Thursday, December 13, 2007

“Get Busy Living or Get Busy Dying”

This famous line from the great movie, “The Shawshank Redemption”, seems apropos to the current mood of many investors. Locked in their prison of investment doom and gloom, the glass half empty crowd seem to becoming “institutionalized” in their fear of unknown, as well as the possible and the maybe.

*click on image to enlarge.

For those who are not so frozen in their fear of the unknown, the possible, and the maybe, I have an actionable idea that may make sweet music like Le Nozze di Figaro. My long idea is rooted in three strong current market trends:

* Hedge Funds, Low Redemptions, and the Quality Migration Cycle
* Mid Cap issues and the January Effect
* Growth over Value

The actionable idea is the Mid Cap Growth ETF – IJK.

IJK is a unique position to consider as it benefits from each of the three above noted items for the following reasons:

1 - A source of strength for our aged bull has been the fact that equity hedge funds have not experienced mass redemptions. Quite the contrary, new money continues to flow into the category requiring capital to put to work to earn those fat performance fees. If money is both staying and flowing in, where is likely to be put to work?

One place is where the equity hedgies have been all along – in the Smids, as this is where the bulk of their equity capital is deployed. However, the hedgies are not unaware of the risks facing the markets and the economy, which may explain why a quality migration from Small to Mid has resulted in the Small cap sector faltering while the Mid caps have not (see blog posting of last Thursday, December 6th).

Moreover, as also noted last Thursday, the Mid cap group has yet to trigger a sell signal, as the Small and Micro group has.

2 – The second driver for IJK is the historical ritual of the renewed flow of funds into 401ks and other retirement vehicles known as the “January Effect”.

Where the January Effect is felt most dramatically is in, you guessed it, the Smids. Therefore, it is quite reasonable to assume that as 2008 gets underway, the January Effect will join the funds already at work by the flushed with capital hedgies to help get the New Year off to a good start for the Mid caps.

Now that we know the who and the when, let’s fine-tune our work to identify the where.

3 – The third driver for IJK is what is known as the growth scarcity factor.

Most of the time, value outperforms growth. However, as Rich Bernstein at Merrill has noted numerous times before, when growth becomes scarce, growth tends to outperform value. Since growth rates for corporate earnings are expected to decline for the next several quarters, the growth scarcity factor suggests that the outperformance by growth over value that has emerged these past four months (across all size classes, I might add) has a good chance of continuing for a while longer.

Investment Strategy Implications

IJK is a good actionable idea for anyone seeking to get busy living at a time when others are “institutionalized” in their fear of the unknown, the possible, and the maybe. See you Zihuatanejo.

Note: The above is strictly for informational purposes and should not be construed as a recommendation to buy or sell any securities. Please consult your financial advisor. Neither Vinny Catalano nor any member of his family owns the above referenced securities. Accounts managed by Blue Marble Research do have positions in the above referenced securities.

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