Newsletter – January / February 2013 – What would you do if…


What would you do if…

Big American pension fund managers have a problem: after 12 years of holding a portfolio of America’s 500 largest stocks, they are only breaking even. On the bright side, at least their stock portfolios are outperforming their mortgage portfolios! (LOL) Question: What would you do if you were them? Answer: reduce your exposure to the stock market: sell. Question: When would you start your selling program? (Big investors can’t just sell out in one day or one week: it sometimes takes months for them to reduce their giant positions.) Clue: in 2000, the high for the S&P 500 Index was 1553. In 2007 the high was 1576. In January 2013 it poked up over 1500. Do you think they’ll start selling soon?

Large institutional investment managers have to act in secret: stealth selling. If ‘the street’ were to get wind of the fact that Goliath Pension Fund wanted to sell a few million shares of ABC, those who had been considering buying ABC would postpone their purchase, knowing that Goliath’s big sale would depress ABC’s share price. When big sellers want to off-load a few million shares, they need hundreds of buyers. That’s why they act in secret. In fact, some managers will sing the praises of ABC even as they sell shares out the back door. Deceit and stealth are a legitimate part of the action of the stock market.

But every once in a while, it becomes easier to see through the bullish fog of institutional rhetoric and discover what they are really up to. NOW is one of those times. Those pension fund managers who are trying to reduce their holdings will do so now, near the old highs, and that selling will stop the current up trend. Those who are optimistic about America’s future will continue to buy stocks, in full confidence that the banking, real estate and mortgage problems 5 years ago have passed and America is back on track. Their buying will cause the current up trend to continue. By waiting for the US market to ‘make up its mind,’ Canadian investors can add to their stock holdings if the market moves above the 1500 – 1600 level and reducing their holdings if it turns down. This is the main way CastleMoore manages investments. We determine the direction of the various financial markets and invest in the direction of the trend.

But not everyone operates in the same way. Some managers try to forecast what direction the market will go, rather than waiting for it to start moving in one direction or the other. They might analyze the economy or the companies and base their buy or sell conclusions on their perceived health of the economic environment. These practitioners use financial analysis or fundamental analysis to make their forecasts: it is a wondrous art form when used skillfully.

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