are other debt bombs lurking in Europe and all over the world, for that matter.

However, the point I try to make to those asking these very good questions is that the focus on the stock market is constantly moving. Sure, the questions are valid, I say. But, I proceed to add that the stock market has moved on - and so should they. It's not that the issues at hand don't matter; they do - just not to the guys and gals running the big money around the world.

If you've been paying attention, the action in the stock market for the better part of the past three months has made this clear. No longer does a rumor out of Nicolas Sarkozy's office move the market 1%. No longer does the German's insistence on more austerity ruin the mood of a good day. Nope, it appears that the days of the Dow moving hundreds of points in a matter of minutes based on news out of Europe may be behind us.

In order to drive the point home, I toss in the idea that the big declines seen in the stock market in 2010 and again in 2011 were the result of worries that a credit event in Europe would create another "Lehman moment" and put the global banking system at risk. So, given that there is no imminent risk of a credit event and that the banks of the world are now stronger than they were last year (and the year before that), stocks have moved on to more mundane things like earnings, valuations, economics and the rest of the basic fundamentals.

My final point to those seeking an opinion or two from yours truly is that the big money is accumulating stocks - and that perhaps they should be doing the same (but only on dips, of course). Remember, hedge funds, which are arguably the biggest driving force in the market these days, came into 2011 underinvested. I saw a report Tuesday that as of the end of November, hedge funds held about 50% less equity exposure than normal (80% vs. 130%). And with the probability of the much feared Lehman moment dwindling this year, the hedgies appear to be moving their equity exposure back up towards more normal levels. According to Hedge Fund Research, after the third worst year on record in 2011, hedge funds are making money again this year - not quite as much as the market mind you, but the momentum of returns seems to be building.

Does this mean that stocks won't encounter a pullback anytime soon or that the current relentless move higher will continue for weeks to come? Of course not. Stocks are extended and are certainly ripe for a setback in the near-term. However, unless there is something meaningful behind the next pullback in stock prices, investors who find themselves underinvested may want to think about doing what the hedgies are doing - moving on.

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