Thursday, June 28, 2007

Cash Out, Be Happy

Although there are still hundreds of billions of uninvested cash sit on the sideline, professional asset managers started quietly pulling out the U.S. equity market. Indeed, they have a good reason to do that. The S&P has returned 8.7% so far this year. With the yield on the 6-month Treasury bills at 4.95% and even higher on money market instruments, they can get at a safe return of 11.2% for 2007 by cashing out from stock markets and parking the proceeds in money markets. Not too shabby on the risk adjusted basis.

Think 2006 was a fantastic year for the S&P? It returned 11.78%. Even if someone is genius enough to catch the absolute bottom and top in 2006, the return would be 17.0%. Given the less sunny economic fundamentals that we have observed this year so far, few expect that the S&P would outperform last year. So why not cash out now, get a guaranteed double-digital return, and go enjoying the summer (even the rest of the year)? It seems a no-brainer.

The near-term support for the S&P is around 1480 (25 points below today's close level), but a bigger decline, for instance to 1445 (4% drop),is not impossible.

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