Caution Becomes the Latest Dirty Word
By Aaron L. Task
03/04/2002 17:41
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By sprinting breathlessly toward stocks today rather than show wariness after Friday's big run-up, investors sent a clear message that they more fear missing out on the next big rally than getting burned again by another false dawn.
Certainly that's true of mutual fund managers, whose performance anxiety has reached epidemic proportions. Cash balances in domestic equity mutual funds rose to 5.2% in January from 4.8% in December, according to Banc of America Securities. Judging by the past few days of trading, portfolio managers were itching to put those funds to work at the first hints of the market warming up.
Similarly, individual investors remained reticent in January, as evidenced by the relatively modest inflows into equity mutual funds of $20.3 billion, compared with $25.1 billion in January 2001 and $42.7 billion in January 2000, according to AMG Data. But $4.3 billion of inflows for the week ended Feb. 27 -- with over one-third into small-cap growth and aggressive growth funds -- suggests retail investors were also ready to jump back into the market.
Of course, there's a cause and effect here. As portfolio managers get more inflows -- be they because retail investors are more optimistic or because they are funding 2001 IRAs as April 15 approaches, or both -- they are compelled to invest the cash, often by the funds' charter.
But the point is that for all the talk about how bearish "everyone" is, the actions of investors big and small suggest otherwise, and from this you can draw your own conclusions.
All Housing Is Local
Last Wednesday I penned a piece quoting some sources forecasting that a period of relative outperformance of the Nasdaq Composite vs. the Dow Jones Industrial Average was at hand. Notably, RealMoney.com contributors Tony Dwyer and Tony Saliba have expressed similar views, suggesting the idea is gaining credibility, even though the email response to my story was largely dismissive.
After outperforming other averages last week, the Comp pulled the trick again today, rising 3.1% as the Dow gained 2.1% and the S&P 500 rose 2%. The Comp's relative performance was all the more impressive, given the 13.5% decline in Oracle ORCL , one of the largest components of the market-cap weighted index. (Oracle composed 3.6% of the Nasdaq 100 heading into today's session, during which the NDX rallied 4.1%.)
That said, many investors remained focused on so-called Old Economy stocks, and few sectors currently generate as much interest as homebuilding and related stocks.
The overwhelming response to last Thursday's piece about housing is that readers agree it's in a bubble phase and that it's destined to implode with devastating consequences.
As I noted in RealMoney.com's Columnist Conversation today, Seabreeze Partners' Doug Kass is adding to short positions on the homebuilders, as per Jeff Mathews' filings at RealMoneyPro.com . Kass' track record suggests that betting against him is a losing proposition, but shorting this group has not been a pleasant or profitable experience for some time (for Kass included, presumably).
Clearly, if a "pop" of the housing bubble is going to come, there was no sign of it today, as homebuilders Toll Brothers TOL , Centex CTX and D.R. Horton DHI were among the whopping 326 stocks on the Big Board's new 52-week high list vs. just 15 new lows. (By comparison, new highs bested new lows by 190 to 33 in over-the-counter trading.)
Toll Brothers raised its guidance for its fiscal year and set a 2-for-1 stock split today, while Centex reaffirmed its guidance for the year last week. D.R. Horton established a 3-for-2 split today, while less pleasant news -- Moody's Investors changed the outlook in its debt to negative from stable, citing the company's aggressive use of leverage -- was ignored. (It won't matter until it matters.)
Not to belabor the analogy, but there is evidence that the housing market is akin to the Comp circa 1998 rather than early 2000, as reported previously . Homebuilding stock enthusiasts note the group's leaders trade with price-to-earnings ratios below that of the overall market, despite expectations for better-than-average earnings growth.
"Many people think that the homebuilding sector has already moved up too much, and that there is no profit potential left. I disagree," Bert Dohmen, president of Dohmen Capital Research, wrote on Friday. "The charts suggest that over the past two months a new base was built in this sector. It is now embarking on the next big up-leg."
Dohmen has long positions in Toll and D.R. Horton.
In the Feb. 27 edition of his Wellington Letter , Dohmen suggested a "speculative frenzy" might develop in residential real estate in the next six to 12 months as household wealth continues to shift away from the stock market and more toward the "long-term, proven investment of real estate." Currently, about 50% of households' wealth is in stocks and related investments, down from 57% at the peak, but still well above the long-term average of 25%. (Still, Dohmen isn't bearish on stocks overall; in fact, he's currently bullish, although more on Old Economy stocks vs. tech names.)
In addition to the shift away from equities, low mortgage rates, the limited inventory of homes and obstacles to building in many municipalities are factors Dohmen cited for his bullishness on real estate.
"The housing boom will eventually come to an end, as all booms do," he wrote. "But in the meantime there will be some excellent opportunities. The end of the boom will come when there is too much inventory ... before that, look for the possibility of the real estate bubble."
That is to say, he believes it hasn't happened yet. |
