Ken Leighton 7 p.m., Oct. 26
Hedge Funds Buying Stocks, Wee Folk Selling
The so-called smart money (in this case, hedge funds) continues to buy stocks while small investors sell, notes Bloomberg News. Individual investors have pulled $37.3 billion from stocks since August, according to the Investment Company Institute, a trade group of mutual funds. The last time the small investor pulled out so much was in the 9 months leading up to February 2003, just before the market went on an upride that lasted more than four years. Hedge funds are buying as fast as small investors sell.
"The Fed (Federal Reserve) has said they're not going to let the market go down and they've done it by pumping liquidity into a variety of markets, ad that's spilled into the equity market," Harry Rady of La Jolla Asset Management told Bloomberg.
And that's what's going on. The Fed keeps saying it will keep interest rates near zero for the indefinite future. In effect, it is telling the big banks they can borrow at zero and gamble in market, and if they lose, they will be bailed out. Unfortunately, the banks are not lending out that money so the economy will grow. And as long as the economy doesn't grow, the Fed will continue its hyper-easy money policy. Hedge funds can borrow at low rates, too. But small investors pay more.
How long can this go on? It's anybody's guess. As I have said, stocks, bonds and commodities will probably continue to go higher as the Fed and other central banks keep the liquidity flowing. But the party will end abruptly.