Irrational Exuberance?

January 23, 2009

 I took some time the other day to peruse some annual reports from a few of the larger mutual fund companies.  A few samples from the Janus 2008 annual report:
 
Janus Contrarian Fund (2008 return -46.02%, 2008 advisory fees $54,842,000)
 
Where are we headed?
 
Unfortunately, I cannot say with conviction when the down cycle will end; I only know that it will end, and when it does, it is vital to be fully invested.
 
…despite having no reason to be optimistic about the near-term direction of the market, I remain a buyer rather than a seller.
 
While I cannot forecast the bottom of the markets, I am extremely confident that we are near a point where risk/reward is as compelling as it has been in many, many years.
 
Janus Fundamental Equity Fund (2008 return -42.21%, 2008 advisory fees $5,329,000)
 
Outlook
 
We believe encouraging signs were emerging late in the period.
 
We think the unprecedented global cooperation by governments and central banks will help thaw the banking system and increase the availability of credit.
 
Additionally, valuations across many markets reached attractive levels.
 
While we can’t predict how long it will take for the financial markets to emerge from this crisis, we were seeing signs that the funding and credit markets were functioning again.
 
Janus Growth and Income Fund (2008 return -43.79%, 2008 advisory fees $33,600,000)
 
Outlook
 
We believe encouraging signs were emerging late in the period.
 
We think the unprecedented global cooperation by governments and central banks will help thaw the banking system and increase the availability of credit.
 
Lastly, we believe there is significant cash sitting on the sidelines in money market funds and bank deposits.
 
While we can’t predict how long it will take for the financial markets to emerge from this crisis, we were seeing signs that the funding and credit markets were functioning again.

———————————————————————– 
I am most interested in this mysterious cash that is ‘sitting on the sidelines’.  Where, exactly, is this cash?  Is it in the mutual funds that lost almost half their value last year? Are they in the depository banks receiving TARP funds due to insolvency?  Are they in the capital markets that have been crushed over the past two years?  Have they been converted into gold receipts, supposedly tucked away in Swiss bank vaults?  Are they squirreled away as home equity, also having lost nearly half its value over the past year?  Is this ‘sideline’ cash literally in cash, tucked under a mattress or locked in the home safe? 

 

No, I submit to you that, just like Bigfoot or the Loch Ness Monster, ‘sideline cash’ is nice to believe in.  It gives us entertainment and comfort thinking there may be such things in the world.  But deep down inside we know that such things do not exist, that they never existed.  I hate to break the news to legions of fund managers and TV pundits, but the cavalry of ‘sideline cash’ is not coming.
 
I am pleased, however, that our friends in mutual-fund-land see ‘encouraging signs’.  I will be on the lookout for these signs in the coming months…

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