A Tale of Two Markets, Part Two November 24, 2009
Posted by smarttradepro in Current Issues.Tags: Retail investors have yet to vote with their cash on the soundness and safety of the equities markets.
comments closed
“Let them eat cake.” — Misattributed to Marie Antoinette
Such an interesting quote for today. Meant to show the total disconnect between the royalty and their subjects, this quote takes us back to a time and place where the working class French literally spent 50% of their household income on bread. The common attribution is that Marie Antoinette, on hearing that the peasants had no bread, spoke the words, “Let them eat brioche.” Brioche was a huge step up from common bread, since it was enriched with butter and eggs. Over the years, the quote has become a more anglicized by changing the “luxury” food item to cake.
To keep this from being a lesson in quote derivation, suffice it to say that Marie Antoinette almost certainly did not utter the words. She was a champion of the rights of the poor and was a well-reasoned thinker who would not have said something so callous. Most likely, an earlier French princess did say something similar and did so out of ignorance and/or lack of compassion for the plight of those struck by famine.
I don’t think our “tale of two markets” is about class warfare. But it is certainly about two different mindsets and two different standards, depending on whether you sit on the retail or the institutional side of the fence.
Last week, we talked about the reactions of the retail public and the institutions during this impressively strong bull market. We talked about cash on the sidelines and how retail investors have yet to vote with their cash on the soundness and safety of the equities markets.
More and more data floods in to support this point. A number of analysts very closely watch the flow of money into and out of mutual funds. Surprisingly, since the March lows, only about 10% of the multi-trillion dollar cash hoard stored up by retail investors has flowed back into the markets via mutual funds (hence, lots of cash is still on the sidelines). Even more surprisingly, there continues to be an outflow of cash from equity mutual funds into fixed income (or bond) funds. Very interesting, indeed.
This means that either 1) there is much more upside potential because of the money on the sidelines, or 2) another (much milder) pain and gain cycle will be needed for the markets to win the trust of retail investors. I tend to favor the second view. If a 65% market rally hasn’t drawn retail investors into equities, what will it take? Most likely, many think that they’ve missed the boat on this bull run and will look to re-invest when equities go on sale. Others probably remain simply shell-shocked by the 50% drop in equity markets in a matter of a few short years.
There really is so much to look at with these fascinating market conditions! Next week we’ll take a good look at the huge differences in the credit markets for institutions versus individuals. We’ll draw some conclusions about where that particular two-market model might be taking us.
In the U.S., this is a week where we take some time out to give thanks. In addition to my thanks for a God who loves me, and family that is a blessing to me every day, I’d like to say a special thanks to the readers and other associates of the Van Tharp Institute “family” for your kind e-mails, commentary and support (be it constructive criticism or good old fashion praise). I always welcome your comments at drbarton “at” iitm.com. Thanks to all of you!
Until next week…
Great Trading!
D. R.
A Tale of Two Markets November 24, 2009
Posted by smarttradepro in Current Issues.Tags: Indeed our current financial markets reflect the Dickensonian superlative and polar opposites.
comments closed
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”—Charles Dickens, A Tale of Two Cities
Today we’re living in “A Tale of Two Markets.” I was just telling a friend and long time trader about this article and using Dickens’ quote. Has there ever been a better opening paragraph? Most strikingly, I did not remember the end of the quote: “…in short, the period was so far like the present period…”
And indeed our current financial markets reflect the Dickensonian superlative and polar opposites. The financial markets are seeing one level of participation from institutions and another from retail investors. And credit markets are bending over backwards to issue corporate debt while continuing to shun retail borrowers and make credit tough to find for small businesses.
Let’s look a little closer at these two separate responses from the retail and institutional worlds.
With the market making an amazing recovery from the March lows, some amazing statistics accompany the 65%+ run that the market has seen. First and perhaps most interestingly, money market funds (where retail investors traditionally park cash) continue to be at a very high level, despite the markets’ strong bull run. Traditionally, when the stock market heats up, retail investors jump in with both feet. Analysts claim that this high level of money market assets reflects the fact that retail investors are still avoiding the equity market after being burned last year.
To be fair, this money on the sidelines could also serve as fuel for a further push up in the markets, if and when the retail investors decide it’s safe to jump back in with both feet.
But it seems, from consumer sentiment numbers, that Joe and Jane Six-pack are still playing their cards very close to the chest. University of Michigan preliminary consumer sentiment dropped significantly from October to November and was well below analysts’ estimates. This is ominous heading into the holidays. This is especially true given that the paper increase in wealth from the surging stock market typically loosens, rather than tightens, the purse strings.
Next week we’ll take a look a look at the huge differences that exist in the credit markets for institutions versus individuals, and we’ll draw some conclusions about where this two-market model might be taking us.
Until then…
Great Trading!
D. R.
They’re Already Talking about Bubbles November 6, 2009
Posted by smarttradepro in Current Issues.Tags: cash, credit/real estate bubble, fear of a new bubble, financial bubble, global markets, inflation, interest rates
comments closed
It’s been just a year since the credit / real estate bubble burst, and there is already serious discussion about another one.
In the current political and economic climate, the global response to the crisis was infusion of trillions of dollars of capital to attempt to reduce the impact of the bursting bubble. With that much extra liquidity chasing the same amount of goods and services (or really a lesser amount, given the global economic contraction), the price of something eventually has to go up.
The game is already afoot.
In places where the economies are a tad more nimble than in the U.S., Europe and Japan, the capital infusion has made a quicker and bigger impact. The manufacturing industries in Asia have recovered much faster than their western counterparts (you didn’t think Americans were going to stop buying big screen TVs, now did you?). Add that to the extra liquidity in the global markets and extremely low worldwide interest rates and you have cash chasing assets again, especially in Asia including Australia. As a case in point, Australia’s central bank has already begun raising interest rates to try to cool off inflationary pressures there.
A cover story in the Wall Street Journal trumpets “fear of a new bubble,” citing some compelling statistics. Included are run-away real estate prices in Hong Kong, Singapore, South Korea and Australia. And perhaps most telling is the fact that risk premium spread—the difference between junk bonds and highly rated bonds—is at its lowest level since February 2008 (before the investment banks Lehman Brothers and Bear Stearns collapsed).
So What?
Financial bubbles at their most basic occur when asset price levels far exceed any reasonable fundamental valuation. And the story always ends the same way. If Asian assets suffered through a bubble-collapse cycle, the ramifications would be felt (and felt strongly) in the rest of the world.
As with all bubbles, the support of the tangential financial markets is necessary. And the equities markets are certainly lending their support. Let’s take a look at an insightful chart from the folks over at Chart of the Day.
The fact there were 6 distinct rallies of greater than 15% during the bear market of the Depression is well known among market followers. This chart shows where the current rally from the March lows fits in with those of the past era.
Bulls could make a reasonable case that this might show that the current action isn’t a bear market rally, but has now escalated to full-fledged recovery. A more cautious view would be that the markets haven’t had time to digest the credit contraction from last fall and that the huge cash injection has merely given the market a “sugar high” and will delay meaningful recovery as it works through the system.
In either case, make sure your profit-taking and stop-loss exit plans are in place. And do take into account the fact that volatility is starting to creep back into the market.
Great Trading!
D. R.
