Pack Doesn't Set the Pace -- or Price

THE SHARE PRICE of General Motors (GM) has sunk to a 53-year low. Just to refresh your black-and-white memory, that was the year Disneyland opened in Anaheim, the first copy of the Guinness Book of World Records was published and Rosa Parks refused to give up her seat on the bus.

Of course, we've known about GM's troubles for years now. From uncooperative unions to foreign competition from Toyota (TM) and Honda (HMC), the domestic auto business has been trending down for decades. It's not as if the industry were red hot three years ago and is suddenly ice cold today. This stock hasn't been a growth story in generations, and the long-awaited turnaround... just never came.

Yet investors still own the stock, and many have been buying it on the way down. The Hennessy Total Return fund (HDOGX) has almost 5% of its assets in GM, contributing to the fund's 17% drop this year so far. Mutual fund giant Dodge & Cox (DODGX) owns almost 50 million shares worth over half a billion dollars. Fund managers like Longleaf Partners and Franklin Resources (BEN) are also large holders.

I mention this because it helps to illustrate that, too often, we assume the market moves in the direction that the public pushes it. In reality, the public tends to sell a stock on the way up, only to buy the high and add more the whole way down. People have been picking bottoms in GM ... or large-cap financials like Citigroup (C) and Bank of America (BAC) for months now. In fact, it can be the absence of supply that moves a market just as much as the presence of demand. This is often lost on pundits and politicians who falsely attribute a rise in XYZ to the supposition that everybody is buying it.

Take the example of a stock that gaps up the morning after some piece of bullish news. You know the drill: XYZ will close Monday night at $30.50, and for any number of reasons such as earnings, could open the next morning at $32.25. The stock opens higher not because of demand — nobody's yet bought a share — but because there is no supply. Holders of the shares are not selling.

And the public has a knack for buying the top. Joe Sixpack largely sat on the sidelines in the late 1990s, then bet heavily on aggressive mutual funds in February 2000, just as the Nasdaq was peaking. Many continued to buy all the way down.

Even now, as congressmen talk of a bubble in commodities fueled by "excessive speculation," it's hard to see how that can be the case when dumbest of the dumb money has yet to get on board. That would be CalPERS, which given its size, geography and structure, tends to be the slowest-moving of the herd.

In the last 10 years, for example, the pension fund's largest allocation to equities came just as the bull market was peaking in 1999 and 2000. As of June, CalPERS had roughly $1.1 billion, less than one-half of 1% of its $245 billion endowment, invested in commodities. That will likely rise meaningfully — to as much as 2% or 5% — before the commodity bull market finally ends.

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Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund was long shares of Honda and Toyota.