Volatile and Resiliant equity market --- source of money?
A constant subject of late on CNBC and other business media outlets has been the "fact" that money is finally moving back into the equity markets after four years of many living in fear. Many pundits suggest that it is simply a move out of the bond markets by retail investors tired of no yield and more downside than upside(almost obviously) in the bond markets. Some suggest that it's small institutional players, meaning hedge funds, that are moving from bonds to equities. All of that seems logical.
There is one problem. According to Bill Gross, the largest bond manager by far, there has been little or no decline in investor holdings of bonds. On top of that, if these self satisfied pundits think that retail is moving or holding up the market, they are miguided. Maybe that was the case during the wild technology gold rush of the late 1990's, but there is no such phenomenon now. Fear is still alive and well, although some who retreated with abandon during the great recession are now inching back in.
So where is the money coming from, or does it matter. Stocks are often priced in the short term by money flows but in the longer term, for one who has any faith rational pricing, stocks are priced based on their value, meaning capital strength, earnings, cash flow, growth, and competitive positioning. For the sake of argument let's for now just accept that stronger money flows into equities are the source of the resiliance and jagged growth.
Certainly the pundits are right that some funds are coming from folks or firms that can no longer tolerate the almost no rate returns of short to medium term Treasuries, various bank deposits, or anemic annuities. That it is not really visible in bond market volumes is the quandary. Here are some thoughts:
---Overseas money invested in bond markets or bank markets that are not so transparent are moving into the U.S. equity market. China's equity markets are weakening, increasingly government controlled, not so transparent, and many companies are beyond heavily leveraged. Europe's equity markets have some opportunities, but decisions made by a handful of career politicians and bureacrats in Brussels can lead to radical changes in direction of financial markets quickly. Even Germany, the strongest country by far in the E.U. has an equity market that is far from attractive, just outright dull. Brazil has seen its big run, Peru as well it seems, and there is not enough liquidity in Indonesia, Vietnam, Malaysia and other southeast Asian countries to absorb major investment even if they have opportunity. On top of that, India has become a complete mess with no leadership of consequence in government and much of the population impoverished in a way that would embarrass even China. Japan's equity market continues at its moribund pace of the last 15 years or so, but yours truly may be one of the few who thinks that there is finally hope and has taken a little bit of that risk recently. For most investors, the U.S. is the place for the money to move.
---With wealthy investors, real estate owners, corporations, and hedge funds all working for the second half of 2012 to monetize assets and avoid higher capital gains taxes, that's new money for the equity market from people and companies that have always embraced some degree of risk. No way they are settling into two year Treasuries. As other opportunities develop, as in acquisitions, mergers, or new projects, they may move some money out of equities but for now it's the only parking place.
---As of the end of 2012, the Fed ended its great recession policy of essentially guaranteeing all deposits in smaller banks, so that they could stay in business and not lose their business to the biggest and most highly capitalized banks. With no guarantee on money above $250,000, there would likely seem to be a tendency to allocate some money not just to groups of other banks but also step back into a few equities. After all, while sitting on the sidelines since 2009, many relatively wealthy, maybe those retired or approaching retirement, have simply watched the equity markets rise more than 100% while they sat "safely" on their money.
Those are some thoughts. Maybe there is nothing new here to many, but to those who listen to CNBC it might be something to think about. Even Bill Gross suggests that bonds may have peaked and returns will fall, but they are still alive and well with minimal withdrawals. The equity market, with its UPS and DOWNS remains thought provoking or worse, but the returns in the most recent years have, in the aggregate, been rewarding.
There is one problem. According to Bill Gross, the largest bond manager by far, there has been little or no decline in investor holdings of bonds. On top of that, if these self satisfied pundits think that retail is moving or holding up the market, they are miguided. Maybe that was the case during the wild technology gold rush of the late 1990's, but there is no such phenomenon now. Fear is still alive and well, although some who retreated with abandon during the great recession are now inching back in.
So where is the money coming from, or does it matter. Stocks are often priced in the short term by money flows but in the longer term, for one who has any faith rational pricing, stocks are priced based on their value, meaning capital strength, earnings, cash flow, growth, and competitive positioning. For the sake of argument let's for now just accept that stronger money flows into equities are the source of the resiliance and jagged growth.
Certainly the pundits are right that some funds are coming from folks or firms that can no longer tolerate the almost no rate returns of short to medium term Treasuries, various bank deposits, or anemic annuities. That it is not really visible in bond market volumes is the quandary. Here are some thoughts:
---Overseas money invested in bond markets or bank markets that are not so transparent are moving into the U.S. equity market. China's equity markets are weakening, increasingly government controlled, not so transparent, and many companies are beyond heavily leveraged. Europe's equity markets have some opportunities, but decisions made by a handful of career politicians and bureacrats in Brussels can lead to radical changes in direction of financial markets quickly. Even Germany, the strongest country by far in the E.U. has an equity market that is far from attractive, just outright dull. Brazil has seen its big run, Peru as well it seems, and there is not enough liquidity in Indonesia, Vietnam, Malaysia and other southeast Asian countries to absorb major investment even if they have opportunity. On top of that, India has become a complete mess with no leadership of consequence in government and much of the population impoverished in a way that would embarrass even China. Japan's equity market continues at its moribund pace of the last 15 years or so, but yours truly may be one of the few who thinks that there is finally hope and has taken a little bit of that risk recently. For most investors, the U.S. is the place for the money to move.
---With wealthy investors, real estate owners, corporations, and hedge funds all working for the second half of 2012 to monetize assets and avoid higher capital gains taxes, that's new money for the equity market from people and companies that have always embraced some degree of risk. No way they are settling into two year Treasuries. As other opportunities develop, as in acquisitions, mergers, or new projects, they may move some money out of equities but for now it's the only parking place.
---As of the end of 2012, the Fed ended its great recession policy of essentially guaranteeing all deposits in smaller banks, so that they could stay in business and not lose their business to the biggest and most highly capitalized banks. With no guarantee on money above $250,000, there would likely seem to be a tendency to allocate some money not just to groups of other banks but also step back into a few equities. After all, while sitting on the sidelines since 2009, many relatively wealthy, maybe those retired or approaching retirement, have simply watched the equity markets rise more than 100% while they sat "safely" on their money.
Those are some thoughts. Maybe there is nothing new here to many, but to those who listen to CNBC it might be something to think about. Even Bill Gross suggests that bonds may have peaked and returns will fall, but they are still alive and well with minimal withdrawals. The equity market, with its UPS and DOWNS remains thought provoking or worse, but the returns in the most recent years have, in the aggregate, been rewarding.
posted by John Borden at 2:51 PM
2 Comments:
Opinion here that there is no real source of new money, just a revaluation of money already invested in previously undervalued equities. Whether this holds up is anybody's guess.
to Anon, your comment on the value of the equity market is certainly correct, but there were roughly $20 billion of new net flows into equity mutual funds in January. Seems to be that there were no months in 2012 that had positive net inflows.
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