How the Money Flows


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Money Is Ready to Flow … Eventually

All Is Not Lost Until All Succeeds

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Money Is Ready to Flow … Eventually

If you've been reading Cabot Wealth Advisory for a while, you know that the people at Cabot are fond of Wriston's Law, the rule that money will go where it is wanted and stay where it is well treated. The practical consequence of the Law is that capital is always looking for a place where it will achieve the highest return on investment relative to risk (which is money's idea of being well treated).

There's a lot of money traveling the world looking for ways to fatten up, and you can learn a lot by taking a look at where it's going. And the standard way to do that is to examine what's known as foreign direct investment ( FDI ). This is the money that crosses borders as a result of M&A activity, international expansion of companies, investment by mutual and hedge funds and the search for safe and profitable havens by managers of sovereign wealth funds.

FDI peaked in 2007, but was squashed by the Great Recession in 2008. But it's been coming back. In 2011, global FDI reached $1.5 trillion, which is a sizable sum, even if it is 23% below those record 2007 levels. And UNCTAD, the United Nations Conference on Trade and Development, estimates that 2012 will finish up with about $1.6 billion in FDI.

The most interesting thing to me, as someone who's professionally interested in investing in emerging market stocks, is that the three countries estimated to be in line for the most FDI growth from 2012 through 2014 are China, the U.S. and India.

As I interpret that predicted movement of cash, it reflects a hunger for the higher potential gains that may be found in the two largest emerging markets, plus a yearning for the relative safety of investing in the U.S. 

As UNCTAD conveniently points out, one reason for the projected increase in cross-border investment is that trans-national corporations have accumulated enormous amounts of cash, and are looking for opportunities to put it to use when conditions are favorable. (Apple alone has $117 billion in the bank.) 

We also know from the way U.S. markets surge when good news leaks out of Europe that an impressive amount of private capital has been parked in low-yielding bonds and even (horrors!) savings accounts by rattled investors. And that money is getting bored and ready to seek some growth.

The moral of this little collection of statistics and observations is that Wriston's Law is still in full effect, but money can't quite figure out where it ought to flow. There are just too many genuine economic uncertainties (and way, way too many alarmist speculations in the financial media) to allow for rational decision making. 

But make no mistake about it, there is a reservoir of frustrated cash looking to circle the globe one of these months, and you will need a clear head and a well-researched watch list when the sluice gates are opened.

All-Is-Not-Lost-Until-It-Succeeds Here's this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.

All Is Not Lost Until All Succeeds

Cryptic, this one is, and contrary, to be sure.  What it means is that when all has succeeded, then it is time to worry, for when there are no problems, and when everyone thinks everything is rosy, then all buyers will have already bought stocks.  At that point, there will be no more fuel available to push stocks higher.  Furthermore, there will be no way for perceptions to improve.  Perceptions will worsen and stocks will fall.  The classic example in recent history was the first quarter of 2000, when we had successfully come through the millennium Y2K scare and the consensus was that the Internet would solve all our problems.  As most investors know, technology stocks led the way down shortly after.


In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 7/30/12 - Would You Rather Buy Hot or Cold?

In this issue, Tim Lutts contrasts the Cold Investor (who buys what's out of favor), with the Hot Investor (who buys stocks in uptrends). Featured stocks: Align Technology ( ALGN ) and Questcor Pharmaceuticals ( QCOR ) .


Cabot Wealth Advisory 8/2/12 - Expectations vs. Reality

Mike Cintolo argues in this issue that investors are now suffering from excessively low expectations, historically a sign that markets are ready to rebound. And there are signs that the market is already strengthening. Featured stock: Western Digital ( WDC ).

Have a great weekend,

Paul Goodwin
Editor, Cabot Wealth Advisory

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks

Referenced Stocks: ALGN , FDI , QCOR , WDC

Cabot Heritage Corporation

Cabot Heritage Corporation

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