Rising Demand, Fewer Assets

You've read me say it seems like stock market bargains are anything but plentiful. I'm still mostly invested and hardly sitting in cash. But I'd like to buy a few more things and haven't found anything to pounce on.

I've got a list of candidates. Yet they've almost all had price increases by the time I learn of them.

David Rosenberg is prominently mentioned in this Globe and Mail piece. His comments focus more broadly than just stocks:

David Rosenberg, chief North American economist at Merrill Lynch & Co. Inc. in New York, argues that supplies of "financial assets" -- stocks, bonds and other securities -- have been shrinking, while demand for them has been growing. This tightness helps explain why stocks and bonds have maintained historically high prices despite the fact that "real assets" -- primarily real estate and commodities, which typically move inversely to financial assets -- have also hit unprecedented peaks.

"Whether it be REITs, corporate bonds, high-yield emerging markets -- everything is hitting either new cycle highs or multiyear highs in terms of price," Mr. Rosenberg wrote in a report. "What we know from our Economics 101 is that the price of everything is determined by the interaction of two curves: supply and demand. In the case of financial assets, the demand may well be fuelled by rampant global liquidity. . . . At the same time, the supply growth of financial assets . . . has either been stagnating or declining outright."

Further down the article:

"If you're a classic value investor, you're just standing on the sidelines scratching your head," he said in an interview yesterday. "There's nothing out there that's undervalued.

"You just have a lot of money chasing slowing growth in assets."

I wonder if Meryl Witmer's remarks during the Barron's conference in October will prove true. Recall she said that her firm, Eagle Capital Partners, was 50% cash, which is about the most they ever carry. She also said whenever their cash level has gotten that high in the past, something happened to bring the market down in the following six months to a year.

Witmer looks at things from the bottom-up perspective, while Rosenberg may be taking a more top-down view. I'm not a big picture guy myself. Others do it wonderfully well. It's just not my area of competence.

It is safe to say that stocks aren't dirt cheap.

Comments

[Brian Kann]

You lost my readership in your first sentence.

[Moon]

That's funny, Mr. Kann. Sentences like that keep me coming back here. Of course there are always stock market bargains to be had. It's just that at times like these, the bargains are indeed less plentiful and not as deeply discounted. Boosting portfolio cash levels via more selling and/or less buying is not just top-down prudence -- it's a natural side effect of bottom-up discipline.

[Jonah Williams]

This post gets it right: what rational investors are buying XOM or almost any Chinese stocks (for example) at these P/Es?

I've been half in cash & income producers for almost 6 months, and it's hard to stay on the sidelines, but I agree with Witmer that something Negative is coming.

[John]

Brian: I take it you haven't been a long-time reader of this blog. I've been saying the same thing since launching this site in April 2005. So long, and thanks for stopping by.