Institutional investors are organizations that pool money for the goal of investing. These include mutual funds, pension funds and hedge funds. The advantage for a retail investor is that they get access to managers who are more informed and better skilled in their specific category. Retail investors also get the opportunity to place their funds in investments not always open to an individual. Individual investors are also able to get a diversified portfolio more easily, depending on the fund with which they’ve invested.
Just as you can with statistics, if you dig hard enough, you can find the numbers to support any case.
But in the stock market, it’s very important to remember that the mindset of institutional investors is different from that of Main Street.
By “institutional investors,” I’m referring to any entity that is buy-side, with investing money being the main concern. The Wall Street investment banker mindset, the sell-side, is its own unique beast.
Institutional investors are paid to play. That’s their business. If a mutual fund or exchange-traded fund (ETF) takes in money, it has to invest it. Contributors don’t pay fees to have money sit in cash.
The stock market is very much a marketplace that is fueled by the supply and demand of common shares and cash.
With greater demand (new inflows to institutional investors) and less supply (the amount of initial public offerings [IPOs], secondary offerings, and corporate share buybacks), prices go up.
That’s why everything in the stock market is only relative—share prices, earnings, earnings estimates, valuations, and views.
Is priceline.com Incorporated (NASDAQ/PCLN) worth $847.33 a share? Or should it be $694.06 a share, like it was on May 1? That’s a huge stock market gain, and the month isn’t even over yet. (See “BlackRock Takes in Billions For Equities: A Signal the Stock Market Is Near a Top?”)
The only thing institutional investors lament is a lack of new cash inflows.
Being in the business … Read More
There very well could be more upside in the Dow Jones Industrial Average.
Many components have been underperforming the stock market significantly; if there is to be any real economic recovery, these companies should feel it.
As an index, the Dow Jones Industrial Average seems a little out of date and not particularly reflective of today’s world or the rest of the stock market.
But regardless, it’s still the global benchmark, and ownership of both the index and component companies is vast.
Even though Merck & Co., Inc. (NYSE/MRK) is a great pharmaceutical company (and dividend payer), on the stock market, the position is back to where it was in 1997.
Another Dow Jones component looking for improvement is Hewlett-Packard Company (NYSE/HPQ), which has its own specific set of problems.
Then there’s Alcoa Inc. (NYSE/AA), which reports early. This stock market laggard is still trading at the same level it was in 1989, taking share splits into consideration.
And there are several other Dow Jones components that are laggards.
It’s pretty clear that institutional investors have made a profound bet on the safest blue chips, most evident in January and February.
While business conditions for a lot of companies are flat, both interest rates and monetary environments remain very accommodative. In addition, there are efforts being made regarding fiscal policies in many important economies.
China effected a policy to slow its frothy economy and real estate market, and it succeeded.
So, with many countries trying to get their fiscal affairs in order, the potential for genuine economic growth (in a year or two) is being cultivated.
If this came … Read More
After several summers as a teenager working in golf course construction, I can tell you that building a golf course requires a lot of planning.
The crew I worked with would go into an existing golf course and rebuild an entire hole. Or a green that wasn’t draining properly.
The problem—and the most delicate part of this endeavor—was to be careful not to wreck all the services that were buried in the ground. These included irrigation, drainage, telecom, and power lines.
While operating a Case backhoe, I cut through a large electrical line that was missed by the locate crew.
Needless to say, you reevaluate your priorities pretty quickly when something like this happens. An enormous flame shot up out of the ground.
Case Corporation doesn’t trade on the stock market. It is now part of a company called CNH Global N.V. (NYSE/CNH) out of the Netherlands, Fiat Industrial S.p.A being its majority owner.
On the stock market, Caterpillar Inc. (NYSE/CAT) is one of the largest players in heavy equipment. The company was doing really well a few years ago when the construction boom in Asia combined with the mining boom to produce significant growth.
The position is down from its previous stock market high, but the company is not expensively priced.
With a current price-to-earnings ratio of around 12, the position boasts a current dividend yield of 2.3%. If it was over three percent, then Caterpillar would be a much more attractive stock market … Read More
It is a phrase that’s pertinent to the stock market.
Without question, I remain completely taken aback by what has transpired with the stock market since the beginning of the year.
Looking at the numbers, not being invested in many corporations has been costly.
Excluding the reasons why, the simple fact is that the Dow Jones Industrial Average is up 16% since the beginning of the year (not including dividends).
The S&P 500 is up 15.7%. The NASDAQ Composite is up 14.8% and the Russell 2000, an index of small-caps, is up 16.6% (not including dividends).
I think this stock market can smell the end of quantitative easing.
More meaningful, however, is the Federal Reserve’s policy regarding interest rates, which are going to continue to be low for the near future, as it has been made very clear.
This is a huge, perhaps neglected, certainty for the stock market and corporations.
Making the case for being a buyer in this market is extremely difficult. Institutional investors have already placed their bets and a lot of corporations—good companies with real staying power and solid prospects for earnings growth going forward—are fully priced.
Johnson & Johnson (NYSE/JNJ) is a benchmark stock. Like many large corporations, Johnson & Johnson does everything it can to squeeze every penny out of its bottom line. The company lays off employees, closes plants, and does everything to minimize taxes. Johnson & Johnson’s 10-year stock chart is featured below:
Chart courtesy … Read More
Everyone said that in their respective professions (a manufacturing sales manager, an insurance adjuster, a foodservice executive, and a bank manager) business conditions were flat.
I’ve heard this from many people. Countless businesses are holding steady, but despite profound efforts, they can’t generate meaningful top-line growth.
Yet, the stock market just hit an all-time record high on modest first-quarter earnings results.
Quite obviously, this stock market is overbought.
Wall Street and institutional investors are in the business of betting on the future using someone else’s money.
Corporate earnings over the last several quarters have held up. But the earnings have mostly been squeezed out of worker productivity and cost controls.
Blue-chip balance sheets continue to grow stronger, and the lack of certainty in the global marketplace has dampened the willingness of corporations to make new investments.
The result is continued growth in quarterly dividends and share buybacks; and this is one of the many reasons why institutional investors have been buying this stock market—there is nowhere else to go.
I think it is still worth keeping a sharp eye on the crucial movements in the Dow Jones Transportation Average. It is old-school, but I believe that many component companies do provide a decent reflection of economic activity in the U.S.—at least from a corporate perspective. (Read “BlackRock Takes In Billions for Equities: A Signal the Stock Market Is Near a Top?”)
What I learned from many large-cap earnings reports was that sales … Read More
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