Investors Preparing For End Of Federal Reserve Bond Buying Program; Seeing More Day Trading Activities

Market retreats on worsening Japan nuclear leak and economic bad news. Institutional investors are performing sector rotation in the portfolio. Hedge funds remain on the sideline of equity stocks but execute quick trades on commodities as well as emerging market and IPO stocks. Individual investors are holding on with existing portfolio and not selling in a panic when market declines. On the other hand, they are not buying aggressively as in last October in anticipation of a pullback for buying opportunity with cash on hand. Some individual investors fully in cash are hoping for a significant drop in market as some people predict. However they are worrying about inflation and frustrating with the low return of money market. It is a trade-off of risk and return, mainly among the middle-class households. The dilemma is that the wealth is not significant enough so that even a low return can generate large amount in absolute monetary term. But the safety of money market is an opportunity cost in comparison with others taking the risk especially in the early stage of rally. As long as these capital are frozen in the money market, equity stocks trading volume will remain stabilized at relatively low level. This alternatively ensures that there will not be panic selling as happened in the financial meltdown.

Some market participants become impatient when the market halts on the rally. As a result, day trading activities increase as investors make better use of the cash on hand. Many market participants expect a sizable pullback. But very few will sell heavily to reduce portfolio holding. Opportunistic traders will take advantage of pullback and take profit on recovery.

Market makers make money on this uncertain environment. Small investors should stick with a consistent investment strategy and not shaken out under violent market turbulence.



Consensus on Forecasts, Underweight
The great expectations game is one all investors are forced to play.

Party Like It's 1937
Just as the U.S. economy is emerging from a severe contraction caused by a credit crisis, there are pressures to tighten both fiscal and monetary policies in order to rein in an excessive budget deficit and stave off nascent inflation.

In 1936, however, sharp rises in income taxes were enacted. Beginning in August of that year, monetary policy was tightened through a doubling of bank reserve requirements to absorb excess reserves that were thought to threaten inflation.

That sounds awfully like what what's in prospect.

Meantime, QE2 has inflated asset prices for those sufficiently well-off to own stocks, as well as prices that ordinary folks pay at the pump and the supermarket, which are excluded from supposedly high-minded notion of core inflation.

It’s Good to Be the King: CEO Pay Up Big 2010, Not So Much For the Average Worker
Life is good at the top of corporate America. CEO pay rose 12% last year, bringing the average compensation to $9.6 million in 2010, based on a report and study done by NY Times. That's definitely a lot of money at a time when middle class wages haven't increased for a generation and unemployment remains near 9%.

Investing with the highest paid CEOs isn't necessarily the best for shareholders. True, leaders like Ford's Mulally, J.P. Morgan's Jamie Dimon and Apple's Steve Jobs have turned around their firms and lifted the share price; but this is the exception not the rule when it comes to CEO pay. Plus, this kind of payout for the top brass is also not the norm outside the United States, according to a recent Gretchen Morgenson column on CEO pay in The NY Times.

'Dented' Bonds Draw Buyers
A trickle of securities backed by less-than-pristine mortgages are surfacing as investors overcome painful memories of the housing bust in order to pick up a little extra yield.

"Investors are climbing over each other looking for opportunities to invest in higher-yielding assets," said David Spector, president and chief operating officer at PennyMac Mortgage Investment Trust, which bundled a scratch-and-dent security backed by $373 million of mortgage debt and is looking to do another deal. "Banks will be selling more of their legacy loans."

Mortgage investors and managers like PennyMac buy these loans from banks, then modify some and collate them into a bond. They then sell the bond to raise cash so they can buy more delinquent loans.

Scratch-and-dent deals are sold entirely in the so-called Rule 144a market, making them available only to a select group of sophisticated investors. They also offer substantially more yield than other residential mortgage-backed securities.

This added premium—upwards of 5 percentage points over a market benchmark, compared with about 3 percentage points for other asset-backed deals—is what lures investors looking for higher-yielding assets. Buyers are generally hedge funds and money managers, who are loathe to discuss their investing strategies, industry participants point out.

"Lots of investors are looking to deploy cash," PennyMac's Mr. Spector said.

PIMCO bets against U.S. government debt
The world's largest bond fund began betting against the United States last month by taking short positions on its debt on expectations the nation's shaky finances will drive interest rates higher and imperil its triple-A rating.

Bill Gross, PIMCO's oft-quoted co-chief investment officer, in January warned that "mindless" U.S. deficit spending could result in higher inflation and a weaker dollar.

He has also been raising alarms about a lack of buyers for Treasuries once the Federal Reserve ends its own bond purchase program, also known as quantitative easing, in June.

Firms Tip Scale Back in Favor of Stocks
Chalk up another point for shareholders in the battle of stocks versus bonds.

The activity has forced owners of investment-grade bonds to rethink the security of their holdings. While many are aware of the risk that companies could get taken private in a leveraged buyout— leaving them owners of a heavily indebted, "junk"-rated company— many are starting to factor in the chance they will be hurt by a company's decision to spin off a unit.

Break-ups aren't the only stock-related risk confronting bondholders. Management teams also are borrowing to pay back shareholders directly through stock buybacks or dividends.

As the memory of the financial crisis fades and the economy strengthens, companies are starting to pay more attention to stockholders and less to debt markets. "There's always a point in the cycle when growth is improving and [corporations] go from being conservative and bondholder friendly to becoming more shareholder friendly," said Robert Tipp, chief investment officer for asset manager Prudential Financial Inc.