For the last 48 hours, I have been catching up on my subscriptions and other periodicals that I get on-line that have not been available to me during our move to PA.
For those of you who might be interested, the most important to me are Morgan Stanley's Global Economic Forum, ContraryInvestor.com, John Murphy @ MurphyMorris.com, The Economist, Barron's and Business Week.
Of all I read the last two days, the following from ContraryInvestor.com of September 3 stands out as the most important. Take a look, and see what you think.
Ken
... note - no charts
Unless we are missing something here, consumer America is reminding us of the actions of equity investors two years ago. Equity investors that continued pouring money into equity mutual funds well after the top in the major equity indices had already been seen. In denial that a severe downturn in equity prices could be a possibility, let alone a strong probability. In the face of clearly deteriorating labor market conditions and now a relapse in macro economic weakness, American households continue to lever and spend as if a significant economic recovery were right around the corner. As you know, month over month July personal income growth measured a big goose egg. Yet consumption was up 1% during the period. Durable goods purchases (read autos) led the way. So when will consumer America address the fact the labor markets are not turning around in earnest as their spending habits continue as if recovery has already happened? As you know, it is only recently that the public has not returned to equity mutual funds post a sharp price drop recovery. Although a few months of data do not define a cyclical or secular trend, it appears to have taken two and one half years and close to $7 trillion in market capitalization shrinkage to change the consumption habits of equity mutual fund participants. If the economy remains soft ahead, we are setting up for consumer spending "shrinkage" on a rate of change basis. How can it be any other way? Even the credit markets will not facilitate unlimited household leveraging. Just as these markets cut the corporate sector off at the knees in a period that was possibly their greatest need for short term financial liquidity in decades, so too will the credit markets ultimately turn against what appears to be limitless household leveraging of inflating assets. It's simply all part of the longer term cycle. Every cycle.
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Looking behind the numbers a bit, in aggregate, 110% of the total current weekly inflow to domestic funds was directed to domestically run foreign focus fund products. There is no precedent for what has happened in the US domestic equity fund complex over the past four months. Coincident with the weekly equity fund numbers hitting the Street late last week, the official ICI (Investment Company Institute) equity mutual fund numbers for July reported the single largest monthly outflow from equity funds in US history.
The report is certainly no surprise at all given the anecdotes found in the weekly AMG numbers throughout July. To date through August, the numbers indicate an additional approximate ($3.4) billion in aggregate outflows. What does continue to amaze us in part from data gathered from these reports is that equity mutual fund managers remain undaunted. Although ($49) billion flew the domestic equity mutual fund coop in July, equity mutual fund managers only liquidated an approximate ($36) billion in common stock. Hence, the cash to assets ratio in the aggregate equity mutual fund complex dropped to 4.3%. Not quite the lows of the past three decades, but close enough in our minds to suggest a sustainable secular bottom in equity prices is nowhere in sight.
As we have mentioned before, many funds have either an actual or unofficial mandate to remain near fully invested at all times. But is this really serving the best interests of the broad equity fund client base? Or just serving the consultant driven institutional marketing purposes of many of the large fund families? Without dragging you through the philosophical mud regarding our fearless forecast of what is to come ahead, we are convinced that before this bear market in equities has breathed its last, cash is once again going to become a viable asset class within the equity fund management sphere of activities. |
