Gambling and Trading
Research for Online Investors

by John Dalt

11/18/10

Bank of America conducted a survey of big fund money managers last week.  The big fish are bullish.  They are as bullish as they have been since last April.  Do you remember what happened last April?  The market went into ‘sell-off mode’ for three months!

Professional money managers at the biggest funds are buying into the QE2 promise of wine and roses.  They have reduced their cash on the side to just 3.5% on average.  That is tantamount to pushing it all out on the table.

I used to go to Vegas a few times a year.  I learned a lesson there; you don’t ever push it all out on the table!  I have continued to follow that hard learned rule in the stock market, and consider this survey a contrarian indicator.  If they are all in, where does the money come from to push the market higher?

Apparently, even the hedge fund manager gods have drunk the kool-aid.  Their bullish bets on commodities and emerging markets far outweigh their shorts.  The Bank of America survey included 200 big institutional investors with over $600 billion under management.

I tell my wife (sweet Karen) that there is a big difference between gambling and the stock market.  It may not be obvious to all.  When I gamble I am playing against the house.  The dice have no memory.  Other bets at the table do not matter.  In the stock market other positions make all the difference in the world.

There is no “house.”  When everyone at a craps table bets one way, the dice still produce a random result.  When everyone goes bonkers on one side of a momentum stock trade, who is left to support it?  Who is the unlucky last buyer at the peak, before sellers run to the other side of the trade?

You can refer to this phenomenon as ‘everyone is on one side of the boat.’  We prefer the image of a small smoke filled room, full of gamblers, who all want to leave at the same time.  The cops are coming, they are about to be caught with their hands in the cookie jar, and the door is too small for all to leave.  We end up with a panic as the gamblers throw caution to the wind.

This is what causes bubbles, short squeezes, and other wild market fluctuations.  Be warned; make sure your sea legs are prepared for the rough seas.

The Wall Street Journal article reporting the survey results makes the same point I bring to you.  These survey results can be a contrarian indicator.  In the summer of 2007, money managers were bullish on European equities.  Merrill Lynch even coined a term “EU-phoria.”  It was the best time to sell EU equities, as they crashed over the next few months.

If you came to play, just be sure you know the game…

To the mailbag:
The TSA is just another clear demonstration that you can convince the American people to accept the further destruction of their rights, as long as you tag it - “for your safety.”  Who is kidding who? ---paid up subscriber R.A.

From a Pravda Opinion article last year:  “It must be said, that like the breaking of a great dam, the American descent into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple, excuse me dear reader, I meant people.”

Good letter on the Irish and Greek credit issues. ---paid up subscriber D.F.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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