“When you come to a fork in the road, take it.”

-Yogi Berra


The quote above describes the dilemma that investors find themselves in. They are at a fork in the road, and the noise machine all around them is advising that take it. The amusing issue, alluded to but never answered by Yogi, is which way to go.

The credit crisis blew up a mere 3 years ago; the recency effect has investors fearing a replay of that crisis, only centered on European instead of US banks. Bloomberg observes more than $75B in fund withdrawals have been pulled from U.S. equity funds since the end of April (Fund Withdrawals Top Lehman as $75B Pulled). That is more than the five month withdrawal after the collapse of Lehman Brothers.  US stocks have lost $2.1 trillion in market cap May 2011.

Wall Street is lagging the trading. Street Strategists started the year looking for solid gains, including year end consensus targets of 1365 on the S&P 500 — about 8 12% higher from Friday’s close. They have been tripping over themselves to lower their SPX predictions, but as the WSJ observes, they are still looking relatively bullish (Wall Street’s Optimism Fades).

Hence, our Stew of Negativity is fairly well understood: Start with fears of another 2008 bank crisis; add a new cyclical recession as your two base ingredients of investor’s worries. Season that with the ongoing de-leveraging and the long slow recovery process that typically follows credit crises; add the accompanying housing overhang, merely half way through its rush towards 10 million foreclosures. Salt & Pepper to taste.

Are there any positives? Sentiment is negative, markets are oversold. As mentioned last week, I wished sentiment and oversold readings were more extreme to pull the trigger to get long. Missing the 5.3% pop [UPDATE: To clarify, I mean for a trade; I still have a 50% long exposure via value/dividend equities] last week was not enough to pull me further (or get me excited) about the long side, but it may have worked off some of the oversold conditions.

In the hunt for the contrary indicators, I noticed a few modestly interesting items, most from Mike Santoli’s Barron’s column this week, History Lessons. Amongst the notable data points Mike notes:

• “Nasdaq had its best weekly gain since July 2009.”

• Deutsche Bank Strategist Binky Chadha said that outflows from stock mutual funds were “comparable to those around March 2009

• Short interest relative to market capitalization has “exceeded any level going back to exceeded any level going back to 2009.

Monthly Merrill Lynch fund manager survey revealed “the lowest risk appetite since early 2009.

• Ratio of corporate-insider stock sales to purchases has been at or below 10 for six straight weeks, for the first time since January to March of 2009.

• Citi global equity strategist Robert Buckland notes global cuts in corporate earnings forecasts “have had their weakest five weeks since 2009.”

Those are the positives, though they are hardly compelling. I am unsure of the history of using outflows over so short a period, and I recall outflows were strong for 2 years. The fund manager survey is broad, and is questionable as a timing tool.  Insider stock sales t0 purchases ratio tend to accelerate during a downturn; they can broadly inform but have a greater value when they reach extremes. Cuts in corporate earning forecasts similarly don’t make me bullish; nor should the weakest 5 weeks of cuts (really?) give anyone comfort.

The only data point in the list that warrants close attention is the Short interest relative to market capitalization. High short interest can equal a squeeze play. It acts as buying power on any move Think of how QE2 liquidity moved equities higher August 2010, eventually leading to an equity pile in.

Investors are now at a fork in the road; Yogi would suggest they take it . . .

Category: Investing, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Fork in the Road”

  1. [...] Must-Read from Barry: Investors find themselves at a fork in the road…  (TBP) [...]

  2. GargbageInGarbageOut says:

    >>including year end consensus targets of 1365 on the S&P 500 — about 8% higher from Friday’s close

    Little bit of a math problem with that statement. 8% increase from 1216.01 = 1313.29 only.


    BR: Doh — its 12.25%

    I’ll fix above

  3. mathman says:



    starts off with the following quote:

    The law locks up the man or woman
    Who steals the goose from off the common
    But leaves the greater villain loose
    Who steals the common from off the goose.

    The law demands that we atone
    When we take things we do not own
    But leaves the lords and ladies fine
    Who take things that are yours and mine.

    The poor and wretched don’t escape
    If they conspire the law to break;
    This must be so but they endure
    Those who conspire to make the law.

    The law locks up the man or woman
    Who steals the goose from off the common
    And geese will still a common lack
    Till they go and steal it back.


    and so it goes.

  4. seana0325 says:

    Sounds like you might be alluding to a QE3, Barry. Its surprising how few people are talking about it. Atleast it seems that few are. Its surprising to me that so many think (Helicopter) Bernankes hands are tied. Krugman’s drum beat has been getting louder and more clairvoyant to us laymen the closer we get to Sep 21.

    Barry, from your view point, are his hands really tied too tight?

  5. BusSchDean says:

    Using the language of you finance guys…if everyone knew when and how short the Greece “haircut” will be the markets could start thinking more long term.

  6. rd says:

    It will be interesting to see if this fund outflow is somewhat semi-permanent.

    We have a number of senior people retiring from our company this year and cashing out their ESOP at what may be a high for a couple of years.As these boomers with relatively high wealth (ESOP, 401k etc.) retire, they will probably be keeping their funds in balanced accounts, especially after they have only just made their money back from following the Wall Street mantra of “equities all the time.”

    Flat median household income, high unemployment, and high household debt means that it will be at least a couple of years before the younger generation is piling lots of extra money into their retirement accounts to replace the retirees money.

    This is the depression where the “post-WW II” financial and economic US data set is different from the current data on so many fronts. The talking heads haven’t wanted to go look at what happened from the late 1800s to 1945, but it appears that those data sets are much more valid for comparison to today. Those data sets are nowhere near as optimistic in the short run as the post WW II data.


    BR: I wonder how the baby boom bulge retirements will impact outflows . . .

  7. mark says:

    Questions re: Short interest

    Is the increase in short interest in the US due in small/large part to the prohibition on shorting in Europe? Can one even measure that?
    If true what does that mean for the level of short interest here as a “signal”?

  8. an interesting consideration…

    “…“If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day.

    Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769 Million Euro. So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it. The IMF seems to have delayed approving another tranche for now, so Greece must already have the money for this payment?

    The Fed Scheduled their meeting for 2 days. It now starts on September 20th. Maybe a co-incidence, but what better way to be prepared for new emergency policies?

    CDS “rolls” on the 20th. On the 21st, all Sept 2011 CDS will have expired. My guess is that banks own more protection than they sold to the September 20th date, so defaulting while those contracts are still valid would be a net benefit to the banking system. As a whole, triggering CDS will likely benefit banks as I can find banks that say they own protection against positions, but find more hedge funds are uninvolved or have sold protection to fund shorts in other sovereigns.

    We just finished the big finance minister meeting. They can all return home, brief their staff and be prepared for Tuesday. Prior to D-Day there were lots of last minute preparations to make sure everyone was on the same page and as prepared as possible. Why not before GD-Day?

    Papandreou cancelled a trip to the U.S. And Venizelos mentioned that Papandreou had to be in Athens for “Initiatives”. If you ever wanted some hand holding from your leader, it would be at a time of default. He would have to be in country to calm things and mention all the deals he put in place last week on the conference call…”
    The Fed Bails Out Eurobanks Yet Again
    Author: Yves Smith

  9. JB says:

    JB: I thought you were 50% long How did you miss the 5.3% pop ?

    BR: To clarify, I meant for a trade deploying fresh capital or sidelined cash;
    Yes, we still have a 50% long exposure via value/dividend equities.

    I will fix above.

  10. abelenky says:

    Likely Typo: “the noise machine all around them is advising that (**they**) take it”

  11. atandon says:

    Here is how I suggest current market should be played. With over 60% cash in hand (not in bonds) and 40% in equities. Buy 6 month forward call options for 1350 SPX strike to take cover for 60% cash in hand (We are not going in unless price is above 1350 again). [If price breaches above 1350 then we convert to delivery (any SPX based ETF)].

    But, so long as the price is below 1350, sell call options at current strike (may be one or two notch up) on the equities in your portfolio (40%) and take them as regular profits (limited by strike). Roll down if market goes down.

    Any opinions on if this is correct?

  12. DeDude says:

    When you come to a fork in the road, take it, and stick it in the nearest piece of meat that isn’t your own a$$

  13. market_disciple says:

    My game plan is surprisingly simple. If S&P closes above 1,220-1,250 range and oil futures closes above $90. I would start scaling into a long position on equities.

    I would feel even more comfortable with a long exposure to equities if gold and bond prices (Fear meter) are dropping a bit. That would be my second confirmation.

    As long as S&P closes below 1,220-1,250 and oil futures closes below $90, a quick short play has been working well. Regardless of the mess going on in Europe, equities are looking more bullish by making higher lows since early August.

  14. nofoulsontheplayground says:

    Put/call ratios are bearish today. We’re down pretty big, and the equity put/call is at 0.62, which means equity call buyers, a contrary indicator, are too bullish in the face of this face plant today. Furthermore, index put/call buyers are bearish to the tune of almost 4:1, which is smart money.

    The EEM, which is an issue I watch for overall market direction, is close to taking out the August lows. That does not bode well for the broader US markets, as it tends to lead.

    Last week’s oversold bounce looks like a 1-week op-ex wonder ramp.

  15. gman says:

    Sept is one of the most bearish months on average as well.