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« Musings for July 19, 2007 | Main | Intermediate Term Market Outlook Turns Bullish »

July 21, 2007



The problem with expecting the retail investor to return in much of a way is two fold. First, their most recent wrong-way bet was in the residential real estate market. The liquidity of that disaster is limited and many are trapped. As bad as watching CSCO go from $80 to $15 was, most were not leveraged significantly. This is not the case with all the wannabe Donald Trumps. Not only are they sitting on losses but many are likely in a total wipe out situation. The capitulation phase of the stock bear market didn't occur until July 2002-March 2003. We are still very early in the housing debacle, so I would guess that the return of the retail investor will be very modest.

The other factor is one of reference dependence. The late 1990's was a generational bubble in the stock market, just as the housing bubble is the same in that market. To use what occurred in the late 1990's as a point of reference as to what "normal" bullish participation from retail is not wise in my opinion. The fact is, it is unlikely for retail investors to behave in that way again until we have a generational turnover to the point where the lessons are forgotten.


As an advisor, I've had a firsthand look at the skittishness of individual investors. I've had many meetings with people who have been earning 20% on the $50k they have in their 401(k), as we've been allocating about 35% to international stocks, yet are sitting on three times as much in CDs.

Most investors are geographically-biased and size-biased. As such, average U.S. investors who've been watching the major indices for years have seen little movement. Why? Money has been flowing everywhere else (real estate, international stocks, small caps, mid caps). Now that the large caps are once again moving, I think the average investor will bring his money into the market again.

The one thing I'm confident the average investor will never do is scale back (or look for undervalued areas) before the market gets extremely overvalued. The average investor is a very, very slow trend follower.


The little investor is still skittish after losing money in Cisco from 2000-2. Doesn't trust stocks yet. Anecdotally, talking with friends and coworkers who were trading stocks in the late 90's? They haven't logged on to their brokerage accounts in years.

I think the bear argument is always more persuasive than the bull argument. The bear argument runs against the crowd and provides you with the belief that you know something that other people don't know. It's alluring.


I'm looking forward to this next article. (you might as well just put my name in as the guy you're talking about.) BTW, most of those bear bloggers will say its system liquidity that's propping up the DOW, all about to come to an end thanks to the CDO massacre of ought seven, the day the music died for Private Equity LBOs. Now, I take a contrarian view to the consensus view of impending financial armageddon (that's a fun blog, btw, sheesh) but its not an easy place to be with the market whipsaws. Is now the time to put on a hedge? (put options, pair trade?)
Just for kicks, say Global Alpha states next month that it was up big during July - what then? Would the consensus view turn? (Maybe these FSI turkeys may actually know what they're doing when it comes to risk management?) Bridge loans get un-hung, credit spreads don't fly apart, cats and dogs cease and desist the shared living arrangement - and the bkx puts on 10%?
Or will we have a self fulfilling black swan...(that everyone saw coming from 10 miles away?) This feels more like high stakes poker to me.

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