In­di­vid­u­als dip toes into mar­ket

Some small in­vestors buy­ing stocks again

USA TODAY US Edition - - MONEY - By Adam Shell USA TO­DAY

NEW YORK — De­spite re­cur­ring night­mares from the fi­nan­cial cri­sis, the fear fac­tor hasn’t caused ev­ery in­di­vid­ual in­vestor to flee the U.S. stock mar­ket for­ever.

There’s no deny­ing that many in­vestors still suf- fer from a form of post-trau­matic stress dis­or­der. Af­ter watch­ing their 401(k) bal­ances cut in half and the value of their homes shrink, these risk-avoiders are still con­tent with park­ing their cash in per­ceived havens, such as govern­ment bonds, cer­tifi­cates of de­posit and pass­book sav­ings ac­counts.

But some in­vestors, en­ticed by stocks trad­ing near fresh two-year highs and what they be­lieve to be an im­prov­ing in­vest­ing en­vi­ron­ment, have re­gained their courage and are ten­ta­tively reen­ter­ing the mar­ket.

“You can’t be afraid,” says Karthik Kr­ish­nan, a 51-year-old in­for­ma­tion technology con­sul­tant from South River, N.J. “I am back in the mar­ket.”

Kr­ish­nan, who ad­mits to suf­fer­ing a brief scare that caused him to stop buy­ing in­di­vid­ual stocks in 2008 at the height of the fi­nan­cial turmoil, says he’s started nib­bling at stocks again. On Nov. 11, he plunked down roughly $20,000 to snatch up 1,000 shares of com­puter net­work­ing com­pany Cisco Sys­tems.

An­a­lysts are split on whether the fledg­ling re-

newal of an­i­mal spir­its on Main Street is a good sign. Some say it could be sig­nal­ing that the buy­ers’ strike that has been in place since global mar­kets nearly melted down two years ago is near­ing an end, set­ting the stage for a new up-leg for the stock mar­ket. Oth­ers warn that it could be a sign of a mar­ket top, as mom-and-pop in­vestors have a poor record when it comes to mar­ket tim­ing. The buy­ing by Kr­ish­nan and other folks co­in­cides with re­cent sell­ing by so­called “smart money” in­vestors such as CEOs and chief op­er­at­ing of­fi­cers.

Why is Kr­ish­nan buy­ing stocks again? He’s con­fi­dent the stock mar­ket will climb back to new highs. Not to­mor­row. Or next week. Or even next year.

“In the next three or four years, the Dow will (be) above 15,000,” says Kr­ish­nan, who kept his mu­tual fund pur­chases on au­topi­lot dur­ing the 2007-2009 mar­ket rout.

The Dow’s all-time clos­ing high was 14,164.53, which it hit on Oct. 9, 2007. It closed Fri­day at 11,092.00, al­most 22% be­low its peak.

Kr­ish­nan’s buys are geared to take ad­van­tage of dif­fer­ent mar­ket trends. On why he bought Cisco a few weeks back: “It gives me tech ex­po­sure,” he says. In late sum­mer, he snagged 200 shares of Col­gate-Pal­mo­live, the con­sumer prod­ucts com­pany best known for its tooth­paste and dish-clean­ing soap. (“It’s a play on div­i­dends.”) He also picked up 100 shares of credit card gi­ant Visa in May. (“MasterCard was too ex­pen­sive.”) His buy­ing spree kicked off in mid-Fe­bru­ary when he jumped into Nike, a global sports brand known for its ath­letic shoes and ap­parel, af­ter he con­cluded the mar­ket’s re­cov­ery seemed on track. (“It gives me in­ter­na­tional ex­po­sure.”)

Up and down days

The buy­ing by Main Street in­vestors pre­cedes the mar­ket’s re­cent pull­back, which has been sparked by profit tak­ing af­ter a big 18% run-up for the Dow Jones in­dus­tri­als since the lows in July and a flareup in head­line risk. In­vestors have been re­cently spooked by Ire­land’s debt cri­sis, a mil­i­tary skir­mish be­tween North Korea and South Korea, fears of an eco­nomic slow­down in China, and sen­sa­tional head­lines of FBI raids of three hedge funds and ru­mors of a com­ing fed­eral crack­down on il­le­gal in­sider trad­ing.

Data that track mu­tual fund cash flows, how­ever, still high­light in­vestor skit­tish­ness.

While in­di­vid­ual in­vestors have yanked more money out of U.S. stock mu­tual funds than they put in ev­ery week since the scary one-day “flash crash” 29 weeks ago, the pace of with­drawals is slow­ing. Flows to U.S. stock funds al­most turned pos­i­tive the week ended Oct. 20, with out­flows of just $217 mil­lion. In the week ended Nov. 17, the lat­est data avail­able, do­mes­tic stock funds suf­fered net out­flows of $2.8 bil­lion, says the In­vest­ment Com­pany In­sti­tute, a mu­tual fund trade group. That’s siz­able for sure, but still down sharply from the week of Oct. 15, 2008, when they yanked a record $23.5 bil­lion out of U.S. stock funds af­ter the Dow suf­fered daily losses of 733 and 679 points in a five-day span.

In a fur­ther sign that risk aver­sion may be abat­ing, in­flows to all stock funds — U.S. and for­eign — have been pos­i­tive four of the past six weeks, fol­low­ing 23 weeks of out­flows.

Most in­vestors still are pour­ing cash into bond mu­tual funds, as they look to re­duce risk but still garner de­cent re­turns in the form of yields. Flows to all bond funds have been pos­i­tive ev­ery week since the start of 2009. In that two-year pe­riod, $667.6 bil­lion went into bond funds, ICI data show.

Michael Wag­goner, 68, a pro­fes­sor at the Uni­ver­sity of Colorado law school, used to be one of those in­vestors get­ting out of stocks and shift­ing the money into bond funds, as a way to re­duce risk as he nears re­tire­ment.

But a year ago, fear­ing a “bub­ble” in the bond mar­ket, he started putting all his new re­tire­ment money into the stock mar­ket, both at home and abroad. He stresses his foray back into stocks is less a bet on the stock mar­ket, which he thinks is likely to do well in com­ing years, than a bet against bonds.

“I’m not buy­ing stocks out of greed,” says Wag­goner. “It is more a fear of a col­lapse in bond prices. I am not chas­ing in­come. I am scared of a big cap­i­tal loss in bonds.”

Yields in all types of bonds have fallen sharply this year, push­ing prices, which move in the op­po­site di­rec­tion, higher. In­vestors who own bond funds risk los­ing cap­i­tal if bond prices fall.

Is now the time?

Pes­simists fear that Main Street in­vestors are get­ting back into stocks at just the wrong time. Some an­a­lysts are warn­ing of a near-term mar­ket peak. Bullish­ness on the part of in­di­vid­ual in­vestors hit its high­est point since Jan­uary 2007 the week of Nov. 10, when bulls hit al­most 58%, an­other sign of sen­ti­ment per­haps get­ting too pos­i­tive.

An aca­demic paper co-au­thored by Ge­of­frey Friesen, an as­sis­tant pro­fes­sor of fi­nance at the Uni- ver­sity of Ne­braska-Lin­coln, found that mu­tual fund in­vestors who tried to time the mar­ket ac­tu­ally re­duced their av­er­age re­turn by 1.56 per­cent­age points an­nu­ally. The study, pub­lished in 2007, looked at cash-flow data for mu­tual funds from 1991 to 2004.

“His­tor­i­cally, in­di­vid­ual in­vestors have done a lousy job of tim­ing their pur­chases,” says Friesen. “In gen­eral, they tend to get in closer to the top and tend to pull out closer to the bot­tom.”

It’s not un­com­mon for fund in­vestors to chase hot per­for­mance, he adds, as they’ve been do­ing the past few years in the bond mar­ket. They also tend to sell to flee poor re­turns, as many did dur­ing the 2007-2009 stock bear mar­ket. Friesen says the mas­sive cash in­flows to bond funds the past two years sug­gest that the big gains in the bond mar­ket are be­hind us.

But at the same time, the fact stocks are trad­ing near two-year highs also sug­gests there was a bet­ter en­try point for stocks ear­lier in the rally.

Wendy Hunt, a 38-year-old mar­ried mom with two daugh­ters from Cincin­nati, is more than happy with her en­try point, which oc­curred much ear­lier in 2010. Nor has she lost the good feel­ing when stocks go up.

“We have re­turned to the stock mar­ket in a big way,” she says. “We’ve seen a mas­sive re­turn in the past two quar­ters and ex­pect to see con­tin­ued growth in the fourth quar­ter.”

She placed her bets on con­sumer pack­aged goods com­pa­nies, such as Kimberly-Clark, Proc­ter & Gam­ble and Kel­logg, which all sell goods that con­sumers buy even in tough eco­nomic times. Her biggest hold­ing is tech ti­tan Ap­ple. The maker of the pop­u­lar iPad and iPhone ac­counts for 30% of her port­fo­lio.

“We’re mov­ing back into stocks be­cause of the growth and pos­i­tive mo­men­tum of the mar­ket,” says Hunt. “We feel like con­sumer con­fi­dence is ris­ing, and the mar­ket is re­flect­ing it. Why not ride it while we can? We are up ex­po­nen­tially from where we were last year at this time. Stocks are what’s pulling us up!”

Smart or dumb money?

But at the same time peo­ple such as Hunt and Kr­ish­nan are buy­ing, cor­po­rate in­sid­ers are sell­ing. That raises the ques­tion of whether in­di­vid­u­als, of­ten re­ferred to as the “dumb money,” are get­ting in just as the “smart-money” crowd is ex­it­ing.

Sell­ing by “in­sid­ers” of Stan­dard & Poor’s 500 com­pa­nies — or “in-the-know ex­ec­u­tives” such as CEOs, chief op­er­at­ing of­fi­cers, chief fi­nan­cial of­fi­cers and mem­bers of the board of di­rec­tors — hit a record high in the Nov. 1-9 pe­riod, com­pared with all the other time pe­ri­ods that have been tracked by In­sid­erS­core.com since it be­gan track­ing data in July 2003, says di­rec­tor of re­search Ben Silverman. CEOs in that pe­riod sold shares val­ued at more than $312 mil­lion, more than dou­ble the av­er­age since 2004. The to­tal ex­cludes Mi­crosoft CEO Steve Ballmer, who sold an eye-pop­ping $1.3 bil­l­lion in shares.

“For in­vestors look­ing for mar­ket clues, the mag­ni­tude of the sell­ing is telling us that a bunch of peo­ple in­volved with run­ning big cor­po­ra­tions felt, for what­ever rea­son, that now is a good time to sell stocks,” says Silverman.

While there are al­ways stan­dard rea­sons why ex­ec­u­tives sell stock, rang­ing from tax pur­poses to di­ver­si­fi­ca­tion, the re­cent sell­ing co­in­cides with the mar­ket’s re­cent top hit on Nov. 5 and fears that taxes on cap­i­tal gains might rise in the new year if Congress doesn’t ex­tend the soon-to-ex­pire Bush-era tax cuts.

New stock sales by com­pa­nies — ei­ther via ini­tial pub­lic of­fer­ings such as the re­cent Gen­eral Mo­tors sale or sec­ondary of­fer­ings — are also on the rise, with more than $40 bil­lion in stock sold to in­vestors this year, ac­cord­ing to es­ti­mates by TrimTabs In­vest­ment Re­search.

“In­sid­ers are sell­ing, and so are com­pa­nies,” says TrimTabs di­rec­tor of re­search Charles Bi­der­man. “In­di­vid­ual in­vestors should be sit­ting on the side­lines wor­ried.”

But the side­lines is the last place Stacy Har­ris, 58, of Nashville, wants to be.

“I’m putting my money into pre­ferred stocks and IPOs,” says the pub­lisher of Stacy’s Mu­sic Row Re­port. “I’m back where the real money is.”

Oth­ers share her view. There is talk on Wall Street that “some pen­sion funds are be­gin­ning to look at U.S. stocks again,” a re­cent Citi re­port noted.

And bulls such as Jim Paulsen, chief in­vest­ment strate­gist at Wells Cap­i­tal Man­age­ment, say the bullish­ness on the part of in­di­vid­u­als is war­ranted.

“The two-month surge in the stock mar­ket to new re­cov­ery highs has left in­vestors think­ing, ‘What now?’ ” Paulsen says. “Many be­lieve this rally was fab­ri­cated with hype about the midterm elec­tions and the Fed­eral Re­serve’s (sec­ond at­tempt to lower in­ter­est rates by buy­ing govern­ment bonds). But the rally is more likely the re­sult of im­prov­ing eco­nomic fun­da­men­tals. There­fore, the like­li­hood of fur­ther up­side still ap­pears promis­ing.”

What would spook the op­ti­mists? “The only thing that would scare me is if the hous­ing mar­ket (takes an­other dive), and the econ­omy suf­fers a dou­ble dip,” Kr­ish­nan says.

By Eileen Blass, USA TO­DAY

“I am back in the mar­ket”: Karthik Kr­ish­nan, of South River, N.J., is in­vest­ing in in­di­vid­ual stocks again. “You can’t be afraid,” says the in­for­ma­tion technology con­sul­tant. Some of his re­cent in­vest­ment choices, at right:Get­ting back inKr­ish­nan’s buys show bets on var­i­ous in­vest­ing themes.

By Toby Talbot, AP

Col­gate: 200 shares Aug. 27

By Paul Sakuma, AP

Cisco: 1,000 shares Nov. 11

By Adri­ano Machado, Bloomberg News

Visa: 100 shares May 23.

By Elaine Thomp­son, AP

Mi­crosoft CEO Steve Ballmer: He sold $1.3 bil­lion in com­pany shares in Novem­ber. He said the sales were made to di­ver­sify his in­vest­ments and aid his yearend tax plan­ning.

By Eileen Blass, USA TO­DAY

James Paulsen: Says bullish­ness is war­ranted.

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