Jan 2, 2011
It was the night before Christmas Eve, and CNBC trucked out TrimTabs’ Charles Biderman to a de minimis audience, knowing full well that a man with his understanding of money flows would very likely repeat his statement from last year, that there is no real, valid explanation for the inexorable move in stocks higher, as equity money flows in 2010 were decidedly negative, and any explanation of the upward melt up would need to account for Fed intervention (and no-volume HFT offer-lifting feedback loops but that is a story for another day). A year after the first scandalous report was published, TrimTabs is sticking with its story: “If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else. We believe that place is the Fed. By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities.” And, wisely, Biderman, just like Zero Hedge, asks what happens when the buying one day, some day, ends: “…stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support. Then even more QE will be needed, and stock prices could keep rising for a while. In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually.” Ergo our call earlier that Bernanke has at best +/- 150 days to assuage the market’s fear that QE2 is ending (not to mention that we have a huge economic recovery, right Jan Hatzius? We don’t need no stinking QE…). Therefore the best Bernanke can hope for is to buy some additional time. At the end of the day, the biggest problem is that the massive slack in the economy means that LSAP will have to continue for a long, long time, before the virtuous circle of self-sustaining growth can even hope to take over. By then bond yields may very well be high enough that Ron Paul will demand someone finally bring Paul Volcker out of the fridge.
What Source of Money Is Pushing U.S. Stock Prices Higher? Market Cap Rises $2 Trillion in 2010 as Buying by Companies and Foreigners Offsets Selling by Pension Funds and Retail Investors. However All of Gain and Then Some, $2.4 Trillion, Since QE2 Announced at End of August.
At the end of 2009, we published a report entitled, “Are Federal Reserve and U.S. Government Rigging Stock Market?” We questioned whether the Fed or the Treasury were pushing up stock prices because we could not identify the source of the money that pushed the market cap up by nearly $7 trillion from mid-March 2009 through December 2009.
At the time we released our report, many people thought it was crazy to suggest that the Fed or the government would manipulate the stock market. Yet Ben Bernanke, Alan Greenspan, and Brian Sack have all but admitted publicly this year that the Fed attempts to prop up stock prices.
The market cap of all U.S. stocks increased $2 trillion in 2010. All of the gain and then some, $2.4 trillion, occurred since the end of August after QE2 was announced. Once again, most of the money to push the market cap higher does not seem to have come from the traditional players that provided money in the past:
Companies and foreign investors were net buyers:
· Companies. Corporate America was the biggest net buyers of shares, although all the float shrink occurred between January and August. The float of shares decreased $150 billion in 2010, mostly because new stock buybacks nearly tripled from the depressed levels of 2009. However, between September and year-end the float did not shrink but instead grew by $14 billion.
· Foreign investors. Foreigners provided some buying power in the U.S. stock market, purchasing a net $89 billion in U.S. equities from January through October.
But the buying of companies and foreigners was offset by selling elsewhere:
· Pension funds. Pension funds were apparently huge net sellers of U.S. equities. Based on Informa Investment Solution’s Plan Sponsor Network data, we estimate that managers of separate accounts pulled $169 billion from U.S. equities from January through September. Pension funds account for about 60% of the assets in separate accounts.
· Retail investor funds. Retail investors were net sellers of U.S. stocks. U.S. equity funds and ETFs redeemed $38 billion in 2010 even as a whopping $273 billion poured into bond funds and ETFs.
· Retail investor direct purchases. We doubt retail investors were big direct buyers of U.S. stocks when they were net sellers of U.S. equity funds and retail investor sentiment was relatively cautious until late this year.
· Hedge funds. We have no way to track in real time what hedge funds do, but we doubt they were big net buyers of U.S. equities. While hedge funds posted an inflow of $60 billion from January through November, the most popular strategies were Event Driven ($14 billion), Fixed Income ($9 billion), and Emerging Markets ($7 billion). Equity Long Bias, Equity Long Only, and Equity Long-Short received a total of only $12 billion.
U.S. Stock Market in Trouble Once Fed Interventions Stop. No Amount of Bond Buying Will Keep Stock Market Bubble from Bursting Eventually.
If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else. We believe that place is the Fed. By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities.
But what will happen when the Fed stops buying assets? If QE2 works and the wealth effect of higher asset prices creates a sustainable economic recovery, we think the Fed will stop its QE activities. The Fed is legally mandated to manage the economy, not the stock market, and we think the Fed will sacrifice the stock market to its legal mandate. If that happens, stock prices are likely to plunge to well below fair value.
A more likely outcome is that stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support. Then even more QE will be needed, and stock prices could keep rising for a while. In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually.
Mutual Fund and Exchange-Traded Fund Flows Not Dramatically Different in 2010 Than in 2009. Bond Funds Post Big Inflows, Global Equity Funds Post Moderate Inflows, and U.S. Equity Funds Suffer Redemptions.
Mutual fund and exchange-traded fund flows in 2010 were not greatly different than they were in 2009. Bond funds—references to “funds” in this section include both mutual funds and ETFs—continued to rake in huge amounts of money, although inflows subsided to $273 billion in 2010 from a record $416 billion in 2009.
Equity fund flows were mixed. Global equity funds posted a respectable inflow of $87 billion in 2010, up modestly from $62 billion in 2009. Nevertheless, global equity fund inflows were nowhere near the peak of $182 billion in 2007. U.S. equity funds posted their third consecutive outflow, losing $38 billion in 2010, little changed from the outflows of $42 billion in 2008 and $47 billion in 2009.
Flows shifted dramatically in late 2010 as the municipal bond market tanked and bond yields backed up. Bond funds lost $1.0 billion in November and $16 billion in December, the first monthly outflows since late 2008. If this selling persists, the exodus from bond funds could put more upward pressure on bond yields.