Joseph Stiglitz says that Wall Street is hyping up the economy to sell more stock.
Has it worked?
Well, the stock market certainly has rocketed up from its March lows.
But many investors are still avoiding equities.
As Vincent Deluard – a strategist for TrimTabs Investment Research (25% of the top 50 hedge funds in the world use TrimTabs’ research for market timing) – says:
We’ve never seen this before – such a huge rally, and the little guy is out.
In other words, the stock market rally is due almost entirely to hedgies, pension funds, banks and other institutional investors, and not every day investors.
It is even possible that the government itself has been propping up the stock market. And Bill Gross and Nouriel Roubini say that we have a Ponzi style economy.
TrimTabs notes that small investors pulled out $14 billion net from stock mutual funds from the beginning of last year through mid-December, on top of a net $245 billion withdrawn in 2008.
Individuals hold the lion’s share of stocks. For example, the Fed reports that individuals held 80% of the $19 trillion in stock in U.S. companies (both private and public) at the end of September. So the recovery will not happen so long as the little guys are sitting on the sidelines.
TrimTabs notes that most of $592 billion taken out of money market mutual funds last year has gone into bond and bond-hybrid funds instead.
No wonder David Rosenberg is saying:
- “People have been lured into two bubbles seven years apart, and for a lot of them it’s over.”
- “The bulls say if the market is up this much without retail investors, just watch when they come in, but it isn’t going to happen.”
- Investors who have not been spooked or angered by the market are probably too poor to buy anyway.
33 comments
Comments are closed.
George,
“For example, the Fed reports that individuals held 80% of the $19 trillion in stock in U.S. companies (both private and public) at the end of September. “
Do you have a handy citation or link for this “Fed report”? Thanks.
I presume this includes stocks held through 401K accounts and mutual funds. I don’t see too many mutual funds having closed shop. In my opinion, the true stock market bottom will be when half the mutual funds close shop.
Woohoo! I’m famous! They’re talking about me!!
The large scale picture is that the amount of new money going into stock mutual funds is net negative to slightly positive while there is a large amount of new money being put into bond mutual funds. The general conclusion is that Mr. Little Guy, for a variety of reasons, is looking for less risk and more income from his investments.
So the answer to your question I think is no. I’m not sure how Little Guy does what you’re talking about unless he starts a small business.
Seem to have put the above in the wrong place. It was meant as a reply to quant.this at 7:55 pm
It will be interesting to see if the money taken out by individuals makes it’s way into small private investment and helps in a real economic recovery.
(sort of disagreeing with mark’s reply above)
Lots of SME’s are issuing bonds because banks won’t lend at the moment. Bond funds are buying, so small investors who buy bond funds ARE backing small(-ish) businesses indirectly.
Speaking as one Little Guy, I think I understand how the pump and dump game works, and nothing I know about these guys and their cheerleading and their trading programs will convince me that they aren’t trying to do the same thing with the whole stock market. When dump time comes, it will probably happen in about an hour and a half and Little Guys like me will find out about it at the water cooler. If we are lucky and the Fidelity website hasn’t totally crashed, we’ll be able to get out of our pension plan’s stock mutual funds at the day’s closing NAV. And then, after a day or a week or six months, they will try to do it again. Equities markets stopped being about investing in companies, based on their earning potential, a few decades ago. Now it is about professional gamblers fleecing suckers.
I’ve been sitting out since May. Yes, I’ve missed an enormous run up. But the market has made zero sense to me, and I have to agree with bob — we exist to be fleeced as far as the big fish are concerned. I wonder what the big boys will do when they discover that the effortless volume that they have been getting from the 401k conscripts really has dried up for awhile.
I’m sorry that many are in bonds – I must admit, I’m sitting in money market and Ts. I know that the Ts are worthless, but had limited options, plus I figure that when the government defaults I will have bigger fish to fry than the fact that my T bills are worthless.
Ina, I hope this make sense to you. goldman sachs and others borrow at near 0% (possibly to probably with the fed’s and govt’s consent) to “prop up” stocks to give the impression that the economy is OK and like it used to be.
IMO, they are trying to SUCKER the lower and middle class into buying stocks at higher levels and trying to SUCKER the lower and middle class into going further into debt to the spoiled and rich again.
It is my contention the short side of the trade more or less is in control of the market, presently working to build positions, and at the same time shake out weak hands.
If you consider that, the multi-month trend in the CBOE Put/Call ratio is heavily leaning to the call side, and consider this in the context of the phantom economic recovery backed by much hot air and absolutely nothing of meaningful substance, then you simply must come to the conclusion that, short positions are being hedged with the preponderance of these call options whose relative excess over the past year is plain to see.
Of course, an additional likelihood is that, in conjunction with short position hedging, long positions in such strong hands as probably effected the market’s rescue early last year are averaging up sales of their long positions via [covered] call options written and sold to institutional interests mentioned in the article above, which options then are being exercised by their purchasers following efforts to goose markets higher via the CME, allowing strong hands currently long equities seamless opportunity to trim their positions.
Likewise, in the course of the market’s fits and starts higher those building short positions likewise probably are simultaneously managing long positions whose trade on the way up helps offset the cost of hedging short positions (i.e. via call options). Naturally, these long positions will come in handy once weak hand shorts are out of the way and it is time to detonate an explosion of sell orders intending to precipitate an avalanche.
Think this unlikely? Well, then, ask Mary Shapiro about that uptick rule! It’s still AWOL and that is not cool if you are “mother, apple pie and Chevrolet” when it comes to thinking about the stock market.
So, here is my biggest concern. Although there is no way of knowing with certainty — indeed, we could see the next 12-24 months trading in the range established over the past year (which range, presently, we likely are very near the upper end) — there’s a risk we could see a brief period in which a collapse dwarfing autumn 2008 unfolds, featuring days on end when circuit breakers kick in and trading becomes very chaotic, allowing very few opportunities for the greater bulk of investors to get out. This is my greatest fear.
As far as I’m concerned, I’m sitting in gold. So let the bad times roll, baby!
Unless a huge asteroid made of gold crashes onto the Earth, I’ll be looking good… and even if such an asteroid does crash onto the Earth, we’ll all go the way of the dinosaurs. So I’m looking good either way.
Vinny G.
I don’t understand how the following (paraphrased) statements from the article fit together:
0. We just had a big rally.
1. The little guy is out of the market.
2. Most stocks are held by individual investors (little guys.)
3. We cannot have a rally without the little guy.
0 and 3 are contradictory. 1 and 2 are contradictory. I cannot understand the article.
David, maybe this will help?
I think 1% to 2% of the population owns about 50% of stocks?
Maybe a wealth/income inequality problem?
Luckily I got ~80% of my stuff out in October 2007. Thats right one day I actually got into Treasuries on the exact day of the highest DOW/S&P somewhere around 14,138 or something. (Only safe choice/figured mouth of a thrashing dying beast was the last part to die) I have the print sheet to prove it. I got out thanks to all these blogs and my own, “How can this go on?” I’ve been out ever since getting nothing on my Ts for several months now, but I figure I’m still 25% to the good anyway.
Brant
I did the same thing. I was listening to Roubini and Ravi Batra and reading these blogs. I only lost about 5% value, while everyone else lost 30%. I only have a 401K, no stocks on my own.
Individuals have not held the majority of stock (directly owned that is) for decades. Institutional ownership has been the norm for al publicly traded equity for decades. If one includes 401-k’s and the like, the institutional figure declines (mutual funds of all types hold about 33% of equity), but they are institutional holders, along with pension funds of all types, insurance companies and some bank holdings. Fed flow of funds data will confirm this again for decades.
I asked “George” for a citation on this “individual” stock ownership business. But he’s apparently engaged elsewhere right now. I agree, individual beneficial ownership and institutional investment decision-making are two different things.
Hopefully George will respond before N-C’s update cycle buries the thread in the cyber-strata along with the trilobytes.
The markets are on Levitra due to ZIRP. It is 2003-7 redux. It doesn’t matter exactly who is bidding which asset up. Leverage is back.
Let me try……..
0. We just had a big valuation rally and now see light volume and a lack of smaller investors. The pool is full of sharks.
1. The little guy is out of the market. Statistically speaking. The sharks are getting hungry, but are trying to convince the smaller fish the water is great and they just ate.
2. Most stocks are held by individual investors (little guys.)Little guys represent more cash in total than the smaller number of large institutions. The buffets cannot begin in earnest without the whole food chain.
3. We cannot have a true rally condition consistent with our established statistical norms without the little guy. So with that information be wary of what the larger firms could easily be doing to further separate you from your wealth. A shark is a shark, but now the aquarium management has no problems keeping them in the same pool as the small fish.
In the 1980’s, the stock market rallied on the lowering of interest rates. Homeless people didn’t have much allocated to their stock portfolios. So, they didn’t participate in the new wealth.
Now it’s the middle class’s turn to miss out on the run-up in nominal values.
(Well, if we see some big declines soon, then maybe they were the “smart” money.)
Elliot Spitzer discovered Merrill Lynch emails whereby they were telling their big dog clients that such and such stock was looking like a loser and to sell, and at the very same time emailing their retail (little guy) investors that the very same stock was a buy.
Some little guys have caught on but “there’s a sucker born every minute.” (P T Barnum )
I was banned from blogging by MarketWatch for this remark a couple of years ago. In fact, I could not even publish a comment on this blog for well over a year. It wasn’t until I bought a new computer, and set up a new profile that I was able to blog again. I recently learned that your computer can be blocked via your network (NIC) card.
missed a great article Yves…..
http://www.businessweek.com/magazine/content/10_03/b4163032935448.htm
Let’s not generalize… there are plenty of private investors who have been in stocks since March-April (or even since Nov-Dec 09). And, as had been the case after past crashes, I’m quite certain once the ‘little guy’ realizes there won’t be any major correction (that’s an IF), he’ll pile back into stocks sooner or later.
since when economists are preoccupied with the state of the stock market? is this a subject matter field for economists?
“The markets are on Levitra due to ZIRP”
Concise and to the point, I agree with DoctorRx. This isn’t a rally. It’s a bubble. It does not show underlying strength in the economy but rather masks its deterioration. Yes, leverage is back. Big, dopey slow movers like pension funds have been enticed in, or rather forced back in by their need to deliver unrealistic returns, and they will be burned when markets head south. When things do depends on when the government/Fed starts pulling back from ZIRP. Until then markets seem content to chase their own tails, but because this is all air, pumped up by Bernanke bucks, it could either last a while or go at any time.
If “Bernankes bucks” is taxpayer money, then the “little guy” is also rallying along…
If this is really true and the Little Guys is still out, then there is no reason to expect an imminent crash in the markets. Clearly the hucksters of WS won’t allow that until the Main Street is suckered in once again to be fleeced royally. The magnitude of the social chaos that would follow is anybody’s guess.
‘We have an irrational tendency to be less willing to gamble with profits than with losses..’ – same old prospect theory
I’d imagine the table he’s referring to is “B.100.e Balance Sheet of Households and Nonprofit Organizations with Equity Detail” from the Z.1.