By Mike Whitney
Last Tuesday, the Dow Jones finished above 13,000 for the first time since 2008. The DJIA has nearly doubled since March 9, 2009 when it touched bottom at 6,547. The index is now (roughly) 1,200 points from its all time high of 14,164. (The S&P 500 is presently 102 percent above its March 2009 low)
For the most part, retail investors are still on the sidelines steering clear of equities altogether. This has the experts scratching their heads wondering what it will take to get individual investors back into the market again.
Here’s a clip from the Wall Street Journal that helps to clarify:
“According to mutual-fund flow tracker EPFR Global, individual investors have pulled $8.3 billion out of U.S. stock funds since the beginning of the year….
EPFR hasn’t tracked a single week in which individual investors put money into U.S. stocks since last July. And since the market bottomed in March 2009, EPFR has counted just two months of net inflows from individual investors.” (“Investors Sell Signal: Surging Stocks”, Wall Street Journal)
So, what gives? Are people worried that the financial system is going to blow up again or are they just too broke to play the market anymore? Is that it? Or maybe it’s Europe or the gloomy job’s picture or the fact that corporate earnings are looking softer. Whatever it is, there’s no sign that mom and pop are coming back anytime soon, and, if that’s the case, the current stock-surge is bound to fizzle in short order. Here’s more background from Zack’s.com:
“According to the Investment Company Institute (ICI), stock funds saw an outflow of $218 million in January on top of a whopping $28.84 billion outflow in December.”
And this is from Marketbeat:
“Investment Company Institute reports today that they had net outflows of $130.32 billion in 2011, nearly quadruple the amount posted in 2010…. That yearly total is only surpassed by a $147.5 billion outflow from US stock funds in 2008, and marks five straight years of net outflows from those funds totaling $469 billion.” (“Stock-Fund Outflows Surged In 2011″, Marketbeat)
Ordinary working people, who used to dabble in the market to augment their shitty wages, have thrown in the towel. They got burned in the dot.com swindle and then reamed again in 2008 when the housing bubble burst. So, now they’ve packed up what’s left of their savings and dumped them into low-yielding bond funds hoping that rich Uncle Harry leaves them a few shekels when he dies so they can scrape by when they retire. But the move out of stock funds by individual investors has effected daily volume dramatically as it becomes increasingly clear that the only folks buying equities in this Potemkin market are the behemoth financial institutions and their high-frequency computers trading with each other in Wall Street’s version of circle-jerk, a completely meaningless exercise that fails to transfer any of the liquidity in financial system to the real economy. It’s a dead loss. Here’s a clip from CNBC:
“Average daily volume on the New York Stock Exchange hasn’t eclipsed one billion shares since Dec. 16-a flat day for the market-and volume has been above its current 50-day moving average just once in the last six sessions…. “Market strength has been undermined by light trading volume,” Ari Wald, equity analyst at Brown Brothers Harriman, said in a note….” (“Stock Market Rally Still Missing One Thing: A Crowd,” CNBC)
So, where are working people stashing their money now that they’ve pulled out of stocks? Trim Tabs David Santschi has a clue and it may surprise you. Take a look:
“In the first 11 months of 2011, investors poured a stunning $889 billion into checking and savings accounts. This inflow is more than eight times higher than the $109 billion that flowed into stock and bond mutual funds and exchange-traded funds.
Inflows into checking and savings accounts peaked at $208 billion in July 2011 and $207 billion in August 2011 as the Standard & Poor’s downgrade of the U.S. credit rating and the Eurozone debt crisis rattled markets. Yet inflows into checking and savings accounts outstripped inflows into stock and bond mutual funds and ETFs in every single month of 2011, including in tax season….
Given the economy’s weakness and the constant interventions in markets by central bankers and politicians, it’s no wonder investors are hunkering down in bank accounts. As long as most investors keep stuffing most of their money under the mattress, the economy is unlikely to get off to the races anytime soon.” (“Real Money goes under the Mattress”, Trim Tabs)
Indeed, there is a lot of mattress-stuffing going on, but what does that tell us about investor psychology and the long-term prospects for stocks?
First of all, it tells you that all the Pollyanna hype we’ve been hearing in the financial media about “improving data”, “green shoots” or the “strengthening recovery”, is falling on deaf ears. In fact, the relentless cheerleading is probably having the opposite effect and spooking people even more.
Second, it shows that policymakers, particularly the Fed, are clueless. This is evident by the fact that, a full 3 years after Lehman Brothers, private investors are still fleeing the market en masse. If that isn’t proof that Bernanke should be given his pink-slip and a bus ticket back to Princeton, then, what is? Listen to what John Maynard Keynes had to say about this type of hoarding-behavior 80 years ago and you’ll see what the Fed is missing:
“Our desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future….The possession of actual money lulls our disquietude; and the premium we require to make us part with money is the measure of the degree of our disquietude.”
Bingo. Mattress stuffing is a sign of fear, and people are afraid because the investment landscape has changed utterly. Research and data-sifting don’t matter anymore because stocks prices aren’t determined by fundamentals; they’re driven by policy. If the Fed goes on a financial asset-buying binge (QE), then stocks will go up. It’s that simple. It doesn’t matter if the stocks are garbage or not.
Of course, QE does have its downside too, which is that it makes the smalltime investors more distrustful then ever. The little guy still believes that stock prices should be determined by revenues and earnings, not by the whimsical interventions of the Fed. QE turns investing into a guessing game where one’s success depends on his ability to anticipate when Bernanke is going to inject more amphetamines into the financial system and send stocks leaping into space. How are mom and pop supposed to figure that out? They’d be better off flipping a coin; the odds are about the same. Here’s Keynes again:
“It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain. It is reasonable, therefore, to be guided to a considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty.”
So if the prevailing policy (QE) undermines confidence and generates more uncertainty than before, then the Fed’s not doing its job, right? That’s pretty straightforward. And the fact that investors are now putting their money into checking and savings accounts, just proves the point.
To show how ridiculous this has become, consider what happened last Wednesday. Bernanke was on the Hill addressing Congress about the state of the economy but failed to make any mention of additional asset purchases. Immediately stocks and Treasuries began to tank as QE-addicted traders liquidated their long positions and raced for the exits. What a joke. This is the monster Bernanke has created with his loosy goosy monetary policies. The irony is that the economic data is gradually improving, but (because Bernanke has turned the market on its head with all his easing shenanigans) the “good news” ignited a sell-off. Traders figured that a sooner-than-expected recovery meant that the Fed would stop juicing the market which is all the fatcat financial institutions really care about. They know that when the QE-spigot is turned off, equities will hit the skids.
Now take a look at this summary by Charles Biderman over at Trim Tabs:
“How many of you know that the market value of all US listed stocks right now is $18.7 trillion. Not only is that almost a double from the March 2009 low, but the gain itself is just over $9 trillion. ….Obviously for such a huge gain the underlying US economy, particularly wages and salaries and employment must be doing so much better than it was back in early 2009. Right? Wrong….
After three years of attempts at a recovery, take home pay is now around $6.3 trillion, up all of $400 billion annually since the early 2009 bottom, or 2% a year. Wait a minute! …….. Shareholder wealth has doubled up, $9 trillion to $18 trillion, and take home for everyone who pays taxes is up about 2% a year,– which is not even keeping up with inflation. After inflation wage earners are losing ground while shareholders are buying Coach and Louis Vuitton stuff at Bloomies and Nordstroms.
So wait a second, how is the stock market up $9 trillion, while the rest of the economy is flat on its butt? …The US government has added about $5 trillion in debt over the past three years. Where did that $5 trillion go? Some of it ended up on the balance sheet of corporate America. The record amount of cash on public company balance sheet currently earns nada, nothing in terms of interest income.
Therefore, companies say to themselves, why not use this free cash to buy back shares? And so they do. And so stock prices have been going up. However, recently as the stock market has risen ever higher new stock buybacks are slowing dramatically and insider selling is spiking and insider buying is disappearing. Unless incomes start surging soon, stock prices eventually have to crash.” (“Making the Case for Occupy Wall Street”, Trim Tabs)
As the economy begins to rouse from its stupor, the Fed will be less able to jolt the market with periodic injections of liquidity. That means stocks will be stuck in the doldrums while the real economy sputters from lack of demand. Then, the next shoe will drop: falling earnings. Up to now, the earnings reports have exceeded expectations because US employers quickly fired employees and slashed expenses when the economy crashed in 2008. Here’s a summary from the Wall Street Journal:
“After three years of profit-margin expansion, U.S. companies have begun to see rising costs eat into the bottom line. And for now, there is little that they can do about it.
After the 2008 financial crisis, companies cleared the decks. With demand falling sharply and credit availability uncertain, they shed millions of workers and cut deeply into their spending on capital equipment. When the economy clawed its way back, they were slow to hire and slow to spend.
The result: Profits swelled. Last year, sales generated by S&P 500 companies were about 14% higher than they were in 2007, according to S&P Capital IQ’s latest estimates. Operating earnings were up 21%.
But in the fourth quarter, there appears to have been a shift, with earnings growing a bit slower than sales. And analysts’ estimates suggest that is something that will continue in the quarters to come.” (“America Inc. Faces Margin Stall”, Wall Street Journal)
This is also from the Wall Street Journal. The article is aptly titled “Earnings Prepped To Fall Off A Cliff”:
“As stocks keep rallying, investors appear to be ignoring some of the major warning signals coming from corporate profit forecasts…. Earnings growth has come off record highs and the corporate profit landscape looks strikingly different when Apple gets stripped from the equation.
Negative guidance has also outweighed positive outlooks, a development that doesn’t seem to be garnering much attention….. analysts are expecting earnings growth in the current quarter to diminish significantly….
As corporate profits remain a concern, stocks keep ticking higher…..While earnings haven’t been able to derail the rally train just yet, diminishing profit growth won’t be ignored forever.” (“Earnings Prepped To Fall Off A Cliff”, Wall Street Journal)
There you have it; the two main headwinds facing the market: The inevitable winding down of QE, and shrinking earnings due to persistent flagging demand.
It looks to me like mom and pop are better off sitting this one out.