JT,
It seems to be institutions rather than individuals doing the selling, other than for margin calls. Contrary to popular belief much of the retail is as least as smart as the funds and certainly more long term oriented.I suspect much of the less savvy were burned off in the last year anyway.
From thestreet.com:
Waves of selling keep crashing into the U.S. equity markets, sending stocks lower. Who's behind them?
U.S. stocks are off more than 10% since the terrorist strikes last Tuesday, and confidence in the world's financial powerhouse has been shaken. Market strategists, economists, and money managers say the selling is, broadly speaking, coming from everywhere. But some forces more than others are at work to drive the stock market lower.
Flight to Quality
"Obviously a lot of managed money is leaning on this quite heavily," said Jeff Hall, economist at IRF/Thomson Financial. Hall said the runup in the short end of the Treasury market suggests that many are placing bets on the safer and more liquid assets of short-term bonds. David Greenlaw, chief U.S. fixed-income economist at Morgan Stanley, agreed. The economist said one sign of the flight from stocks into short-term debt is the steeper Treasury yield curve, which tracks the difference in yields between short-term and long-term securities.
Cash has also become a safe alternative, said Maryann Hurley, Treasury market strategist at D.A. Davidson. "I'm hearing bank deposits are just bulging."
John Bollinger, president of EquityTrader.com, pointed out there have been large numbers of block trades on the New York Stock Exchange since Monday. "This to me says that a lot of professionals, fund managers, hedge fund operators and proprietary traders have been very active on the sell side. It's my sense that individuals are not as panicked."
Likewise, Hall said didn't think the individual investor was doing the bulk of the selling. "For many -- take myself as an example as I didn't bail out of my retirement plan money -- there could be optimistic betting that in 18 months or so [the market] will be restored."
Experts said Monday's activity on 401(k) assets was about nine times its normal level. But other data suggest it hasn't been a mad dash to the bank. A researcher at Trim Tabs, which tracks mutual fund flows, said a total of $7.8 billion flowed out of U.S.-based mutual funds on Monday and Tuesday, compared with withdrawals of $8.5 billion Aug. 28 and 29.
Margin Calls
According to John Babyak, portfolio manager at WHB/Wolverine Asset Management, margin calls on individual investors by brokerages are one of the reasons for the sharp drop in stocks since the market reopened on Monday. "I can guarantee it," Babyak said. "They're actually pricing customer portfolios on an intra-day basis -- which is unheard of -- and making margin maintenance calls based on those intra-day levels. They're giving people ultimatums." Traders at the major brokerages were not immediately available for comment.
Investors often sell stock when brokerages require them to increase the amount of cash backing up a margin account. Babyak said the "extreme situation" occurs when brokerages put "a squeeze on customers" who don't want to sell. This has exacerbated selling pressure in the market, Babyak said.
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Who's Doing the Selling?
Margin calls tend to occur in days after a sharp decline, and are often taken as contrarian indicator that stocks are oversold and have reached a bottom. But Babyak cautioned against using it as a bullish sign. "There are other technical things you want to see happen, like the market closing up for a change."
Babyak also believes insurance companies, preparing to meet the plethora of claims in the wake of last Tuesday's terrorist hijackings, could be pulling out of equity investments. "These aren't numbers that tend to drive the market," said Babyak, estimating that the sector owns about $20 billion to $30 billion worth of stocks, "but it's certainly not helping."
Foreign Pressure
Strategists also think foreigners could be selling U.S.-based financial assets, including stocks. According to data by the Federal Reserve, foreigners owned about $1.7 trillion worth of stocks, excluding American depositary receipts, at the end of the second quarter, out of a total of $14.2 trillion. The proportion of foreign holdings of U.S. bonds is higher.
"Certainly we've seen dollar flows out of this country, we've seen fixed-income flows out, and we're seeing equity flows out," said Hall. Currency investors have been fleeing to the Swiss franc at the expense of the dollar, he said.
But the impact of any flight by foreign-owned capital won't be great, said Morgan's Greenlaw, even though there has been some repatriation of currency investments to Japan. "I don't think people are moving big chunks of foreign capital around at this point, because everything's unstable."
In the aftermath of the 1990-91 Gulf War, the U.S. became the beneficiary of a flight to quality abroad. But could the same thing happen again? It's hard to tell at this point, Greenlaw said, as the U.S. has become "more vulnerable in the short run because of the disruptions and near-term downsides in the economy." But things will be different over time. "As [Alan] Greenspan said in his testimony [Thursday] , there's reason to believe we still face an environment of pretty good economic performance." |
