Top Gun FP Client Note: Get Ready For A Nasty Correction

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Investors are more bullish towards global equities than at any time in the past decade, according to the BofA Merrill Lynch Survey of Fund Managers for February.

A net 67 percent of asset allocators say that they are overweight global equities, the highest reading since the survey began asking this question in April 2001.  This represents a significant further increase from January and December when a net 55 and 40 percent were overweight the asset class.
A net 58 percent of investors expect the world’s economy to strengthen in 2011, a three-point rise from last month.  This should be reflected in corporate profits, which a net 68 percent anticipates rising 10 percent or more this year – up from 57 percent and 45 percent in January and December.
Jim Cramer is the seer of this market and his monologue to open Monday’s Mad Money captured the spirit of the moment.  Talking about the hottest stocks right now which go up day after day for no apparent reason (Chipotle, Netflix, ARM Holdings and Apple), Cramer said:
It’s like some kind of zombie stock movie…. The moves in these momentum stocks are beyond reason if you are looking at them through the traditional lens of price to earnings multiples…. The fact is the money that is coming in right now is more important than what these companies say or do…. You aren’t really buying stocks of companies when you buy these momentum names.  You are simply anticipating what the hedge funds and mutual funds crave. 
One well known traditional value investor, Whitney Tilson, couldn’t take the pain anymore and covered his short in Netflix.  Tilson wrote a high profile piece in mid-December, “Why We’re Short Netflix”.  It was a terrific piece of research reviewing Netflix’s stratospheric valuation, increasing streaming content acquisition costs, tough competition in the streaming space, weak streaming library and under-amortization of streaming content acquisition costs.
Less than two months later – and more than 20% higher – Tilson changed his tune last week.  In a high profile retraction, he wrote that he had changed his mind.  Netflix is a much better business than he had previously thought.  He described a sort of virtuous cycle in which surging subscriber growth could overwhelm increasing streaming content acquisition costs.

Most now believe that we are in the middle stages of a bona fide bull market.
Last Friday on MarketWatch, Howard Gold profiled the views of uber-bull Laslo Birinyi.  Birinyi thinks the bull market has plenty more to go, expecting the S&P to reach a peak around 2100 in September 2013.  Gold calls himself a “skeptical optimist” but sees no reason the S&P couldn’t reach 1587 in the next two years (“Time To Call This A Full-Fledged Bull Market?”, Howard Gold, MarketWatch, February 11).
The same day, another MarketWatch article was titled “The Bull Market Is Here To Stay “.
On Saturday, Los Angeles Times financial journalist Tom Petruno called this “The Unhappiest Bull Market Ever”:

For the current U.S. stock bull market, the defining image may be of a grimacing investor, shoulders shrugged in resignation.

Let’s face it: If you’re on board for this ride you’re making money, but it’s not really fun and you might rather be earning 6% a year on a bank CD, if only you could.

This may be the unhappiest bull market ever.  We love to hate it, but that may be just egging it on.

In his article, Petruno quotes Jason Trennert, Chief Investment Strategist at Strategas Research Partners: “Bears always sound smarter than bulls, a distinction greatly enhanced with a British accent, real or affected.”
On CNBC, I’m hearing mostly bullish commentary.  For example, I saw a segment from Monday’s PowerLunch with two bullish institutional managers.  Michael Scanlon of John Hancock Asset Management emphasized the value he is seeing in the stock market.  If there is a correction, said Marc Pado of Cantor Fitzgerald, it will be 5-7% and then the market will resume its march higher.
Where all the bears with the affected British accents?

Along with record bullishness among fund managers, there has been a surge in acquisitions, private equity IPOs, filings for IPOs and other deal making recently.
Blackstone, KKR, Carlyle and Thomas Lee sold $1.6 billion worth of shares in Nielsen three weeks ago (Jan 26).  Last Friday, Goldman Sachs, Carlyle and others sold $2.3 billion worth of shares in Kinder Morgan.  Blackstone-owned Freescale filed IPO papers the same day.
At the beginning of the year, Facebook raised $1.5 billion in a deal that valued it at $50 billion.  It was valued at $10 billion in mid-2009.  GroupOn is talking with investment bankers about going public at a $15 billion valuation. 
Zynga is talking to potential investors about an investment that would value the company between $7 and $9 billion.  It was valued at $4 billion last April.
Last Thursday, a front page article said that suitors had held low-level discussions with Twitter that valued it between $8 and $10 billion.  Twitter had revenues of only $45 million in 2010 and estimates $100-$110 million this year .(“Twitter As Tech Bubble Barometer”, The Wall Street Journal, February 10, A1).
Pandora, an online music company, filed IPO papers to raise as much as $100 million Friday despite having never turned a profit.
Finally, there is the mega-merger between the NYSE and Deutsche Borse announced last Wednesday.
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Greg Feirman
Founder & CEO
Top Gun Financial (
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113

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