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.


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.


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.