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BULLS & BEARS:

September 5, 2005

A bouillabaisse of market thoughts ...

Chinese IPOs have caused some recent market excitement, and the best fireworks display was by Baidu.com, a Chineselanguage Internet search engine that went public Aug. 5.

Baidu.comopened at $27 on a Friday and at the close of business had soared to $122. On the next Monday, some poor soul paid $153 for it.

In the weeks following Baidu.com's pyrotechnics, there was talk about how the Chinese and Indian economies are booming and their stock markets were poised to become major markets.

The talking heads implied market values in India and China would double in the next few years and that the United States had better watch out because they are gaining fast.

Of the entire world's stock market value, U.S.-listed companies make up 51 percent of the pie. The next-biggest piece is Japan at 11 percent. China's sliver is 0.4 percent and India's is only 0.3 percent.

Even if the Chinese and Indian markets double, they'll each still be less than 1 percent of the pie. No doubt, those percentages will change over the years, but the United States is-and will be-the big dog for a long, long time.

Currently, the fad on Wall Street is to advise clients to place more money overseas since the home-grown markets have been nothing to write home about.

In the last 12 months, the Dow Jones Industrial index has returned about 4 percent, whereas the Dow Jones World index, excluding U.S. stocks, has zoomed up 24 percent.

Because of this green grass across the ponds, money has been pouring into foreign equity funds. Through July, of the roughly $83 billion that has flowed into all equity mutual and exchange traded funds this year, a tsunami-like two-thirds of the money has gone into foreign equity funds.

Normally, more than 80 percent of the money flows into domestic funds, but the domestic funds have attracted only $29 billion through July. You have to go back 14 years to find a more anemic inflow rate.

Regardless of the cash-flow waves, one market constant is that the public seems to pile into markets nearer the top than the bottom. Buyers tend to barge in the front door of the party just as the party is about to end.

Back in 1999 and 2000, the money was going into domestic equity funds like there was no tomorrow. Just as the market peaked in March 2000, monthly inflow hit a record pace.

So today, as the public is clamoring to get in the foreign fund party, I'd be inclined to slip out the back door and place my bets on America.

Simmering stall

The grayest baby boomers are blowing out 60 birthday candles this year.

When they were born, the Dow Jones industrial average was at 180; it peaked at about 11,750 in 2000. Since then, we've been in a stall, waiting for the engine to cough to life again.

There have been stalls before, usually just two or three years in length.

The mother of all stalls lasted about 11 years, through the 1970s; at 5-1/2 years, the current one is the second-worst.

But the bright side of the stalls is that the longer they are, the better the rate of climb after the engine grabs hold again.

Mix the U.S. strength, the money flows, and the current stall together, and you've got one bullish bouillabaisse.
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Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.

U.S. funds ready to recover as foreign party nears end
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