Do People Really 'Hate' Stocks These Days?

Yesterday we came across an article at Bloomberg entitled „Stocks Least Loved Since ’80s on U.S. Wall of Worry“. Naturally that piqued our interest, as sentimentrader's 'dumb money/smart money' spread has blown out to a rarely seen 29% as of yesterday (the 'dumb money' is 67% confident of a rally, the 'smart money' 38% confident). This spread would suggest that stocks are anything but 'unloved'.

It certainly isn't the only indicator saying so, although there are admittedly a few 'holdouts' in the sentiment arena. For instance, Wall Street strategists on average recommend 'only' 60% exposure to stocks and a mighty 6% to cash (the remainder is allocated to bonds – gold still doesn't figure in the allocation models of the paper pushers). This cash allocation is almost twice the actual cash allocation currently held by mutual fund managers. So perhaps the strategists 'hate' stocks, but the mutual fund managers love them?

Mind, the strategist allocation to stocks has been as high as 72% in the past, right around the year 2000 top. That didn't work out too well. They tried again, with in interim high of a 66% allocation to stocks right at the 2007 top. By now their clients' funds may well be exhausted. Certainly it's clear that the number of yacht owners among Wall Street's clientele must have shrunk considerably if they listened to its advice.

Meanwhile, Mark Hulbert's Nasdaq sentiment index stands at 75% (meaning that stock market timers recommend a 75% exposure to high beta tech stocks). This is a rather unique expression of 'hate'.

Oh, and the 5 day average of 'high yield', this is to say, junk debt issuance, has just reached a new record high! That's right dear readers, a record high!




The 'unloved' SPX looks a tad overbought here. The much ballyhooed 'golden cross' is often a sell signal in primary bear markets – this is not always the case, but as a 'buy signal' its value is practically zero. Statistically, the market is about as likely to go up after a golden cross than at any other time! The same goes by the way for the 'January barometer' superstition. Its predictive value is a big fat zero – click chart for better resolution.




In the above linked Bloomberg article, the following arguments are forwarded by fund managers. We believe it's a case of wishful thinking, but let us see what they actually have to say:


“The benchmark gauge for U.S. shares has climbed 6.9 percent in 2012, the most since it rose 14 percent to begin 1987, data compiled by Bloomberg show. It traded at an average of 14.1 times earnings since the start of 2011, the lowest annual valuation since 1989. More than $469 billion has been pulled from U.S. equity mutual funds over five years and New York Stock Exchange volume slipped to the lowest since 1999.

Pessimism is taking a toll on the securities industry, where more than 200,000 jobs were lost last year, even as U.S. unemployment declines as the economy accelerates. Sentiment is the worst since the early 1980s, when 17 years of equity market stagnation gave way to the biggest rally in history.

“Investors are scared to death,” Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees about $370 billion, said in a telephone interview on Feb. 3. “The fears are justified, but from a valuation standpoint the market has overshot, as it typically does. We’ve been pounding the table to put money into equities.”


(emphasis added)

All these 'scared to death' people have recorded the lowest bear percentage in six years according to the AAII survey of two weeks ago (American Association of Individual Investors).

The bullish argument – forwarded by fund managers holding the lowest amount of cash relative to stocks ever – seems to be: 'the market is cheap' and 'people have pulled a lot of money out of stock funds, so that means they are scared and are going to jump back in at any moment'.

What though if the suckers don't come back to be sold stocks at yet another top? In Japan outflows from stock mutual funds have been going on basically uninterrupted for over 20 years. In a secular bear market such outflows are not a bullish sign – on the contrary, they mean that people are in an ongoing process of diversifying their investments into other areas. The industry is going to keep losing assets and will be forced to sell some its holdings as a result. Remember, the same people always told us how bullish the massive inflows of the 1980's and 1990's were. Now they want to have it both ways: inflows are bullish and outflows are apparently bullish too.

As to valuation, in secular bear markets the average p/e ratio can fall a long way below 14 times earnings. Let us not forget, these earnings are at the historically very upper limit relative to total economic output. They will mean-revert. Meanwhile, valuations are likely to eventually fall into single digit territory. Ceteris paribus, a fall in the average p/e to a level of 7 (not unheard of, we have seen even lower levels over the past century) would lead to a 50% loss.

The article continues in a similar vein and adds an interesting tidbit of information:


“The stock market has effectively doubled since the March ’09 low, and we’re still in redemption territory for equity funds,” Liz Ann Sonders, the New York-based chief investment strategist at Charles Schwab Corp., said in a Feb. 2 phone interview. Her firm has $1.7 trillion in client assets. “That’s never happened.”

Money managers haven’t kept up with the S&P 500’s advance. Hedge funds declined 5 percent in 2011, the third year of losses since 1990, according to Chicago-based Hedge Fund Research Inc. A total of 21 percent of 525 global fund categories tracked by Morningstar Inc. topped their benchmark indexes last year, the fewest since at least 1999.”


In other words, all these bullish and hopeful fund managers have woefully underperformed a market that has net-net been going nowhere for 13 years in nominal terms (in inflation-adjusted terms it has produced a considerable loss). Maybe that is why people are pulling their money from stock mutual funds?


“The retreat leaves stocks in position to rally because so many bearish investors can be lured back to equities and the market is cheap, according to Scott Minerd, the chief investment officer of Santa Monica, California-based Guggenheim Partners LLC, which oversees more than $125 billion.

“Stocks are poised for a generational bull market, whether it starts this year, or next year, or in five years, is anybody’s call,” he said. “Even if we had a 50 percent increase in multiples, stocks would still be cheap.”


The fund manager 'slope of hope' in its full glory. Where are all those 'bearish investors' that can be 'lured back'? Regarding the market's 'cheapness', see above. As we said last week already, it is most likely a giant value trap.




The 'unloved' Nasdaq Composite. Advisors recommend a 75% long exposure to this sector at the moment – click chart for better resolution.




How Exposed Are Investors to Stocks?

From the above one might be tempted to conclude that investors are really 'underexposed' to the stock market these days. Fund redemptions have after all been going on for five years, so how much can there be left?

Yesterday we came across the following rather surprising charts at 'Wall Street Rant':




Ownership of the wold's financial assets: US investors hold nearly 42% of the stocks in the whole world – click chart for better resolution.




Does this look like US investors are 'underexposed' to stocks? The site offers another chart that shows the exposure of US households to the stock market:




The exposure of US households to stocks still amounts to 42% of their total asset allocation, by far the biggest portion of their investments, with fixed income a distant second at 20%. At the lows of the previous secular bear market this allocation to stocks had shrunk to 26%. Still a long way to go!




To summarize:

There is no evidence that allows us to conclusively conclude that investors will be 'lured back' into the stock market. On the contrary, the probability that a lot more selling of stocks by households is yet to come appears rather high.

Moreover, the argument that 'stocks are cheap' is not tenable if one considers the historical record of secular bear markets (they tend to 'undershoot' in terms of valuations) and the fact that corporate profit margins are at present uncommonly and likely unsustainably high.

The idea that the stock market is 'unloved' and 'cheap' mainly seems to be an article of faith of fund managers who are as over-exposed to stocks as they have ever been in all of history.



The 5 day average of junk bond issuance, via sentimentrader. Investors certainly seem not too shy about taking on major risk at the moment.




A comment to the above from IFRE.com:


“The high-yield market is starting off at a modest pace this morning as investors digest the 23 deals (30 tranches) that priced last week for US$18.746bn. This set a new weekly global record, easily surpassing the old record of US$16.5bn set the week ending May 14 of last year.


Needless to say, 'May 14 of last year' was not exactly the most propitious time for buying stocks.



Charts by: StockCharts.com, SentimenTrader, McKinsey Global


 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

5 Responses to “The ‘Unloved’ Stock Market – An Article of Fund Manager Faith”

  • Monty Capuletti:

    Hmmm….Unloved??

    Let’s dig into this a bit further…

    “Exchange-traded funds pulled in twice as much new money as mutual funds did in 2011 in what amounts to the latest sign that the ETF juggernaut is gathering momentum, increasingly at the expense of mutual funds.

    Traditional mutual funds gathered $58.58 billion in net new money in 2011, according to estimates by Morningstar, the Chicago-based financial data firm. That compares to inflows of more than $119 billion into ETFs last year, according to data compiled by IndexUniverse.

    It’s a surprising outcome in that the mutual fund industry is about seven times as big as the ETF industry in terms of assets under management. According to Morningstar, $7.7 trillion was invested in long-term mutual funds at the end of December 2011, a figure that excludes money market funds. IndexUniverse data show that ETFs ended the year with $1.062 trillion in assets.

    http://www.indexuniverse.com/sections/features/10771-2011-etf-inflows-twice-that-of-mutual-funds.html

    Or this..

    “The US exchange traded funds industry made a strong start to 2012, attracting the largest monthly new inflows for more than two years.
    US listed ETFs (funds and products) attracted $28.8bn in new inflows in January, a 200 per cent increase from $9.6m in the same month a year ago, according to the ETF Industry Association, a US trade body.”

    http://www.ft.com/intl/cms/s/0/272c6412-5198-11e1-a99d-00144feabdc0.html#axzz1ll2pCg3t

    So, are individual investors really not involved? Or are they just not buying what under-performing, over-paid mutual fund mangers are selling?? Seems pretty clear, that even w/ many ETF’s structured around non-equity asset classes (FX, Bonds etc..) that the fear or panic or revulsion these managers speak of simply doesn’t exist, and individual investors have decided that ETF’s offer much more than “professional” investor poseurs, and at much lower cost, or they can just buy single stocks.

    What is much more likely is that those who still have $ to invest and are confident about their job prospects are still in the sandbox, while those who are part of the record 1/3 of 401k owners borrowing (Check latest Fidelity data) against their plans simply don’t have any savings to invest.

    And what is blindingly obvious, to all but those who presume their own wisdom as truth, is that the mutual fund business, in this country, is a dying industry, with far too many undifferentiated peddlers selling hollow “generational bull markets” themes to scare investors into believing, after 100% moves in SPX, that something very very big is just ahead…

  • meleaca:

    People getting out of the equity funds are most likely buying common stock keeping the same exposure to equities; many figure that they can read the fund prospectus and structure their portfolio this way without paying management fees. I did that myself, including with the 401k that has a brokerage link option with virtually no restrictions.
    Thus mutual fund outflows do not imply equity market outflows, but rather going around the middle man.

  • RedQueenRace:

    “More than $469 billion has been pulled from U.S. equity mutual funds over five years and New York Stock Exchange volume slipped to the lowest since 1999.”

    So the money has come out of US equity funds. But US investors still have considerable equity exposure. Sounds like they may have “diversified” into foreign equities.

  • Andyc:

    I dont see how anyone can be bullish on anything considering the situation in Europe.

    They seem desperate not to have a credit event on Greece as that might throw all the banks into chaos due to CDS exposure and a credit event seems inevitable, if not with Greece then maybe with Portugal or Spain or Ireland or et all…….and soon it would seem.

    If CDS on these sovereigns kick in the banks are liable to implode and everything will crash with them at least temporarily, until Bailabank Ben can prop them back up again of course.

    Then again we are talking about US fund managers and investors, maybe they have never heard of Europe?

    I will note that I did see that some bloggers were making a more bullish case after that last unemployment report and they seemed a bit more genuinely enthusiastic about their case than previously, so maybe some are becoming more bullish, God help them.

    I dont see anything to be bullish about no matter what economic indicators might read because with banking looking like its on the brink how can anyone have any confidence in anything?

  • hettygreen:

    Mutual fund managers, leading analysts, paid optimists (sirens): “C’mon in everyone. The water is just fine!”

    Cue the music from Jaws.

    Just like in nature where the oceans have been over fished, the disappearance of large, flashing schools of investors is becoming an issue in the financial food chain.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • robot tradersA Fully Automated Stock Market Blow-Off?
      Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.  The bots keep buying... Illustration via...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
  • Juncker, Keqiang, Tusk 2EU Sends Obsolete Industries Mission to China
      “Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”)  and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
  • chart-4-silver-basis and cobasisGold is not Going to $10,000
      One Cannot Trade Based on the Endgame The prices of the  metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322!   All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...
  • Purchasing Power of the BuckThe Real Reason the “Rich Get Richer”
      Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs.   Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com