Investors Move to Stocks

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It appears that in the last two months, the investing public is finally feeling comfortable enough to buy stocks. This is why we are encouraged to see that finally the investors, after buying long bonds, corporate bonds, and junk bonds in search for yield, are shifting some of their money from money market funds into stocks. That is correct: they are not selling their bonds. Rather, they are now abandoning their money marke funds in search of stocks that can yield (say) 2+ percent, which is more than 10 times the amount they annually earn in the money market funds.

Why are Investors Finally Awakening Now?

We are not sure why it took so long for investors to jump on the equities bandwagon -- probably due to fear of Europe (a rational fear) and fear of a meltdown in China (an irrational fear). Now, though, they have decided to buy stocks in the U.S. and Japan.

How much money will come into stocks in 2013? We have reviewed projections from several large banks, and the consensus is that money is flowing into stocks at a rate of $450 billion per year. We think the big banks are somewhat low in their estimates.

Where is it coming from? Several sources:

  1. Corporate buy backs and mergers,
  2. Money coming out of U.S. money market funds, and
  3. Foreign investors buying U.S. stocks, mutual funds and ETFs.

Several major banks have made estimates of up to $500 billion a year of money from these three sources.

Thus far:

  1. Weekly published statistics from several sources indicate that the inflows are strong.
  2. Daily, companies are announcing new stock buy backs and/or mergers which return cash or new stock to investors.

On a more subjective basis, we get a lot of calls from all over the world asking us if it’s time to buy U.S. stocks.

Foreign Markets are Attracting Some Money, but Some Foreign Markets are Not Living up to Billing Yet -- Instead, Money Destined for Them will Find its Way to the U.S. and Japan

Early in 2013 we correctly expressed interest in Japan and the U.S., and they have moved up, but some of the other countries we had picked for performance (Mexico and China) have not performed up to expectations. Money is moving from them, and from other underperforming parts of the world, into the U.S. market.

Bullish on U.S. and Japan Stocks, and Gold: Let’s Make Hay While the Sun Shines

Technically and fundamentally, U.S. and Japanese markets have big potential. Strategically, Japan is important to the U.S. as a counterbalance to China’s growing influence and power in Asia and Africa. In the last few years, the Japanese yen has gone from 120 yen to the dollar all the way down to 76 to the dollar. They dealt with the export problem by manufacturing near their end markets in the U.S., Latin America, Europe, and non-Japanese Asia. The yen is now falling in value, and we believe that over time it will revert to 120 yen per dollar. When that time comes, Japanese companies will be able to export much more, and make a great deal more money doing so.

This will create a golden age of corporate profits in Japan and solve many of their problems. We like Japan… If you buy Japan, be sure to short the yen and buy an ETF that focuses on Japanese big caps, or buy major Japanese banks and brokers. Do not forget that gold has big potential.

Among U.S. companies: Don't just plunge in but do use corrections to make purchases. Today you might consider sticking to home builders (strong demand/limited supply/positive pricing), airlines (new oligopoly pricing means more profits -- the days of low airfares in the U.S. are ending), the home remodeling retailers (when people’s homes rise in value, they want to spend more to improve them), mortgage insurers (an industry that almost disappeared and is now recapitalized), banks (government allowing U.S. banks to repurchase stock and increase dividends), and natural gas (pricing and inventories are low, and demand is high). This is a short term (six month) investment. Long term, we like food grains. We will select new industries as they arise.

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Tony Danaher

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