The Point of Maximum Pessimism

The time of maximum pessimism is the best time to buy.

– Legendary Investor John Templeton

Yesterday Merrill Lynch released their monthly survey of fund managers for October.  The survey covered 172 fund managers with $531 billion under management.  Merrill called the survey “one of the most pessimistic” ever.

Here are some highlights:

• The number of managers believing the global economy is in recession jumped to 69% – from 44% in September
• 60% of managers believe the global economy will weaken over the next 12 months – up from 37% in September
• The number of managers overweight cash increased to 49% – up from 36% in September
• 43% of managers think global equity markets are undervalued – up from 15% in September.  The October number is a 10 year high.

According to Merrill Lynch, three factors are coming together that tend to be associated with market rallies: low risk appetite, high cash positions and a belief that stocks are undervalued (“Is Pessimism Good News?” (subscription required), Brett Arends, The Wall Street Journal Online, October 15).

Along the same lines, on Tuesday The Wall Street Journal reported that three high profile hedge fund managers (Steve Cohen, Israel Englander, John Paulson) have moved a lot of money into cash: “‘Smart Money’ Stays on the Sides: Hedge Fund Chiefs Like Cohen, Paulson, Move to Cash to Ride Out Storm” (subscription required).  According to the article, Cohen sold about half his stock holdings last week, closing out the positions of 50 managers who work for him.

If ever there was a moment of maximum pessimism in the stock market, this is it.