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Friday, February 15, 2008

Good News: Investors Are Miserable

The Wall Street Journal reported yesterday what we've known for some time; Fund managers and asset allocators are bearish or "risk averse." In a story posted yesterday, Brett Arends wrote:

"Fund managers and asset allocators are the most risk averse in more than seven years," reports Merrill on Wednesday. "A net 41% of fund managers say that they are overweight cash -- a level last seen in the aftermath of the '9-11' terrorist attacks. … Investment time horizons have almost shrunk back to extremes last seen in March 2003, while the number of investors adopting risk-averse investment strategies has hit new highs."

Merrill calls this "an unprecedented combination of high cash levels and low risk appetite."
Arends explains why this is good news for us contrarians:

"It's because the Merrill survey is a contrarian investors' bible. When there's an extreme consensus in one direction or another, that's usually a great moment to take the opposite bet.

And if fund managers are now as nervous as they were just after 9/11, that makes a tempting case for putting some money into the market right now.

No fewer than 79% of fund managers expect the outlook for profits to weaken in the next 12 months. Two-thirds expect the global economy to slow down.

And there are seven fund managers overweight cash for each one who is underweight. That's the highest ratio since Merrill began tracking the numbers seven years ago. As recently as November, the ratio was less than three to one.

State Street Reports Global Investors are Leary of Risk

Not only are fund managers at Merrill Lynch bearish, State Street reports investor confidence is near its record low, set in December 2007.

"Global Investor Confidence rose by 3.0 points from a revised December level of 65.8 to reach 68.8. North American investors were responsible for the bulk of this, as evidenced in the rise in the North American Confidence Index from 65.3 to 71.8, but European investors also contributed with an increase in risk appetite from 85.0 to 86.6. Among Asian investors, confidence retreated slightly from 85.6 to 85.4. "

The “State Street Investor Confidence Index® measures the attitude of investors to risk. Developed by Harvard Professor Ken Froot and State Street Associates Director Paul O'Connell, the Index uses the principles of modern financial theory to model the underlying behavior of global investors. Unlike other survey-based confidence measures that focus on expectations for future prices and returns, the Index provides a quantitative measure of the actual and changing levels of risk contained in investment portfolios representing about 15% of the world's tradable assets.”
My three charts here show the State Street Investor Confidence Index is the second lowest reading ever dating back to mid 1998.


More Sentiment Indicators including:

  • AAII: American Association of Individual Investors Bull/Bear Index: AAII Charts and Info
  • CBOE (Chicago Board Options Exchange) Put/Call Ratio (CPC): CPC Chart and Info
  • II-BBS: Investors’ Intelligence Bull Bear survey: II Charts and Info
  • ISE (International Securities Exchange) Sentiment Index: ISE Charts and Info
  • State Street Investor Confidence Index State Street Charts and Info
  • VIX (CBOE Volatility Index: VIX Chart and Info

Kirk Lindstrom's Investment Letter Performance

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