According to the Financial Times, global equity funds witnessed a $21 billion inflow of cash in the last week. Bond funds had outflows.
Please consider Billions Rush into Equity Funds as ‘Great Trump Rotation’ Takes Hold.
Global equity funds witnessed a $21bn flow of cash in the last week – the ninth highest on record – as bullish stock investors pile into stocks in the wake of Donald Trump’s election, according to data analysed by Bank of America Merrill Lynch.
Cash poured out of bonds and into equity funds as the sell-off in global debt ramped in the days ahead of the US Federal Reserve’s second interest rate since the financial crisis this week.
In the week to Thursday, BAML data showed the seventh straight week of outflows from fixed income at $4.4bn, with investors rotating into stocks on the back of a stronger outlook for the world’s largest economy and expectations of ramped up corporate profits after Mr Trump’s election.
In total, $63bn has flowed into equities funds since the presidential election compared to $151bn of outflows in the 10 months from January to October.
BAML data also showed materials, energy and industrial stocks as the biggest beneficiaries of the “Trump trade”, while the soaring dollar has hit gold and commodity funds.
Money Flow
It’s important to know that money does not flow into stock or bonds. Nor does money flow out of stocks and bonds.
Given there is a seller for every buyer there cannot be a flow. Equity funds can have a “flow” so to speak, but there is no net flow. The alleged amount of cash on the sidelines does not change one bit.
On an overall basis, it is impossible to dump stocks for bonds or cash but one can do that on an individual basis.
Contrary Indicators
What is it that retail traders know that those on the other side of the trade don’t know?
The above chart is a strong contrary indicator.
Mike “Mish” Shedlock
What if Peter has $1000 in cash and Paul has 10 shares of Apple worth $1000, Peter buys half of Pauls stock for $1000, now the market value of the 10 shares is $2000 and Paul has the $1000 in cash. There is still $1000 in cash on the sideline as you say but somehow that feels like money has flowed into the market.
If the amount of sideline cash did not change (and it didn’t) how did money flow into our out of the market?
Though your statement is correct in its basic context to my view…
Indirectly the measure of confidence expressed by increased valuation may be used by the company as leverage to raise fresh capital created by credit expansion outside of the above set. That capital is then invested to increase earnings which if positive feed back into higher returns for the shareholder, plus an increase in physical assets and higher revenue, which may see share values pushed higher still. Sideline cash will increase under that scenario.
?
Is confidence in a stock determined by the representative company’s performance or simply confidence that someone will pay more? We see a long history of company stock prices that in no way reflect the company’s actual profitability. Stock prices appear to be driven by emotion and the belief in the greater fool theory. The only ones seeming to be do any real analysis are those busily trying to justify selling their “book”. Ultimately most gamblers are only seeking some credible rationalization as justification to act…..just like the rest of us. Normally I wouldn’t care what they do, but when their actions drive the entire worlds economy, is it not rational to question if “Las Vegas” can destroy the world? Most people are not in on this game yet we all find ourselves tied to its fate.
Ultimately it is about morals. We all understand that a little immorality is relatively harmless to society as a whole, but the reason so many have insisted on a moral standard for society is that they understand that it seldom stays little OR harmless. Morality is based upon the understanding that we possess certain weaknesses and that they are weakness because we lack the ability to resist once started. That is why gambling was always considered a vice and was largely outlawed. The simple recognition of weakness. What we have seen is a complete embrace of this particular weakness because there is so damned much money in it. Even our governments see it as a bottomless slush fund, using lotteries as another source of funding…to help the poor of course, YET it is the poor who primarily fund it. No one cares.Easy money.
There is no way of denying that our current markets are nothing but gambling. And in all truth, we KNOW what that means for the vast majority of HUMANS.
I’m not one to want to outlaw much of anything, but what we have is quite the opposite. We are embracing gambling, mainstreaming it, enabling and promoting it in almost every sector of our lives. How does this end well for us?
Though in total the sum of all valuations will net to the same, the application of cash as a form of vote might be considered similar to any other use of money in that it directs activity. If you buy bread more will be made. Although shares are not consumed, the product they represent is. Those voting into a company are giving the opinion that that productivity will be worth more. It is not a conclusive argument as in reality equally they reverse the share deal next day all to no effect.
Finally, I suppose it would depend on exactly what is meant by sideline cash. All cash is sideline always from a certain perspective, so more relevant is maybe where it expresses itself as a valuation of a good or asset, shares included.
Just thinking out loud.
Sideline money is the suckers, the muppets, who while untrusting and generally already having been robbed, will eventually buy back in when the market rises to fast to be resisted. The markets create nothing. They only redistribute wealth from earners to casino owners and their “employees”. Goldman says buy, you can bet they are selling and a sell recommendation lets you know they are buying.
It is interesting that the likes of Goldman and JPM were on their knees eight years ago and are now doing marvelously. Lots of people lost massively, yet I doubt Lloyd or Jamie lost much at all from their personal stash.Losses went to their “investors”.
Who owns the sideline cash, and how or why, is something else, and that is where we are looking at the whole monetary, political, financial, economic, and social makeup. As far as I am aware it belongs to the central bank, we are obliged to use it, and it is actually technically a credit we make to the central bank when we hold it. A more complex and deceptive system I have not encountered, nor wish to.
Did Apple just do a stock split by increasing the share value but keep the same number of shares? Is that how you got to more money in the market?
All that changed was what someone was willing to pay for the shares at the margin There is no guarantee that anyone else will.
I have dealt with the S&P futures for decades and there is a concept known as an “airball,” where the bids and offers change drastically with absolutely no contracts changing hands. A classic case of this to the downside occurred during the flash crash. Back in those days DayTraderRockStar allowed one to listen in on his pit feed and it was something to behold. The sellers were offering the contract down in 1-5 point increments ($250-$1250 per contract) and there were absolutely NO bids. No money was changing hands at all yet the contract was decreasing in value rapidly.
You see the same thing in a stock when news hits overnight that causes it to gap up or down. Technically the value doesn’t change until it actually trades but effectively it has when the bid/ask changes.
Since the election, retail investors poured money $63 million into stocks… with the S&P @ at an average of 25 times earnings. That kind of stuff happens just before a correction.
p/e can go back above 40 as easily as it can go back down to 15. Neither you, nor I, nor anyone else, knows which one.
And especially so, once E increasingly stems from sales to those who make their money off of expansion of P….
“p/e can go back above 40 as easily as it can go back down to 15.”
He said “a correction.” Selling off enough to drop the P/E from 25 to 15 is bear-market action. A 10% correction takes the P/E to 22.5.
This market is very overbought. The Dow RSI was in the very high 80s at one point and the bulk of the gains were in a few stocks (i.e., the rally was a bit narrow). With seasonality and the extreme bullishness prevalent it will take a while for this to break more than a couple percent without rallying back. It may also try to push to Dow 20K +/- some small amount. But the bulk of the move looks to be behind us and with all the gaps below (that I believe will eventually get filled) the next big move is likely down. It will just take time to play out and will probably involve a period of sideways chop with some head fakes both up and down before a nasty sell-off takes place. My expectation is this will happen in Q1 2017.
Shameful misunderstanding. My Asian friend read Greg’s post aloud, and mispronounced election. Damn those L’s.
When long Treasuries hit 4%, a P/E of 25 gets harder to justify. Since margins are historically high and likely to go down, we may only need long rates at 3.25% to hit the wall. Let’s see: the 30 year rate finished the week at 3.19% … Oh, and VIX at 12.20 indicates perhaps a touch of optimism.
Think globally. Plus, retail participation is still low, but it will rise as the global flows seeks the only alternative for big money.
Exactly, you get the point. And with the “war on cash” is going global, the message to the retail investor is: “don’t trust your government and central bank, park your money in the U.S.”. Which will accelerate when the dollar resumes its rise against all other currencies. The U.S. is BY FAR the best place to be for foreign investors.
China is selling their treasury bonds and Japan is now the largest foreign holder of treasury bonds. Bond price is now lower and rates have to rise. Fed can’t sell government debt at the lower rate and has to hike rates. ( complicate the situation with an election ) China has to put the money somewhere — buys stocks or Hollywood studios or homes in Seattle. Meanwhile, a higher rate on 20T debt is an enourmouse burden. China steals a US drone in international waters.
And to be contrary its all Russia’s fault but I guess every country has an opinion. But we can cancel the election because Podesta fell for a phising email. Or was it a youtube video? ( sarcasm )
Not sure if my movie is right, though.
Sorry, but your analysis is wrong. This is not like Japan YET. We first have to have a “phase transition” in the Dow, like the crazy move in the Nikkei in the 1980’s. Thus, FIRST the dumb money has to come in and catapult the Dow to somewhere between 30,000 and 40,000. Only THEN we have a crash. Participation in the stock market is still WAY below 2007 and you cannot have a bubble and a crash without foreign and retail participation going ‘all in’.
My feeling is the “the market” has been waiting on this dumb money or sideline money since the last crash. As a major cynic in regards to the markets, I wonder if they will go ahead and cash out even if ALL the dumb money is not back in, under the assumption that it may never return. For me, it appears all as a confidence game dependent upon greed and fear. They sell us worthless artifacts under the premise that we will at some point be able to sell them to someone else for more. Inevitably those who sold them to us initially will end up buying them all back at a steeply discounted price and then start the cycle all over again. We see the primary dealers only getting larger and richer with each cycle.
I wish there were no stocks other than preferred, dividend paying stocks. These would more accurately represent company ownership and reflect the true performance of these companies. I have a very hard time wrapping my head around the notion that a company can sell shares that represent nothing more than a betting platform. These stocks appear to have no real practical claim on the company or its assets. If companies had to actually share their income with ALL their shareholders, maybe they wouldn’t be so anxious to sell stock and falsely inflate non GAAP profits in order to push share price.
Is it too much to ask that our economy is based on reality….true profits, real value, and actual supply and demand that is not artificially inspired by debt that increasingly understand will NEVER be paid off? But then again, an economy based upon truth, transparency and consequence may not be capable of existence as we might never consume in enough meaningful quantity without the “proper” manipulated motivations.
You don’t get invited to many X-Mas parties, do you?
Not really. People run in despair.
Most people do not seem enjoy thinking all that much.
Human’s principle motivation is to avoid reality at ALL costs, Christmas being a big one. IF Christmas was about family and all of the things they purport it to be, it would be NOTHING like what we have today. Instead, Christmas is like every other aspect of our society in that it is just another (and largest) reason to consume….consume crap that NO ONE needs, many borrowing the money to do it.
It’s a Wonderful Life! if you have a substantial line of credit….
Not sure about that. If you can get a good yield/coupon on good bonds, there will be an exodus from the stock market. Why risk it on a dividend stock with inflated p/e. But I would avoid municipal bonds from places like Illinios or coastal real estate exposure. Maybe buy short term now let it mature and load up later. Or just plain cash…
Rates are going up up up. ( unless your one of those Time magazine cover contrarians )
The U.S. markets will be “a place to be” for the rest of the world: the dollar will rise against all other currencies. That means there will flow A LOT more money to the U.S., from the rest of the world. Simple capital flow analysis. Read M. Armstrong. He is the true expert.
Please. Stocks will head down when the recession arrives. The current “expansion” 7 years 6 months long. We’ll have a recession well before 30K Dow.
The time between 2001 recession ending and start of last recession was 6 years 1 month.
You make the same mistake as a lot of other analysts: to view the stock market domestically. The dollar will rise vs all other currencies, this makes the U.S. a very interesting place to park money for the rest of the world. Just as what happened to the Nikkei in the 1980’s.
Oh, I get it.
It is different THIS time.
Good luck
There Is No Alternative (TINA) is the newest “strategy” being deployed by the big money managers. Stocks is all there is and they are speaking frankly so that it cannot be misunderstood.
Normally these goofballs are paid to speak gobbledygook and are praised for the high level of ambiguity they deliver. Straight talk from them is alarming unto itself.
Shouldn’t this rotation really be called the “Yellen rotation”?
Still sticking with my 1980-82 analog.
Reagan elected – with a Republican Senate – in an “unexpected” landslide.
Dow rises almost 7% in the month following the election.
The Fed is raising interest rates also.
Recession follows, and over the next 18 months, the Dow loses 25% of its value.
History doesn’t necessarily repeat, but often rhymes.
We all know what happens when ‘retail investors’ pile into the market.
“The alleged amount of cash on the sidelines does not change one bit.”
Cash is always someplace and it is where the holder wants it to be at the time. One can say that cash in the stock market is on the sidelines, until it is moved somewhere else.
The election caused a run up that may very well have also happened with a Clinton victory. World stability is low which means the probability of a market correction due to outside forces increase. In the absence of any crisis, financial or otherwise, the market will drift up as it did during the Obama years.
OK I’m the dumb money ( by definition now much) . How safe are nursing home stocks eREITs, do the Repubs have the nerve to kick Grandma out when they’re the only ones who can afford the 24/7 FT home health care?
They’ve already lost 15% , all I care about is will the dividends, or at least 80% of the 8-9% dividends keep coming in?