Wednesday, December 23, 2009

2009 - One Very Strange Year

An interesting post by CNBC reporter Bob Pisani
  • 2009 ending at the highs for the year, the close to a VERY strange year.   Don't get me wrong: with the S&P 500 up 23 percent for the year, it has been a very good year...the best return, in fact, since 2003, when the S&P was up 26 percent.
  • But the gains have come despite statistics that are less than market friendly.

  •  According to, this year has seen
  1. OUTFLOWS from U.S. stock funds all year
  2. a RECORD AMOUNT ($311 billion) of new stock offerings (includes IPOs, secondaries, and converts, but particularly a large offering of secondaries in the second half of the year);
  3. Announced cash M&A, as well as corporate stock buybacks, AT THE LOWEST LEVELS FOR ANY YEAR THIS DECADE.

  •  These are strange statistics, all of which would argue AGAINST a big move up in stocks.  More on fund flows. What a weird year! Look at these 2009 stats, again courtesy of
  1. U.S. stock funds: $32 billion OUTFLOWs
  2. U.S. ETFs: $18 billion OUTFLOWS 
  3. International stock funds: $26 billion INFLOWS 
  4. International ETFs: $35 billion INFLOWS 
  5. U.S. bond funds: $370 billion INFLOWS 
  6. U.S. bond ETFs: $39 billion INFLOWS 
  • What do we make of this? That the U.S. investor, on net, put NO MONEY into U.S. mutual funds this year, put a small amount into international funds (mostly emerging market funds), and put A TON OF MONEY into bond funds

We've noted earlier this year that the retail investor, despite a manic stock market rally was putting her money into bond funds rather than stock funds.  [Sep 16, 2009: Mutual Fund Investors Cling to Safety of Bonds, Missing Stock Rally]  This is confirmed by TrimTabs data above, and appears to not have changed in the last quarter of the year despite the ever rising market..

Much of the "institutional money" is really "retail" (via mutual funds).  Sure there are some big pension funds and hedge funds, but the hedge fund industry is about $3 trillion, while the mutual fund industry dwarfs it at $10 trillion.  Many hedge funds were similarly decimated in 2008, and spent much of the first half of the year simply trying to survive.... only having so much cash to apply to stocks. (remember, redemption mania in hedge fund world?)

So if the retail investor was actually pulling money out of stocks in 2009, and putting money into bonds.... and the institutional investors was still recovering from the shelling of 2008 and first quarter 2009, many grudingly increasing equity exposure only months after the rally had started, who is left to do all this consistent buying, day after day -- in fact so eager to buy equity we had periods in spring and early summer where premarket futures was up 8-9 out of every 10 sessions?  Certainly one one entity would not show up in the data above...

Alex, I'll take "Tin Foil Hat Theories" for a thousand [Jun 29, 2009: Larry Levin - the Visible Hand and Invisible Hand is Everywhere] [May 27, 2009: Daniel Shaffer Notices the "Invisible Hand" aka Plunge Protection Team] [Jan 9, 2008: An Amazing Blunt Commentary on the Plunge Protection Team]

It is hard to believe an entity that has interfered with every piece of the US economy and bond markets, would sit on the side and let the "free market" work without some "help" in the equity market.  Especially the one market that most directly affects the most Americans and can "inspire confidence" in the masses. While concurrently providing a massive fiscal stimulus through the "wealth effect".  Improbable?  Think of all the things you thought impossible just 2 short years ago.
  • The likelihood they did occur is increased by the fact that a year after the PPT group’s launch, a retiring Fed board member, Robert Heller, wrote a much-discussed article in The Wall Street Journal that in the case of an another emergency like 1987, there might be a better alternative than the Fed’s usual remedy — interest rate reduction. “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, ” Heller wrote, “the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.”
  • The authoritative Financial Times quoted a Fed official, who declined to be identified, but acknowledged that policy-makers had considered “buying U.S. equities” — not just futures. The Fed, said the official, could “theoretically buy anything to pump money into the system,” including “state and local debt, real estate and gold mines, any asset.” That sounds much like the same broad conception of empowerment Greenspan had injudiciously taken note of in 1997.
  • ... the former Clinton aide, George Stephanopoulos, had earlier described the group as having “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”

One other very strange thing, if you recall in early March 2009, President Obama himself said it was a good time to buy stocks. 
  • (March 3, 2009) Responding to a question about the suffering Dow, Obama said, “What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it.”
It was a shocking thing to hear from a President; the first time I've heard of such a thing I was poking fun at him, saying he should start a stock picking newsletter on the side.  But in retrospect., "fortuitous" timing... indeed.  Coincidence...considering the market bottomed that week?  You can think that over on your own time.

As for me, back to my grassy knoll as I chortle to self quietly under breath, wondering which dark pools are being used for said (alleged) activies.  Perhaps there is an ulterior reason regulation of the back waters of the markets is constantly delayed or watered down - we probably could not handle the truth.

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