Thursday’s Financial Flight – Welcome Dumb Money!

Are you the dumb money? 

Pretty much, by definition, you wouldn't know it if you were, would you?  The "smart" money, as we've noted all summer, has been flowing out of US equities but, according to the WSJ, it's gushing out of Europe at a pace that puts ours to shame.  Last week marked a record-breaking 29 consecutive weeks of outflows from European stock funds – 2 weeks more than the run that came ahead of the 2008 financial crisis.

This year's outflows ($86Bn) have reversed 2/3 of last year's inflows ($123Bn) with 1/3 of the year left or, in other words, ALL of the money is being withdrawn at the same pace it went in.  This makes perfect sense to us as we're about 2/3 cash too in our 4 Member Portfolios but, after all – we're the smart money!  

Despite ALL of the money being removed, like our own S&P holding up on no volume, the Euro Stoxx 600 is down just 3.4% and still a bit higher than it was at the start of 2015 – it's a magic trick who's fund-manager secret is to leave the index-leading stocks high (like AAPL in the US) while cashing in all the issues that won't move the needle much.  That keeps the dumb money flowing in – even while you are heading for the exits.

One big difference between Euro Stoxx and the S&P is the honesty of European companies in their guidance.  European companies have guided their earnings outlook down 30% for 2017 while S&P 500 CEOs are guiding up 17% – it's as if they do business on two different planets, not two different continents!  They don't lend to the same planet either with Euro Stoxx banks down 25% while US Banks are flat for the year.  

Even compared to the S&P 500's aggressive forward earnings guidance, market PRICES  are clearly out of control.  This FactSet chart, in fact, clearly illustrates why 1,850 is our Must Hold Line on our Big Chart – if prices were tracking earnings the way they usually do – that's where the S&P would be today but we're at 2,175 – 17.5% (325 points) above fair
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