Excerpt from fund manager John Hussman's weekly essay on the U.S. market:
It's fascinating to watch the increasingly carnival-like atmosphere on CNBC on any given day (I generally catch about half an hour with breakfast before the market opens, to hear the prevailing arguments and get the tone of investor sentiment). One quickly finds that the cheerleading tone of the late 90s is back, and the greater fool theory is in full bloom, with investors regularly encouraged to "buy high and sell higher." Lately, the bullish arguments are running so fast and loose that it is apparently no longer a requirement that they have any relationship to fact.
Take for example a remark last week that "mutual funds are sitting on piles of cash that these managers are going to have to get invested."
Wow. That's just a bald-faced fib. It could not be further from the truth. Cash as a proportion of mutual fund assets has never been lower. Never...
The greater fool theory relies on one thing -- the assumption that there is somebody else out there who is willing to pay an even more reckless premium for stocks. That's what the market is thriving on at this point: the hope that there is an ocean of unsatisfied demand out there by short sellers or mutual fund managers who will be "forced" to buy. Unfortunately, the facts do not support that assertion. As noted last week, we may see additional buyout activity, but that is driven primarily by credit spreads and does not have a strong relationship to subsequent market returns.
In any event, mutual fund cash is at a historic low, and higher short interest is more than offset by rising margin debt.
There may not be many greater fools out there after all. As they say, if you're sitting at the poker table and you can't spot the pigeon... you're probably the pigeon.