Ahead of the Tape - 12/22/05

December 22, 2005

Ahead of the Tape
By Justin Lahart, Wall Street Journal

For some investors, the game at the end of the year is to load up on whatever has been doing well, in hopes of giving their returns for the year a last-minute goose. This year, that game has less to do with U.S. stocks than in the past.

Instead, this year's hot investments have been overseas stocks. Even after adjusting for the dollar's rise, most countries' stock markets have been doing better than U.S. counterparts. Emerging markets have done best, but more-established stock markets, such as Germany's and Japan's, also have been surging. They have added to their gains in the past month -- driven partly, it appears, by U.S. fund managers anxious for a good showing in 2005.

This practice of hopping onto whatever is hot and riding it higher, better known as momentum investing, tends to get looked down upon on Wall Street, where the real honor comes from finding an opportunity that others have overlooked.

But the proliferation of hedge funds has meant that those opportunities have been whittled away, says Doug Kass of hedge fund Seabreeze Partners. So many fund managers have latched on to momentum investing as a way out. Even managers who usually avoid the practice can get tempted when the year is ending and bonuses (or worse, their fund's survival) are on the line.

"I think it's a function of frustration, and I think it probably continues," he says.

The influence of U.S. investors on Tokyo's stock-market rise has been especially strong. According to Japan's Finance Ministry, foreign investors bought 1.6 trillion yen (more than $13 billion) worth of Japanese shares in November.

They may be buying still.

The Nikkei Stock Average is up more than 7% in December (for all of 2005 it is up 39%), showing the sort of surge commonly seen when investors pile into the hot areas at the end of the year. For Japanese professional investors, the fiscal year doesn't end until March 31. True, there is an enthusiasm (some would say mania) for stocks among individual investors in Japan, but the real force behind this month's rally may reside in the U.S.

If that is true, when the New Year wipes fund managers' slates clean, and the desperation to buy isn't there anymore, stocks in Japan and other hot markets could have a bout of selling.