THE BIG MONEY IS TURNING BEARISH
State Street released their Investor Confidence Index for October 2009 which tracks the current level of institutional bullishness or bearishness. According to State Street the index was “developed through State Street Global Markets’ research partnership, State Street Associates, by Harvard University professor Ken Froot and State Street Associates Director Paul O’Connell, the State Street Investor Confidence Index measures investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors.” In other words, it uses money flows to gauge the level of bullishness displayed by institutional investors. Over the course of the last two months investors have become substantially less bullish:
“This month, institutional investors have paused to take stock. The Global Index reading of 108.4 remains comfortably above the neutral level of 100 for a seventh consecutive month, but underlying flows have been tempered somewhat from the very strong levels of July and August. While the US earnings season has been relatively robust so far, the number of positive surprises that have been observed in employment, retail sales, manufacturing and trade figures has diminished considerably, and this may be influencing investor risk appetite.”
“Looking at the underlying data by region, we have seen less interest on the part of North American investors to add further to their holdings of foreign equities, particularly Japan and the UK,” added O’Connell. “At the same time, non-US interest in US markets has picked up. It adds up to a mixed picture where institutional investors have become more discriminating in selecting target markets than was true over the summer, and are looking to balance country-specific prospects against the slow but steady improvement in the fundamental backdrop.”
Source: State Street
“At the same time, non-US interest in US markets has picked up.”
Foreign buyers are the marginal stock buyer. No doubt because of the cheap dollar. If the dollar makes a stand and starts a sustained reversal because the FED gets a backbone and stops QE and/or raises rates early, this will crush the inverse dollar/equity risk trade. Plus, the marginal buyer overseas won’t be able to scoop up US equities so cheaply with devalued dollars. Suffice is to say I’m watching the dollar very closely.
I agree with Jack. The dollar is the primary driver of the equity market since August.
The other support of equities is the lack of any other asset class with a bright long-term future return. Equities may be overpriced now (maybe 10%-20%), but provided we don’t go into a depression, they are less overpriced than government bonds, corporate bonds, most commodities (which appear to me to be up near bubble territory again) and gold (which is really bubbly unless inflation spikes to double digits).
One comment: How did Goldman Sachs get the GDP report so WRONG? Or was that a headfake so they could buy the dip and get the shorts out in force so they can be blown out of their positions today? (I don’t short equities, but the GS GDP estimate revision gave me enough pause that I didn’t add any equity positions yesterday.)
Foreign buyers are right up there with corporate share repurchasers in terms of prescience. When they start piling in, the market is almost always about to top out.
Don’t hate on the foreigners.
There are plenty of top tickers in the good ole US of A.
institutional investors generally invest in the equities between novto may,so we still have to wait to see what fourth quarter earning will bring