Market Sentiment: Richest Investors are Returning to the Stock Market which Feels Safe Now After a 100 Percent Run Up

For those who understand the psychology of the markets, this Bloomberg report should raise a lot of red flags and confirm that we are indeed in a topping process that might not be a very long lasting one, but could still lead to a major decline (say 20%). Personally, I am still expecting a topping of generational proportions, but this is not based on facts but rather on pure guess work and I won't bet the house that this is going to happen in April 2011 ;-)

Here are the bullet point summary and commentary of the report below:

• The richest investors among the general public are now back into stock, after a run up of 100% and two years of bull market. They didn't buy when the S&P 500 was trading at 666, but now that it's back to 1330, they feel stocks are cheap...
• They are also very confident about their "blue chip stocks" and feel that stocks are safe again.
• They believe a price earning ratio of 14 means stocks are cheap and undervalued, while bottoms are generally found at around 7. Moreover, in a deflationary environment, 14 is very expensive, specially for low growth companies like the Dow Jones Industrial ones.
• All advisers are having the same conversation with their clients: sell bonds and money market funds to buy stocks.

WOW!

Feb. 24 (Bloomberg) -- Michel Moreno, the 42-year-old chief executive officer of the Moreno Group, an oil-services company, has been investing the cash he set aside during the financial crisis in the most well-known U.S. companies.

“If I’m going to have market exposure, I want to focus on the area I’m personally more comfortable with, which is large-cap stocks,” he said.

Investors like Moreno are buying shares of the biggest U.S. companies again as the market returns to levels not reached since 2008 and the municipal bond market has become more volatile. GenSpring Family Offices, whose average account size is about $30 million, has moved about $1.5 billion, or nearly 10 percent of clients’ assets, into stocks of large dividend-paying companies during the past three months.

“Wealthier folks are beginning to look at this as a market that they can be opportunistic buyers in,” said George Walper, Jr., president of Chicago-based Spectrem Group, a consulting firm that tracks attitudes among millionaires. “They’re still much more cautious than they were in 2005 and 2006, but it’s starting to turn around,” he said.

More than half of investors with $5 million to $25 million in investable assets said they will probably buy stocks in 2011, according to a Feb. 22 survey by Spectrem.

Investors put $5.2 billion into mutual funds that invest in the largest U.S. companies in January, the biggest monthly inflow since April 2009 and a reversal from the $13 billion in outflows in December, according to data from Morningstar Inc. In all of 2010, investors withdrew $77 billion from large company funds, said Morningstar, a Chicago-based research firm.
[...]
“These stocks are not just a little cheap, they are almost as cheap as they ever get, relative to the rest of the market,” said Grantham, who accurately predicted the 2009 market bottom.

The largest U.S. companies, as measured by the Standard & Poor’s 100 Index, returned 13 percent in 2010 compared with 27 percent returns for small U.S. stocks in the Russell 2000 Index. The S&P 100 had a price-earnings ratio of 14 compared with a ratio of 31 for the Russell 2000 on Feb. 23. Price-earnings ratios represent the price investors pay for each dollar in annual earnings-per-share. A low ratio may indicate a stock is undervalued.
[...]
Investors have been moving from money-market funds back into mutual funds. On Feb. 16 there was $2.8 trillion in money- market funds, down $83 billion from early December, according to the Investment Company Institute, a mutual fund trade group. Investors put $23 billion into stock mutual funds in January, the biggest monthly inflow since February 2007, Morningstar said. U.S. stock funds took in $5.18 billion in the week ended Feb. 16, the sixth straight week of gains, according to Washington-based ICI.

Bel Air Investment Advisors, which manages Moreno’s investments, has increased clients’ stakes in stocks and other growth investments by 10 percent to 20 percent over the past several months, said Todd Morgan, senior managing director. Los Angeles-based Bel Air clients have $20 million or more in assets and its founders have a combined 57 years of experience with Goldman Sachs Group Inc.

Moreno, who lives in Houston, said he likes the safety and growth potential of companies such as United Parcel Service Inc. that have good balance sheets and predictable dividend streams.

Companies with low debt levels and significant sales in emerging markets, such as 3M Co., offer attractive prospects, said Gary Flam, a portfolio manager for Bel Air, which has $5 billion in assets under management. Shares of 3M returned 13 percent and UPS returned 14 percent over the past six months.

“The strong balance sheets, large cash balances, dividend payouts, multinational revenue streams and relatively cheaper valuations make these ‘blue-chip’ stocks attractive,” said Brent Fykes, senior investment partner for GenSpring, the largest U.S. registered investment adviser, based in Palm Beach Gardens, Florida.

Several clients have sold half of their bond portfolios over the last two months and invested the proceeds in large-cap dividend-paying U.S. stocks, said Larry Palmer, a managing director for Morgan Stanley Smith Barney Private Wealth Management. Palmer’s clients have an average account size of about $8 million and his team manages more than $1 billion.

“There’s a margin of safety they have, emotionally, in those high-quality blue-chip names,” said Palmer, who’s based in Los Angeles. “All the advisers here are having the same dialogue with their clients,” he said.
[...]
Investors’ newfound enthusiasm for large-cap stocks could become worrisome if shares continue to gain momentum, said Jonathan Satovsky, founder of New York-based Satovsky Asset Management, which manages $380 million for about 200 families. “The fund flows are perpetually wrong,” he said.

The current market cycle likely has six or more months to run before investors need to become concerned about a reversal, Satovsky said.

“I should be going all in,” he said. “But I would rather lean into the wind.”