The Mouth of the Gift Horse...

Old_Joe

Ted's recent post ⇒ Investors Pulled $28.79 Billion drives me to ask a couple of questions, as there is evidently some mechanism operating here which is not apparent to me.

1) OK, there's not much question that there has been a rather sustained outflow from mutual funds for quite some time now. From what I have read, the same goes for individual investors, also leaving the equity markets.

2) Generally speaking, when fewer buyers desire a product, the lack of competitive buyers results in lower prices. (I understand that there may be many exceptions to this mechanism.)

3) The equity markets have obviously been on a tear in the last month or so.

4) This is sometimes dismissed, though, as occurring on "very thin trading" (eg: not a whole lot of customers fighting over the product.)

5) If mutual funds are being forced to sell some part of their holdings to satisfy the large customer withdrawals, and individual buyers are supposedly also fleeing, then:

• HOW does this market go UP??
• WHO is left to buy??
• WHERE is the upward pressure coming from?

scott

Institutional buyers (hedge funds, etc.) I think mutual funds are seeing outflows, but ETFs appear to be seeing some of that money - I don't know how nervous investors will be less nervous in ETFs than actively managed mutual funds, but oh well. Last week or so there have been some inflows to stock funds, as well. Easy money, lots of liquidity, money goes somewhere and it goes into the market.

Far too great a tide into fixed income and dividend yielding stocks/blue chips last year - now other stock sectors are doing better YTD. I understand that people are looking for yield, but it swung too far in that direction. The response of not getting any yield was a scramble for anything yieldy.

Trading is, however, still very thin, which can cause more outsized moves. Apparently, volume the other day was at 1999 levels. Still, while thin trading can cause outsized moves up, it can also quite easily create outsized moves in the other direction.

I think you've lost a significant portion of individual investors for a long time. Some will certainly come back, but I still think many will not for a while.

Pangolin

ETF inflows have been taking up some of the slack from mutual fund outflows:

Through the first 11 months of the year {2011}, total inflows into exchange-traded products stood at about $101.4 billion.

http://etfdb.com/2011/where-the-etf-money-is-flowing-the-answer-might-surprise-you/

Old_Joe

Reply to @Pangolin: Hey, you nailed it pretty good!

From Ted's link: "For all of 2011, stock funds hemorrhaged $130.32 billion" and "Investors pulled $28.79 billion from stocks funds in December". So 130b - 29b = roughly 101b for the first 11 months.

That works out damn near even with your 101b "first 11 months" number. It helps to explain the increase in volatility since it's much easier to go in and out of the ETF side, and also makes me wonder how many investors are actually "leaving the market".

Thanks!

hank

Agree with everything Scott & Pangolin say above. I'll simply re-state that MF = largely retail investors (you & me presumably). As mentioned above, excludes pension funds which tend to increase equity holdings when markets dip. With paltry bond yields, pension fund managers are likely boosting equities. On the other hand, a lota retail $$ been chasing bonds of various colors (ie treasury, inflation indexed, high yield) - under the perception these investments are "safer" than equities. I don't necessarily agree - but that's another issue. I mention it because retail money running to bonds reduces what's invested in stock funds. Couple unanswered questions could also shed some light. (1) Do the figures in Ted's article perhaps exclude international funds (lots of $$ running to Asia and Latin America)? (2) Do the figures perhaps exclude sector funds - especially gold - which is likely still attracting new money?

scott

Reply to @hank: It's very much a generalization, but I think you had such a scramble for yield that other things were sold and/or ignored. One example - and this isn't a perfect example at all, but it is an example - is Fairholme holding Brookfield Asset Management, which was down 15% last year (and yields less than 2%), and spin-off/MLP, Brookfield Infrastructure, which was up 37% last year and yielded near 7% not that long ago (now yields a bit less than 5%.) Infrastructure - while I think is an excellent long-term play - now feels noticeably overbought, while the parent company (although up some this year and which I like) appears reasonable. Additional spin-off Brookfield Renewable Power (which now yields around 5.3%) was also up huge in 2011.

Lots of money went into fixed income, as you mention above, because of a desire for yield and the belief of safety - while it varies depending, I agree on the potential risk. Yield is like anything else - everyone ran in that direction...to a point and we may be near that point.

I own MLPs both as a yield play and an asset play, but otherwise stayed away from the hunt for yield because it was apparent that everyone was going to be there and it was going to be another instance of having to time the change in sentiment, which I'm increasingly tired of.

ICI does separate foreign fund inflows/outflows.

hank

Reply to @scott: Thanks Scott: After signing off (above), had a similar thought. That rising equity values don't necessarily reflect more $$ going into the market. For example, as bond yields fall, equities - especially dividend paying type - become more valuable in comparison and buyers may be willing to pay more, Same in regard to foreign markets. With some in Latin America up over 20% this year, it can make U.S. stocks appear to be worth more by comparison. Similar to how price increases on new cars will sometimes pull up the cost of used ones as well. (BTW: John Hussman sometimes argues in his commentaries that $$ flows have little or no direct relation to equity values)

rono

Howdy folks,

Hope everyone is doing well.

Individual investors are still pulling out. This includes 401K type pension monies. At the same time, many folks are buying both for dividends AND as a store of value. This category includes some huge piles of money. This is in light of the Fed, in recent months, saying they would do whatever necessary to ensure economic recovery (WTFever) and meaning they would go QE3, 4, 5 . . .nth if needed.

So, the fed has said, 'party on', and equities seem to be one of the safer bets. Lot's of money has been piling into the nasdaq and tech. Check the R2000 for a fast money giggle play. Staid money is going with dividends. You see them changing the 15% tax rate soon? Right. When all they're serving up is lemons, make lemon flavored cocktails. [I've never had a lemon flavored drink, but would guess that lemon juice, sugar, a dash of salt, and most any alcoholic beverage known to man would work- vodka, rum, tequila, gin, bourbon].

Joe, is this going to end well or badly? WTF knows. I don't. I just look at the odds of them juicing us back to prosperity (10%), having the finanical system meltdown (30%), the whole steeenking planet mired in The Great Austerity for another 10 years or so in some sort of flatline nightmare (60%).

I hope for 1, guard against 2 and I plan for 3.

peace,

rono

scott

Reply to @hank: It's this sort of herd movement to varying degrees from one thing to another - into emerging markets, out of emerging markets and into dividend paying US blue chips/utilities/etc, that gets too overdone, money heads back into emerging markets, etc. You have a market that's volatile and uncertain, and while it's understandable that there would be a scramble for yield, given that people can't find it elsewhere, but the fact that everyone was going to obviously be going for it lead me to avoid it because it was such a tide in that direction that the eventual turn would happen and as I've often said, I'm a little tired of having to move with money flows that have become increasingly ADD.

I think people have to pick their spots and have a longer-term view on some themes, asset classes, etc, because I think there are longer-term stories out there that are going to take a while to play out, but in the meantime, these assets are likely going to be in and out of favor on a number of occasions as the story plays out, possibly over years.

I think this is true with emerging markets. While I reduced my EM holdings a year and a half ago or so, I still maintained a pretty large EM allocation. In december/early January, I started ramping up EM again, although in a more diversified manner than the Asia-centric focus I'd previously had. I think there's a lot of interesting companies I've looked at in Brazil, and many of them are still at least moderately below their highs.

I'm not saying anything against market timing and I think a great deal of many investment decisions revolve around timing, but I just think large scale market timing is too difficult in this market, and having a portion of one's portfolio with a long-term view and a more "opportunistic" portion allows one to still be able to be comfortable with the ups and downs of what they view as longer-term themes while taking advantage of opportunities when they present themselves. It's not easy either; I've often said investing will not get any easier over the next decade - but I think it's less stressful.

I did take a little bit off the table on Friday, as it seemed reasonable to do so, but it will likely be reinvested in a fairly short period, and I continue to look for both fund additions and single names in both US and other countries. I remain concerned about inflation and continue to invest with that - to at least a moderate degree - with that in mind.

As for emerging markets, I think there are some staples-y names that did okay last year - Wal-Mart De Mexico, Coca-Cola FEMSA and the ECON etf, among others. While these won't likely do as well on an EM run, they may present low-key ways to be in EM. There's also the DEM etf and HILO etfs, which are more moderate risk.

I think there are certainly some opportunities in Europe, such as Tesco, which Buffett recently added to. While I'm not interested in Tesco, I do think what they did in Korea with their virtual markets (people walk up to a large, lit-up wall with pictures of all sorts of food items in subway stations and click the QR codes with their phones next to each item to order their groceries and have them delivered, creating virtual stores with very little space.

You can see a case study video here:

Buffett/Tesco: http://seekingalpha.com/article/340441-having-upped-his-stake-buffett-is-expecting-tesco-to-start-the-fight-back?source=yahoo

Pangolin

Reply to @scott: In terms of longer-term themes (esp. emerging markets), I think Jay Pelosky is worth paying attention to:


"In the global search for yield, four principal areas of opportunity stand out. First is USD denominated Emerging Market debt. While local currency EM debt became a crowded trade (currently being unwound), the same is not the case for USD debt. Investors access better sovereign balance sheets at a significant yield pick up over UST. Second, infrastructure investment is likely to grow significantly in both the OECD and EM while offering private capital a rare combination of duration and yield.

Two other opportunities include US corporate spread product, both high yield and floating rate bank loans, which have been sold off heavily and yet offer attractive yield and exposure to the US corporate sector, the most fundamentally sound segment of the market. Given the outlook for a strong dollar, weak growth and EM stagflation, spread product looks more appealing than straight equity. Finally, the long end of the UST curve remains attractive with the Fed committed to be a significant buyer of new paper thru June while the economic, political and investor backdrop remains favorable. The 30yr UST bond could retest its 2008 yield low of 2.5%."

http://www.huffingtonpost.com/jay-pelosky/post_2510_b_994172.html

hank

Reply to @scott: Very thoughtful. Can't argue with anything you said. If folk have the time, temperament, and skill set to time markets and sectors - go for it. But, ain't as easy as it might appear and you can sometimes do more damage than good. As you allude, it can consume immense time and energy. A lot (with a more passive approach) has to do with fund selection and how well you trust the manager(s) to act in your best interest. To that end, this site is invaluable. I also pulled a little out of equity funds last week in the name of caution. But, would still be quite happy if she ran up another 10 - 20 - or 30% by November. (-:

hank

Reply to @rono: Always good hearing from you Rono. Biggest mistake I ever made was selling my gold funds after about a 50% bump in the metal from around $280. Funny thing is, had chatted with some fellow from out west while vacationing in Florida around 2001. We talked investing and he insisted gold and oil were the big plays. Pointing towards the ocean he remarked: "All the gold in the world would fit right here on this beach." Of course, that was the beginning of an incredible run for both commodities. I should add - you called it right from the start. -:)
Take care.