Regarding money flows - interesting article in this week's Barron's titled - More Investors Go It Alone - Fund inflows have dropped by half during the bull market's latest leg.
Seems net inflows into equity and bond funds has fallen by 51% from last year to $42.1 billion - slowest first quarter since 1995.
"Consider this: After the six fund families with the largest fund flows so far this year, the remainder have seen outflows, not inflows. The top six fund complexes -- Fidelity, Vanguard, Janus, Pimco, Alliance and MFS Investments -- had $45.3 billion in net inflows, according to Financial Research."
According to this article, people are taking their money and opening on-line accounts versus investing in mutual funds. "Consider this analysis from Putnam Lovell. Brokerage account assets at E*Trade and Ameritrade doubled in 1998 from $15.5 billion to $30.1 billion. These assets are usually directly invested into individual securities. Now, assume that $4 billion of that $15.5 billion came from market appreciation. The rest, $11.5 billion, was probably siphoned away from outfits like mutual-fund companies and full-service brokers."
The way I read this information is as follows: if a majority of funds are seeing net outflows and this trend continues in earnest, they will have to sell holdings. And if it's true that investors are taking their money and investing on line by themselves, we may have further trouble. IMO, J6P investor doesn't have the basic understanding of markets and valuations. When the markets move against them, they will panic. I read that 50% of NASDAQ's daily volume is non-institutional versus 20% of NYSE's daily volume.
I'm seeing signs that the bigger players are shifting out of technologies and internets. Since many of the J6P investor are trading on margin, the combination of the bigger players rotating out and current prices supported in part by credit is asking for trouble.
The thought that we are in the midst of a paradigm shift - valuations don't matter - is simply not true. We have seen extremes in markets before - whether overvalued or undervalued. Sooner or later, a correction to the upside or downside has always occurred. If you look at the history of the stock market - valuations do matter.
Before every major bear market, experts have touted a "new era".
"For five years at least, American business has been in the grip of an apocalyptic, holy-rolling exaltation over the unparalleled prosperity of the "new era." Business Week, Sept 27, 1929
"There seems to be a consensus that the present is something of a "new era"... a number of conservative economists and businessmen now accept the idea that business expansion can go on indefinitely..."
U.S. News & World Report, Nov. 15, 1965
"Backers of the "new economics" think government now can keep the boom going indefinitely." U.S. News & World Report, Nov. 15, 1965
"Even in such markets as those of the last few days - unless he is operating in particularly volatile stocks, the customer with a 50 percent margin has little to worry about." New York Times Sept. 28, 1929
"The United States has entered a new investment era to which the old guidelines no longer apply." Barron's, February 3, 1969
"Apparently there has been a fundamental change in the criteria for judging security values. Widespread education of the public in the worth of equity securities has created a new demand." The Outlook & Independent Magazine, May 15, 1929
These quotes were taken from a book titled - The Bear Book - Survive and profit in Ferocious Markets.
Remember: Of all the bear markets, 4 of them occurred when P/E Ratios were extremely high where the economy was fine and inflation low:
1939-1942: -41.3% (WWII)
1946-1949: -24%
1962: -27.1%
1987: -36.1%
We Americans have short-term memories. As soon as more of the bigger players decide to shift out of technologies and internets, we are in for trouble. What I'm seeing is that we are seeing more investment options for these players - foreign markets, higher yielding bonds, cyclicals, REITs. IMO, they will continue to shift money out. J6P will panic and margin calls will only add fuel to the fire.
Dan
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