Recently, his F&G Index hit an all-time high. This was noted as yet more evidence that ” investors’ euphoria is truly out of control.” Of course, he wryly adds, “this warning is likely to be about as effective as yelling ‘cliff-edge’ to a herd of thundering lemmings.”
"The F&G index, compiled by Dresdner Kleinwort, is a risk-adjusted price momentum measure comparing global equities (as gauged by the MSCI World Index) to global bonds (represented by J.P. Morgan Chase’s index). The gauge has typically traded between +1 and -2 since its inception in 1986 — but was as low as -3 just four years ago, a sign that “the end of the world is nigh,” and therefore a time to buy stocks and sell bonds. But as the market has turned upward in recent years, the index has shot up above +2 into the “irrational exuberance” area, a sign to sell equities and buy bonds.
Still, he suggests that “the prudent investor should be shipping out beta and junk, and buying quality defensives.” Even better, Mr. Montier says, “holding cash seems like a good idea,” noting that U.S. mutual funds currently have a mere 3% to 4% in cash. To paraphrase Warren Buffett, he says, “holding cash is painful, but not as painful as doing something stupid.”
Note that this tends to be an early warning system, and is not a precise (hours, days) timing measure. Think of it as a 90 day warning of trouble potenitally heading your way.
Fear and Greed In Markets
WSJ, February 22, 2007, 3:26 pm