Top Gun FP Client Note: Bull Market Mojo
January 31, 2011 at 12:33 am · Category: Hedge Funds, Market Commentary, Stocks, Top Gun Financial Planning
NOTE: Every week or two, I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients January 17.
Those who dance are fools; those who don’t are fools.Since both are fools, it’s better to dance.– Japanese Proverb
In the first two weeks of the year, the S&P is up 3%. Since the beginning of December, it is up 10%. Since the beginning of September: 23% – almost 250 points.
Apparently, what is required to make money in this market is to be long and not ask questions.
Jim Cramer captured this truth best on his Mad Money program last week. In the intro to Monday’s program Cramer said that this market is to be given the benefit the doubt and all pullbacks bought: “This market is bullish and should not be doubted”. On Thursday, he said the challenge now is too stay long even after such a big run: “The struggle is now to stay in; to be prudent about not taking profits too quickly”.
On Friday, The Wall Street Journal ran a front page article on pack behavior among hedge funds (“Pack Mentality Grips Hedge Funds”, The Wall Street Journal, January 14, A1). The big hedge funds – which control a lot of money amplified by leverage and also trade more actively than traditional institutional investors – seem to be getting into and out of the same stocks around the same time. This amplifies momentum in the market, accentuating both rallies and selloffs.
For example, The Wall Street Journal reported, hedge fund manager David Einhorn touted his investment in CIT Group at a hedge fund gathering last February. In the wake of Einhorn’s talk, twenty new hedge funds initiated positions in CIT Group in the first quarter of 2010. The stock rallied 40% during the quarter. In the second quarter, as some hedge funds pared their holdings, it dropped 13%.
What stock are hedge funds piling into now?
If you don’t know that, you just aren’t paying attention. According to The Wall Street Journal article, 55 of nearly 200 large hedge funds tracked by AlphaClone owned Apple (AAPL) last year.
Apple is the market’s leading stock. It is up 8% so far this year; 12% since the beginning of December; and 43% since the beginning of September (AAPL 6 Month Chart Attached). Compare that to the numbers for the S&P as a whole cited at the beginning of the note.
Apple now has a market capitalization of $320 billion – the second highest behind Exxon Mobil of any US based stock. It is worth more than Microsoft, Google, Walmart, Berkshire Hathaway, and about $30 billion less than JP Morgan and Wells Fargo combined.
Tuesday is an important day because Apple reports first quarter earnings after the close. Analysts are forecasting $24.4 billion in revenue and $5.38 EPS – about 50% growth compared to $15.7 billion in revenue and $3.67 EPS a year ago.
I have no doubt that Apple’s numbers will be phenomenal. What I want to see is how the stock acts. A lot of investors – including big hedge funds – are sitting on big profits in Apple. At some point, they will want to cash in their chips.
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