Foreigners and US stocks: the ultimate contrarian signal?

Michael Panzner recent commentary is very relevant to our earlier discussion today

"Many commentators note the fact that U.S. investors have poured a lot of money into foreign share markets in recent few years.

As it happens, the flow has not been just one way.

In fact, based on cumulative 12-month totals derived from monthly Treasury Department data, foreigners invested a record amount in U.S. corporate stocks  during the period that ended in July, the latest month available.

When was the last record set? In January 2001, just as the dot-com bubble was bursting and the bottom was falling out of the U.S. stock market.

Indeed, over the past decade, foreigner investor behavior has proved to be a reasonably good long-term timing signal — in contrarian terms, that is.

For instance, while U.S. share prices were bottoming in 2002, foreigners continued to reduce their exposure, until they eventually rejoined the bullish party in late 2005.

A cynic might wonder: now that they are all in, can much lower prices be far behind?"


Good stuff — thanks, Mike.

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Ken M. commented on Sep 3


    Apologies if too far off-topic, but have you ever checked Alibris when looking for books? Prices are usually better, but you probably sacrifice a few days shipping.

  2. SPECTRE of Deflation commented on Sep 3

    3 Month LIBOR up another 5 ticks this morning. 5.67% currently, and on the move for several days. In addition we have this:

    National Debt $8,989,621,240,888.00
    New all-time high

    It’s time to turn on some some Bobby McFadden with, “Don’t Worry Be Happy”.

  3. SPECTRE of Deflation commented on Sep 3

    Barry, isn’t this about what we should expect from a herd mentality from the sheeple, and sheeple isn’t used as a derogatory word since it expresses our human nature. There will be people from all walks of life that will be crushed from following the herd. We never learn is the main point.

  4. Groty commented on Sep 3

    So, emerging market economies have been on fire, Europe is growing, OPEC is rolling in petrodollars and foreign investment in U.S. equities is only now reaching the level seen in 2000? Given the global economy is far larger today than it was in 2000, foreigners may be underweight U.S. equities even though net purchases have been increasing.

  5. Rate Cut Nazi: “No Rate Cuts For You!” commented on Sep 3

    I agree with Groty, in 2007 the foreigners are underweight U.S equities comparing to year 2000 (unless the Armageddon Dude has adjusted the numbers to account for the recent exponential global liquidity growth and inflation)

    Adjusting only for inflation (using BLS Inflation Calculator), we are at least 25% below 2000 levels. Adjusting for the recent global liquidity explosion and inflation, we are at least 60% below 2000 levels.

    There could be some psychological components, the crowd just simply afraid of 2K levels based on emotional and irrational fear and bad memories of 2K internet bubble crash (hence, phobia of year 2000 levels); but there are no fundamental reasons to be afraid of these levels. Even at the year 2000 levels, current 2007 market is undervalued. (S&P500 P/E = 16; while it was close to 40 in 2000)

  6. Phil commented on Sep 3

    Hi Barry,

    Is it about the positive net purchases or turnover? If it is just the positive Purchases, 90 Billion in 2003 is still a lot! Actually in real terms (about 15% Asset inflation in the Dow Jones per year) foreigners might have bought slightly more stocks in 2003 than nowadays!

    How about American investment overseas? Have you got any chart on that?

  7. Trent commented on Sep 3

    As long as we are running a trade deficit the foreign investors have to buy something denominated in dollars. It is one of the invisible hand features of a free economy – if they aren’t buying our goods they will buy our assets – and have to pay too much for them.

    Remember 1990 when Japan was going to buy all of US and instead got Rock Center and Pebble Beach at far too expensive prices?

    One reason I don’t worry much about the trade deficit.

  8. Estragon commented on Sep 3


    In 1990, the balance of payments was roughly zero. At the risk of oversimplifying, that means the Japanese were essentially getting USD assets formerly owned by other non-US holders.

    Today the BOP deficit is on the order of 200MM/qtr or 6% of GDP. That means foreigners are getting USD assets formerly owned by US holders.

    A second important difference is that these USD assets are increasingly held by foreign governments or state investment vehicles.

  9. Dennis commented on Sep 3

    Comparison chart shown is missing many items for a more accurate comp.

    Namely the value of foreign currency.

    In 2001, Europeans invested in US stocks when the euro was very weak and they could buy less US$. Now, the Euro is 70% stronger and they can buy many more US$.

    If Europeans bought US$ 1 billion in year 2001, and 1 US$ billion now..they are actually spending less on US assets (NOW) relative to their portfolio based on their currency.

  10. whipsaw commented on Sep 3

    I am not sure about this.

    What are ‘net transactions?’ If every transaction involves a buyer and a seller, then it seems that what is being depicted is just volume. It isn’t news that volume increases in a bull as people get sucked in and declines the further into a bear you go as people either give up or decide to ride it out.

    Wouldn’t a similar chart of US transactions in US stocks look almost the same except for the scale? I am also uncertain about the impact of using cumulative 12 month totals- I wonder how it would look if simple monthly totals were plotted instead?

    Maybe my problem with Panzner is that he is primarily selling books and Armageddon is always a good hook (for gold bugs especially), but it’s hard to take him any more seriously than the Dow, 36,000! guy. For as long as I can remember, you could find books about impending financial doom on the shelves of any bookstore which just means that they are a pretty reliable genre for a publisher to offer. In most that I’ve read, the inflammatory title that some marketing guy came up with is largely undermined by the qualifications to the title premise in the book and it turns out that practical advice is nil.

    It is a given that Rome Will Fall but timing is just as important as direction and nobody has a handle on the former. It could be tomorrow or it could be in a couple of centuries. For now, it appears reasonably clear that there is a Global Put in place and ye shall fear not in thy lifetime.


  11. wunsacon commented on Sep 3

    You bulls and bears make valid points. I have cognitive dissonance coming out my ears!

  12. Crimson Ghost commented on Sep 4

    I am seeing more discussion about moves to restrict foreeign invrstment in “crucial” industries in both the US and the EU.

    This has bearish implications for virtually everything except gold if it continues and/or escalates.

  13. johntron commented on Sep 4

    I second dennis…..the chart is intriguing though meaningless.

    using nominal net inflows is silly…..for a start how about adjusting for inflation or US GDP or DXY or something, anything.

    Panzner is brighter than this and has produced better charts in the past. C’mon you can do better! ….Unless he’s to caught up in his bearishness that he can’t perceive any of his own cognitive dissonance.

    Perhaps he should read Barry’s primer on “Follies of Forecasting.”

  14. Todd Mentch commented on Sep 4

    Looking at the charts I was struck by the notion: couldn’t this just be the fact that, more capital was required to buy the more expensive stocks, and less when the market value was lower.

    In other words, for this data to be informative, there has to be a relational component, it can’t just be in real dollar terms. Of course more $ flowed in times when stocks where higher, they cost more to buy then!

  15. Winston Munn commented on Sep 4

    The infatuation with dollar amounts is misguided the way I view this chart. The point is that at the previous top the buying was still occuring after the top had been made, regardless of total dollar amount.

    The question, it seems, that Panzner is asking is whether this is occuring again. Is the fact that they are still buying into this latest decline a contrarian indicator of a top?

  16. Unclear commented on Sep 6

    I am in the whipsaw commenter camp. I am not sure about the foreign net transx number. How do you get that data?

Posted Under