Dickensian World

"It was the best of times, it was the worst of times." Such timeless words can find fertile soil in the investment world of today. The system will endure. Like it or not, the changes will be incremental, protect the whales and occasionally toss a sprat into the pan. The SEC filing suit against the managers of the Reserve Fund for misleading investors is not a bad thing, if you like your sacrificial lambs small. Reserve was the money market fund that broke the buck and brought the short term commercial paper market to a stand still.

Actually it was Lehman that was the big fish behind that debacle, but tant pis as the french would say. That whale has left the building.

As an advisor of client portfolio's I have to say, this extraordinary run up has been very schizophrenic. My gloating at moving (or trying to move) clients to raise beta on portfolios has turned slightly bitter as my cautious entries were obviously far too modest. (Beta is the sensitivity to the market. An S&P index fund has a beta of one, more aggressive holding have higher betas as they move with greater force than the broad market. Long term positive? Increase beta. Have a negative outlook, decrease portfolio beta)

Investors would do well to memorize cliche's. They come in handy when you need a good dope slap.
1. Don't fight the Fed. When out to dinner with a guy with a trillion dollar line of credit, let him buy. Don't argue, just enjoy. If you think he's gauche and ordering the wrong things, swallow and smile.

2. The market can remain irrational longer than you can remain solvent. Lord Keynes comment still rings true. If your trillion dollar buddy is slipping 100's into g-strings, let him. Starting a fight will only get you bounced out of the club. Wait until he passes out and then drive him home. Until then you use $1's, and smile.

3. Don't fight the tape One thousand years ago King Canute sat upon the strand in England and ordered the sea to stop rising and the waves to still. He had no luck either. Go with the flow there may be more powerful forces at work than can be seen.

The money flow and source of trading indicates two things still. First, the weakest stocks and companies have done the best recently. This would suggest a strong short covering rally. Second, online trade activity has increased much more than institutional activity. This leads me to believe that this bottom still has some work to do, but the definite bias is to the long side.

John Barnyak
President
www.stonehouseasset.com