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Strategies & Market Trends : Roger's 1997 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Allan F who wrote (7160)	11/18/1997 5:13:00 PM
From: Cynic 2005	Read Replies (1) \| Respond to of 9285

Allan, $20 bil per month is sure a lot of money. But it can be consumed in one day's trading on the NYSE. Mutual funds represent only about 12-15% of the total market capitalization. Adding pernsion funds and such it comes to about 20-25%. Significant amount, agreed! But, people who cite fund inflows as the chief cause of the boom forget a few things: 1) they assume that the mutual fund investors won't panic. They are wrong. Look at the fate of emerging market funds. As of January these funds have had about 14 bil in assets. Now, 10 months later after all the troubles surfaced in Aisa and Latin America, that figure stands at 7 nil. 2) You can switch money from stock funds to bond funds or even to cash with just one phone call. 3) Price elasticity of several stocks is in the range of 7-20%. That is, you can increase the total market cap of a company by 10% by only using 10% of the required money. On July 16th or so MSFT was up $10 rising about 12 bil in market value. Only about 2.5% of the real money (about 20%) was used to rise the market cap by that much. A couple of days later it dropped about 10 bil in value with only about $1 bil pulled out! Same philosophy applies to the stock market in genereal. The wealth effect is phony. Not many realize it. The bottom line is that a few determined sellers who wish to cut their stock holdings by 3-5% casue a 15-20% correction in the indices. A desire to cut back even 10% of the holdings can cause havoc which we have seen in the rest of the world and not yet in the United States. No amount of mutual fund inflows can stop that. Mike Burke calls the fund flows lifting the share prices as "tail wagging the dog." Rightly so! -Mohan