Investors overly
pessimistic

Mutual funds have gotten much
less new money this year

NEW YORK » The stock market seems to be of two minds lately. Money is flowing into equity mutual funds at a depressingly sluggish pace as dread about an economic soft patch paralyzes buyers, yet corporate activity is on the rise, suggesting a brighter attitude on the part of big business.

Despite the swoon in stocks since the start of the year, many analysts remain bullish, saying current pressures are rooted in fear rather than fact. Corporate earnings have been strong, the labor market is in good shape and retail sales show robust consumer spending, despite astronomical energy prices. Still, a laundry list of worries, from higher inflation to recession, has sidelined many investors.

A third of the way into 2005, just $8 billion had flowed into U.S. equity funds, compared to $75 billion at the same point last year, according to TrimTabs Investment Research Inc. There's somewhat less pessimism about investing overseas -- $29 billion has gone into global equity funds, compared with $33 billion at the same point in 2004 -- but the participation is by no means enthusiastic. The greatest interest has been in real estate, gold and energy.

"In my opinion, what we have is avoidance of equities by most investors," said Charles Biderman, president of TrimTabs. "At the same time, we're seeing very heavy buying by companies, particular in tech, in the form of share buybacks, cash takeovers and leveraged buyouts. ... They're saying at these prices, they want to be buyers. So there's a disconnect."

Biderman's firm monitors daily fund flows, corporate stock sales, tax collections and online job postings; overall, he said, the data suggests a booming labor market and upbeat economic climate where companies are eager buyers of stock. From his point of view, the fact that individual investors seem to be staying home from the party is itself a bullish sign: Small investors have a discouraging habit of selling at the bottom and buying at the top.

For example, during the final days of the tech bubble, in the first quarter of 2000, individuals snapped up more than $100 billion in equity mutual funds; in July of 2002, in the midst of the bear market, they sold $50 billion in fund assets, and companies bought back shares. Biderman sees a similar pattern now.

"People are not buying stocks here. And that suggests, to me, that maybe it is time to buy," he said. "Our real-time data says that the economy is surging and there is no 'soft patch."'

Individuals may be reluctant to shell out for new investments, but corporations have been far less shy about putting their abundance of cash to work, said Richard Peterson, chief market strategist at Thomson Financial. With almost $400 billion in U.S. mergers and acquisitions year-to-date, the M&A market is on track for its first trillion-dollar year since 2000, he said.

Corporate share buybacks are running 2 to 1 ahead of where they were at this point last year, totaling more than $90 billion so far. Initial public offerings are also on the rise, with 61 deals raising about $14 billion, compared to 54 deals that raised $10 billion by this time a year ago.

"Companies are buying back shares, companies are buying companies. ... All in all a lot of what we see is good," Peterson said. "But when you look at the market indices, they're all in the red for the year."

Indeed, the Dow Jones industrials have lost nearly 6 percent, the Standard & Poor's 500 has shed nearly 5 percent and the tech-dominated Nasdaq composite index has plunged more than 9 percent, a nosedive surpassed by the small-cap Russell 2000 index, down 10.7 percent. Yet the apprehensions choking stocks are a jarring contrast to the generally upbeat economic picture, said Edward Yardeni, market analyst with Oak Associates.

"There are a lot of fears and many of them are contradictory, so I have to believe that some of them are not well-founded," Yardeni said. "Not everything terrible can happen at the same time. It's very hard to get higher inflation and a recession."

Investors have fretted over the consequences of a collapsing dollar, the soaring cost of crude, the much-discussed housing bubble and the government's trade and budget deficits, Yardeni said. But so far, these fear factors have failed to produce the negative effects bears predicted: Foreign investors have not abandoned U.S. securities, interest rates have not shot up and inflation is in check. And while the housing bubble may eventually burst, the real estate sector looks on track for another good year.

"The problem with the doomsdayers is that to them, prosperity is the source of ultimate grief and they don't want to sit back and enjoy it," Yardeni said. "All the fear ... it's overdone."

On top of that, earnings have run ahead of consensus estimates for the last nine quarters, the nation's gross domestic product was up 3.1 percent during the first quarter -- an above average annual rate of growth -- and government figures for April show strength in the job market. Down the line, an end to the current rate tightening cycle and the prospect of lower oil prices could go a long way toward reinvigorating the stock market.