Tuesday, March 16, 2010

Is America Losing Interest in the Stock Market?

This caught my eye recently:

"BOSTON, March 15 (Reuters) - Investors in February pulled an estimated $3.7 billion from U.S. stock-focused mutual funds, dashing hopes of a rebound in demand for equities, while showering $19.7 billion on taxable bond funds, according to a report from Morningstar.

After investors pulled almost $26 billion from U.S. stock funds last year, analysts thought the trend might have turned around in January, when investors added a net $2.7 billion. But the one-month inflow ended in February, fund analysts at Morningstar wrote in their latest monthly report."

My Take:

As I sit here and watch another snorefest on Wall St, I think we need to ask ourselves if investors are losing interest in the stock market.

Once again, today's Fed statement was a big nothingburger. Rates remained at zero. Shocker!...Not!. There was virtually no reaction from the markets. We are now up a whopping 37 points on the DOW as I write.

As you can see in the article above, investors continue to pull money out of mutual funds and pour them into bonds. This is a very strong sign of a lack of confidence in the stock market IMO. Investors have basically been pulling money out of the markets since the market crash in 2008.

Perhaps we are beginning to see why treasuries have performed so well this year? Just a thought.

One thing is for sure:

The wizards of Wall St must be extremely concerned by the fact that this "flight to safety" has occurred during a 12 month period in which we have seen one of the largest rallies in history of Wall St.

Shouldn't money be pouring into stocks after a 60% one year move? I mean CNBC and the rest of the bulltards thet they roll out on this network everyday keep screaming that the recovery has started.

You know what folks? America doesn't buy it anymore.

Why?

Because they are losing their jobs, they are losing their homes, and they see things getting worse week after week.

Anecdotally I am now seeing it all th time. I have more and more friends and family that are struggling after losing their jobs.

The ones that still do have jobs are completely stressed out and miserable because their workloads have soared as companies cutback on their workers in an attempt to just keep the doors open.

How many of you out there have friends in this situation? My guess is many of you are seeing the same thing.

I think this chsnge in our way of life is psychologically changing American's investment habits.

Investors are no longer buying this market is because they have no confidence in it because they just don't see the recovery around them. If they can't see it then why should they believe Wall St when they say that there is a recovery?

This scenario reminds me of when Warren Buffet refused to buy tech stocks in the 1990's. He has always said he wouldn't buy something he didn't understand. I feel that way now when I look at the stock market and I believe many other people in this country share this view.

Their lack of confidence in both Wall St and the recovery is only exacerabted when you see what we are now exposed to everyday:

The mainstream news is increasingly filled with stories about the endless of fraud that has been seen on Wall St over the last 10 years. The Lehman balance sheet scandal is the latest.

Amricans are also now learning about the cover up of this Ponzi scheme which in my view is even worse than the fraud itself.

The Bank of America lawsuit should only add to this anxiety as the credibility of the Fed could easily be exposed if it's proven in court that they strong armed B of A to takeover Merill Lynch.

On top of all of this, Americans are exposed to seemingly endless economic funding crises that involve just about every state and municipality in the country(some areas are worse than others of course).

After adding this all up and then looking at their own miserable economic situations, I think many are coming to the conclusion that the risk of being "all in" in equities with a bunch of snake oil salesman from Wall St just isn't worth it.

We have seen this act before:


The Bottom Line:

As you can see above, the DOW basically flatlined for 16 years at around 1000 on the DOW. There was some volatility during this time which is to be expected(including a nasty recession in '74/75).

The anxieties seen back then are similar to the ones that we see today: Funding crisis, high unemployment, and soaring inflation(not here yet but its coming). Stocks went out of favor during this period as investors saw little to no returns.

In fact, I can remember an old market veteran from the 1970's telling me the stories about how many of the big players on Wall St bailed on stocks(because they went nowhere) and jumped over to bonds because that's where the money went.

Could we be seeing a repeat today? I sure think so.

The market is still creeping higher but its been a struggle for the bulls over the last 6 months. The volumes over the past month have been pathetic, and I think there is a lack of confidence that this market can move much higher.

The Fed did reconfirm today that they plan on pulling out of the MBS market at the end of the month. It will be interesting to see if Wall St has enough liquidity to replace them.

The market still seems to be filled with "funny money" so they might be able to pull it off for awhile.

One thing however is clear IMO:

Longer term, there will be a point where all of this insanity will become unsustainable because our borrowing needs in order to fund our deficit far outweigh our ability to pay for them.

The timing of when this dislocation occurs is the difficult part. The markets can stay irrational longer than you can stay solvent so a conservative strategy is the best answer at this point.

Remember:

Much of the move we have seen in the past year is a result of money that came out of treasuries and money markets(which are paying basically nothing) and into the markets in order to chase yields.

Fund managers are forced to do this because they have many customers living on fixed incomes that don't want to touch principle. Sitting in CD's, MM's, and treasuries(which many did during the crash) was a very painful experience for them.

Once the markets settled down, money managers started pouring money back into the markets.

The problem with a scenario where you have everyone out there chasing yields is you distort the actual value of both stock and bond prices. This game never ends well because eventually fundamentals matter and prices will eventually return to their actual value. Tech bubble anyone?

When this occurs: Junk bonds will then once again be worth junk instead of the inflated values we see today. Stocks like Fannie and Freddie which have become an obsession with the speculators will also eventually reflect their real value of zero.

Expect more boredom over the next few weeks until the Fed ends their QE strategy.

Until then, go find a newly painted fence and watch the paint dry. It will be more exciting than anything you will see on Wall St until April.

Disclosure: New new positions at the time of this publication.

22 comments:

getyourselfconnected said...

Great article!

I think money is going into bonds but anything with the "real estate" tag will be left out. We will see the FED step back in in that space. Many regular investors got smoked in the dot com bust and i think most felt they got in over their head. They switched to real estate and vanilla S&P index type funds and low and behold they got smoked on two fronts once again. At this point I think return OF capital is more important to main street than return ON capital. Too bad our whole system is based on juicing things into bubbles.

Jeff said...

Get

So true!

And the longer we sit here at zero interest rates the higher the risk of another bubble somewhere.

Like you said...Preservation of capital is the key right now and no one wants to accept it.

These speculators are all going to blow themelves for a third time since 2010 within a year or so.

Maybe then investors will understand that fundementals are what really matters and bubble blowing isn't the answer!

Jeff said...

Ooops I meant third time since 2000.

Herb said...

Yep - its return of capital, not return on capital that everyone is concerned with. Wall*Street is no doubt trying to find some new strategy to keep the rally alive.

Anonymous said...

your article proves that this market will only go higher. the investing public are idiots who always get interested in the market near the end of a bull cycle and then sell in disgust near the bottom of the bear market.

Jeff said...

Herb

Yup

They are slowly running out of options aren't they?

I am curious to see their next magic trick/bubble!

Jeff said...

Anon

Lol. So true. That's why I think the March lows were not the bottom. I saw no disgust or people saying they will never own stocks again.

We may go higher from here but I am confident that the lows in march will eventually be broken.

Anonymous said...

I've got to say that I'm tired of the Wall St. games, the gov. lies, programmed trades, manipulation, false stats . . . There is no logic to the markets and I don't have confidence the fundamentals will prevail so I won't commit new money to anything except metals (miners). Bond bubble will pop.

Just kind of waiting for everything to eventually collapse. We all know it's going to happern so let's hurry up and get on with it!

Jeff said...

Anon

I hear you.

We all are frustrated. I am in metals as well and today's Fed statement will only strengthen them.

I hate the way the government is kicking the can versus letting everything fall to affordable prices.

Stocks, housing, college educations, and everything else must come in line with incomes.

The distortions are so frustrating!

I will continue to make zero interest on the majority of my money other then some bonds. I refuse to participate just like you have.

Anonymous said...

I'm an Industeral Electrician and I can't find a job,As long as oil goes up everything is OK

Anonymous said...

Frustration is the key word at this point. My view is we will start hearing more about the economy improving going forward but the stock market will start trending down,as the valuations are too high and the yield too low. I will be interested to see if earnings will improve on revenues & not just cost cutting, inventory build ups in the future. I think the fed did send a message that yes the economy is healing and the fact they will still stick to the plan of not buying any more mbs in April will be a first step in getting them out of the way and the start of us seeing what is the real situation. The governments involvement is what is making it hard for me to make a good decision. Had the government not been so involved and the market were at 800 then I would be moving funds in but now I am relegated to building up cash. At least with cash I know I've got it and it is not going to go poof one day and while inflation is still very tame, it's working fine.

Jeff said...

Anon


Yeah

Its tough out there in your industry with no growth in real estate.

Keep plugging away. Good luck with the job search!

Jeff said...

Anon

Your thoughts mirror mine exactly wen it coems to cash.

I would be "all in" on stocks if I saw normal valuations.

Everyone is chasing this market and that is not where you want to be if you are an investor.

Part of the problem is everyone speculates vs investing today. This mentality is exacerbating the moves higher and lower.

Instead of corrections we have crashes. The same thing going the other way when the trend is higher. It always overshoots.

I can't wait for the day where I see cheap valuations after the speculators get their clock cleaned again.

I will be "all in" with my cash once we get there just like you will.

Anonymous said...

lol! you gotta be kidding me. you didn't see anger and disgust at the bottom? As a former advisor who worked in a call center office I can tell you I saw it first hand. I whitnessed people panick selling like crazy during the collapse in the fall of 2008. it was insane...the complete opposite of the euphoria of early 2000. Is it any suprise the market is up 75%since? I don't think so. Bears are in denial.

Jeff said...

Anon

Lol. That's what makes a market.

I disagree. You don't see 60% reversals at the bottom. 2000 is a great example of a bottom. Nobody wanted tech stocks for years. We are still 60% from the highs on the Nasdaq.

I have a lot of friends that are advisors and they got calls but they were asking more about what they should do versus demanding to get it of stocks.

We will see what happens. Good luck!

Anonymous said...

"I whitnessed people panick selling like crazy during the collapse in the fall of 2008. it was insane...the complete opposite of the euphoria of early 2000."

Yep - at the bottom, I heard that the bullish sentiment index got down to 6 - lowest in recorded history (I think it bottomed at 22 in the tech wreck). Given how steeply it fell, I guess its no surprise the rebound was so strong.

flipdippy said...

It would seem they are. Some patterns suggest we could breach the 2007 highs in the next 1-2 years. By the time retail goes back in, the fed will be goosing the smart money out of equities and into bonds to keep the ponzi going, and we'll be on our way to visit a real crash from up above to below or near the 2008 bottoms.

I'm sure I will miss some profit opportunities over the next few years, but I'm content to sit in cash (not bonds) and not invest in retirement or bonds or equities until this sorts itself out. If that's in 1 year or 5, it's coming. Smart money will wait. No need to chase anything right now.

Jeffrey said...

Flip

I agree. I haven't made a trade in months.

I do have quite a few bonds but its with PIMCO which did well last year(up18%).

I figure Bill Gross will be get a "tip" to bail right before treasuries fall apart.

The rest is in cash and in some metals along. I do also have a couple small spec stock plays.

This market cracks me up. Party on Garth!

Herb said...

So what events will forecast bonds losing value??

flipdippy said...

Herb,

Just guessing, but if movement in the equity markets continue to be bullish AND volume really picks up, then you know those people who moved their assets to bonds in 08 and 09 are finally back on board the equity bandwagon.

And that would probably be a good indicator as any bonds are about to hit the skids.

I have no idea how a bond crash would impact the average US citizen. You have to assume that whomever makes the markets now will crash stocks and spook people back into bonds if it looks like bonds are in jeopardy. I don't see that happening anytime in the intermediate future, but supposing a black swan event [unlikely] happens it could be soon.

But maybe by that point it's too late, and bonds crash, then equities crash, and bonds crash again further.

Jeff's said it before...when the bond bubble bursts, it is going to be uglier than anything else we've dealt with in the last hundred years in our financial sector.

I too have some PIMCO bonds because they're the least offensive options in those 401k accounts. But I am being vigilant and paying attention, and when it looks like they're in trouble, I'm prepared to liquidate those retirement accounts or roll them over into IRAs where I can leave them in safer holdings.

Anonymous said...

"Flippydippy said...

It would seem they are. Some patterns suggest we could breach the 2007 highs in the next 1-2 years. By the time retail goes back in, the fed will be goosing the smart money out of equities and into bonds to keep the ponzi going, and we'll be on our way to visit a real crash from up above to below or near the 2008 bottoms."

If it takes that long to peak and then burst, that means this isnt a bear market bounce - that means it was a new cycle (and a new bottom). Just sayin.


"I'm sure I will miss some profit opportunities over the next few years, but I'm content to sit in cash (not bonds) and not invest in retirement or bonds or equities until this sorts itself out. If that's in 1 year or 5, it's coming. Smart money will wait. No need to chase anything right now."

Smart money will wait? I have no idea what "smart money" will be doing, but I can assure you it will not be sitting round doing nothing.

Jeff said...

"Smart money will wait? I have no idea what "smart money" will be doing, but I can assure you it will not be sitting round doing nothing."

Anon

Thats precisely the problem. The "smart money" jumps from sector to sector creating one bubble after another along the way.

Then once it peaks the bi money bails and moves on to the next "big" thing leaving retail invetors stuck with the losses.

This type of investing is neither sustainable nor healthy.

Anyone jumping into the snakepit and trying to trade against these guys is just asking to get slaughtered.

Fundementals will matter at some point and all of this crap will come to an end.