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 it at the same time as my clients. 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 April 19.
Few things rattle Rich Zito.
Recently, however, he has begun getting nervous as some of his most conservative clients call and ask if they should invest more aggressively.
“Those calls are the canary in the coal mine,” said Mr. Zito, an adviser with Flynn Zito Capital Management LLC. “They usually mean the markets have gone up too fast and that the market run might soon be over.”
I have received no less than 700 emails this week (no exaggeration) from “little guy” investors explaining how they are still 100% long for three main reasons: 1) QE2 will continue to save the day until June, 2) earnings season will be blockbuster, and 3) that inverse head and shoulders patterneveryone now sees in the S&P.
– Charles Kirk, “Holding Pattern”, Thursday April 14, 6:20pm EST
During the post-tsunami rally from Thursday March 17 through Wednesday April 6, the S&P jumped 6.2% from 1257 to 1335 erasing all the losses in the wake of the tsunami and some. Moreover, it seems to have broken any remaining psychological resistance to the bull market.
The two quotes above capture the sentiment of the investing public. Professional investors have also capitulated to the bull market based on evidence from Merrill’s April Fund Manager Survey released last week. Consider the following table:
Net Overweight Equities 50% 45% 67%
Net World Economy 27% 31% 58%
Strengthen Next 12 Months
Net Corporate Profits 19% 32% 51%
Improve Next 12 Months
Note how conviction in the fundamentals decreased from March to April at the same time overweighting equities increased. What explains this apparent paradox? The period between the surveys coincides with the 3-week post-tsunami rally. My interpretation is that despite growing concern about the fundamentals, professional investors increased their allocation to equities out of fear of being left behind.
The same sentiment is apparent in Silicon Valley where venture capitalists are climbing over one another for a piece of hot startups (“In Silicon Valley, Investors Are Jockeying Like It’s 1999”, Monica Langley, April 19, A1). Benchmark Capital recently beat out a number of suitors to invest $12 million for a 20% stake in a company called Uber. Uber is an application which allows you to order a private car from your cellphone: “Within minutes, a professional driver in a sleek black car will arrive curbside,” according to its website.
Zaarly raised $1 million after a 1-minute presentation at a Los Angeles “Startup Weekend” in February. Zaarly, another mobile phone application, lets you make an offer for anything at any time from your phone: “It’s a little bit eBay and a little bit Craigslist, but it’s mobile, real time and location-based,” according to its website.
“Suddenly everyone wants to invest in Silicon Valley. It’s game-on all the time,” said Benchmark Partner Bill Gurley. “It’s crazy out there. It’s a true California Gold Rush,” said early Twitter investor Mike Maples.
All this bullishness leaves little value to be found in the investment world. The Wall Street Journal ran an article on Monday with a chart showing that small cap stocks are trading at a higher premium to large-caps than at any point in the last 30 years. Valuations are “stretched. There’s not a lot of good value,” said Steven DeSanctis, head of US Small Cap Strategy at BofA-Merrill Lynch (“Are Small Caps Too Pricey?”, Jonathan Cheng, April 18, C1).
NOW IS THE TIME TO INVEST WITH TOP GUN: If you have been thinking about investing with Top Gun, now is a good time to give me a call or shoot me an e-mail.