Money Sage (archive)

Well folks, our impressionistic read on what Wall Street currently likes and dislikes -- insofar as this is reflective of where the "smart money" is ALLEGEDLY GOING -- looks to us like this:
-- Treasuries are OUT. They are too high; yields are too low. Supposedly, the "smart money" has been moving out of Treasuries and into Fannie and Freddie mortgage securities, as well as high quality corporate bonds;
-- Hints abound that high yield bonds -- i.e., JUNK -- are looking good. We are told, again and again, how far up yields have gone, how much spreads between junk bonds and Treasuries have widened, how attractive junk is;
-- Banks and other financials are CHEAP. They always lead the market when the FED cuts rates; every dummy knows that, don't they? Besides, look how much they have gone down. Plus, rescue operations are underway. Smart money is getting in now, ahead of the herd. Get with it guys!
-- Retailers. Yep, buy when everyone hates 'em. Today there is major piece in an eminent organ of financial respectability on how smart money is moving into retailers.

The bottom line -- you can get ahead of the herd if you act now, following in the footsteps of a lot of smart money!

Of course, there may, in our humble opinion, be a couple of jokers in the deck.

The first joker is just this: when is the last time you made money from "information" (and implicitly, "advice") proffered for FREE by the mass media? Is it really true that anyone who spends a fraction of a cent clicking his mouse to the hottest news out of Wall Street -- according to the media -- can make a bundle? Is it true that acting on the basis of "information" available instantaneously, at virtually no cost, to the Great Unwashed willl put you on the road to riches? And, a follow-up question: if this is true, how come we ain't all rich??

As for Treasuries being too high and the smart money jumping ship, and the "easy money" having been made in the Treasury market, we would note that it is characteristic of bull markets" pre-manic phase that the generality of "professional" wisdom is that the advance is at an end. (This follows on the advice proffered at the beginning of the major bull move that the asset class in question is NO GOOD and should be avoided).

As for the "insight" that junk bonds have dropped in price, it is certainly true. The question is, what does it mean? Might it, perhaps, just perhaps, be akin to buying the NASDAQ at 4000, given that it is down 20% from its peak of 5000, and is now CHEAP?? Actually, as we have pointed out in a previous analysis of junk bond bear and bull markets, the spread between junk and Treasuries typically widens to 1000 bps (basis points) at the bottom of a bear market in junk. Today, the spread is a bit more than 600 bps. Just because a market has dropped a lot does not mean it will not drop a lot more. In the case of junk, even a lower primate can see that there is a mountain of this stuff sitting on bank balance sheets, choking the banks' lendable capital and propelling said banks toward insolvency. Indeed, a number of banks have been unable to sell their junk, even at substantial discounts. Want to help them out? Why not let them unload on you. After all, Treasuries are no good and junk is yielding a lot! Besides, lots of smart money is going into junk!

As for banks, financials, retailers, etc., we have heard replays of this siren song several times over the past 6 months. All we can do is observe the historical record: those who rose to the bait have gotten creamed. We, for our part, have said repeatedly that these stocks are RAT POISON. Stubborn cusses that we are, we have not altered our view.

Mirror, mirror, on the wall. Who is the stupidest of us all?
Why, it is those who ___________________________ (fill in the blank)

Well, maybe we should keep our mouths shut. Was it not the Bard, after all, who advised:
"A wise man his own counsel keeps?"