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The Smart Money Wants No Part of this Market
By John Crudele   N.Y. Post
How bad can it get?

One week ago today I warned investors to get out of the stock market.

Then, the inflation numbers did get worse and stocks got clobbered.

And it could have been worse. The Dow had been down around 230 points on Friday before a late day, end-of-the-month rally led by professional investors trimmed the decline. These pros - banks, brokerages and hedge funds - closed out their books last Friday for the month of February and had a strong interest in seeing the market end strong.

These pros won't be so interested in keeping stocks high this week, although there were rumors around on Friday of another interest-rate cut by the Federal Reserve that might help.

Now for this week's question: How much longer can this pain continue?

First off, the stock market isn't likely to keep going straight down. Markets never do. But the key indication of how bad things are going to get will be how investors handle the inevitable rallies.

Over the last few years, Wall Street's charming and well-paid mouthpieces (with an assist from the media) have convinced ordinary investors to buy after these downturns - bargain-hunting is the cute name for it. In the used-car business, they call this an inventory clearance sale or something like that.

And small investors have been very obliging, which put a floor under most market slides. Strangely, small investors might still be playing the role of savior.

Two tracking services said there was a record $140 billion inflow of money into mutual funds in January.

But there is a message behind the inflow of money into mutual funds, and it's worrisome.

If small investors were putting a record amount of new money into mutual funds, who was cashing out?My guess: Corporations and wealthy folks who invest privately are the ones cashing out. In other words, the smart money wants no part of this market.

So how bad can it get?

The easy way would be to look at some numbers. The 30 stocks that make up the Dow now have a combined price-to-earnings ratio in the low 20s depending on how the figure is calculated. The average P/E over the life of that index is 14. That means blue-chip stocks could still fall by one-third and only be back to their historical average level.

Other indices are even more overpriced.

The big worry right now should be that these indices will fall below their historic averages. And that could happen easily if small investors - the folks who put that $140 billion into mutual funds in January - suddenly panic while the big shots are also fleeing.

There is another problem - the PE ratio. You calculate that number by taking the price per share of all stocks and divide it by the earnings per share of those stocks. You're probably ahead of me, but that E - the corporate earnings - have been declining rapidly.

So there is no telling when the market will hit the historic average if the denominator of our equation is steadily falling.

I'm not looking to incite panic and I hope that my warnings prove excessive.

But the pros and monied folks already know this stuff, so I figure that these dirty little secrets ought to be shared with people who actually work for a living and are only dabbling in the market.

There is, of course, the hope that the Federal Reserve will rescue the stock market. And on Friday the U.S. Treasury made a very significant hire when it brought Peter Fisher onto its payroll.

Fisher is an executive at the New York Federal Reserve, where he has been described as the financial market's "troubleshooter." He's know as the fixer - the guy who controls a covert organization that's been dubbed the "plunge protection team."

But Fisher aside, the Fed and the Bush administration have a big problem.

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