Apologies for hitting an old theme, but when I saw that RealClearMarkets had picked up a Bloomberg.com article which had already caught my eye as being very strange to be its lead, it appeared comment-worthy (LINK). Herewith, a brief screed. The title encapsulates the source of the irritation:
Americans Miss $200 Billion Abandoning Stocks
The title taunts readers who are un(der)invested in equities about what fearful fools they have been. The title on the general headline page at BBG.com is even more strongly worded, as it states:
How Haunted Americans Lost $200 Billion to Shell Shock
Well, did you evah? Actually what happened, as the article describes in less purple prose, is that Americans cashed out of rising stocks to either spend their profits (or, get back to even from their prior losses, or whatever) but “made” far more than $200 B. They did not “lose $200 billion” in any way, shape or form after the bottom was in March 2009. This article thus represents “reporting” more than reporting.
Meanwhile, as I wrote the first draft of this post, the above LINK to the article was actually to a complete Bloomberg.com webpage. At the top of the page was the report that the Dow Jones Industrial Average was down 51 points. Readers may want to keep these almost random variations in stock prices in mind as I dissect the article, which says in part:
Individuals are selling into the rally, cutting the proportion of assets in stocks to 72 percent from 72.5 percent in 2009, according to 401(k) and IRA mutual fund data from the Washington-based Investment Company Institute compiled by Bloomberg. The data is for all equities, bonds and hybrid funds, and excludes money markets. Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
This is quite the bizarre statement. The relative prices of both stocks and bonds change every day. If stock prices decline 8%, as they did promptly post-election, or rise several percent, as they then proceeded to do, those proportions fluctuate wildly, and this alleged “leaving money on the table” theme becomes brilliant asset management; and then reverses again. How is it even conceivable that any writer or editor could think that 72% and 72.5% are different, given the ceaseless fluctuation of securities prices that determine that ratio? Plus, of course, some individuals are selling to other entities that are buying. Shares travel from one e-pocket to another. Asset reallocations always occur and are basically sound and fury, signifying nothing.
$200 B is often merely a week’s price fluctuation in the market’s total valuation. And, a trading price is not an actual profit for an investor. It is simply a price at which two other entities have traded ownership of a fractional share of a company. Tomorrow that price, and the price of every stock the investor owns, could open 5% lower– and drop endlessly from there, at least in theory. Until one sells, one has had no return other than dividends. The non-seller has missed out on nothing but a possible mirage, whether prices are at their nadir or apogee, until a sale occurs.
What is true, though subtler, is the basic arithmetic of the above numbers: when stock prices were at their nadir, dividend yields were at their maximum. Individuals probably upped their asset allocation to these suddenly-low-priced stocks to 72.5% by selling bonds or money market funds to purchase the newly-attractive shares in corporations. Now that prices have about doubled and dividend yields have dropped to around 2% (from 4% at their peak), individuals have rationally (my opinion) sold into the strength to keep the proportion of their retirement funds unchanged. Had they not lowered their share ownership, they would passively have ended up at more like 80%. How this exercise in basic math escaped the bright people at BBG escapes me.
What is surprising is not that “Our biggest liability in the stock market has been the total destruction to confidence,” as the perma-bull money manager James Paulson stated in the article. What is impressive and surprising is that at the bottom of the scariest bear market since 1974, individuals had so much faith in stocks that, faced with imploding stock prices (which passively lower the % of a portfolio allotted to stocks), they bought the dip with both hands to be at about a 72.5% ownership. So much for retail being dumb money.
Did the hysteria to buy FaceBook at $40 reflect “total destruction to confidence”? What about piling into Zynga and Groupon shares in 2011? What about pushing the stock averages up to near-record levels again according to q and CAPE? Did investors buying the stocks that over-leveraged hedge funds and others were dumping post-Lehman reflect destruction of confidence?
Meanwhile, Mr. Paulson was also good for another bullish quote: “There’s just so much evidence of this recovery broadening.”
Sadly, that view may simply represent the triumph of hope over fact, given the following from the Conference Board (LINK):
“The U.S. LEI decreased slightly in November, bringing its six-month growth rate to zero” (said a Conference Board economist)…
(Another Conf. Bd. economist): ”The indicators reflect an economy that remains weak in the face of strong… headwinds.”
Say it ain’t so!: they are almost sounding like ECRI! (The Conference Board obtained rights to LEI from Dr. Geoffrey Moore. Moore spearheaded the invention of the Leading Economic Indicators in the late 1940s, which later became an official statistic to the U.S. government. He much later sold them to the Conference Board in order to develop “LEI 2.0″, via the newly-formed ECRI.)
Actually, it appears that the Conference Board is really bullish at the highest level despite the LEI, as a different post on its website trumpets (LINK):
From the Chief Economist
If the Full Fiscal Cliff is Avoided, U.S. Economy poised to accelerate in second half 2013
Improving underlying cyclical fundamentals in the U.S. economy, led by a revival in the housing market and gradual strengthening in the labor market, indicate a likely acceleration in economic growth in the second half of 2013.
Which economist are we to listen to at the Conference Board? These conflicting statements may let them look back to today in 6-12 months and claim they were correct. LOL!
What we have been seeing ever since Recovery Summer of 2010 proved to be a bust are incessant predictions that “the economy” is poised to accelerate. But the Viagra continues to not have kicked in with full force, and thus we have seen unending Fed activity. This view that real recovery is just around the corner is consistent with 13 years of regional Fed economic surveys in which respondents have almost always said that business would be better in six months that it was at the time of the survey.
Persistent over-optimism may explain why investors have beaten stocks by sitting resolutely in cash ever since 1999-2000, leaving aside the massive outperformance of fixed income over both those asset classes. Of course, it is impossible to time, even by luck, the peak of insanity and sell at the top of that record stock bubble. More basically, ever since interest rates peaked in the U.S. in the early 1980s, the financial media have flogged stocks, especially after they got seriously overvalued. Yet few know that a 30-year zero coupon T-bond sold in 1981 for $2. Thirty years later, it quietly matured at $100. That’s a 50X return. How many stocks did that? And, how many non-insiders actually held onto those that did, rather than “taking a profit”? Certainly the broad averages did not do that well.
Facts are facts: Getting retail investors to trade stocks and buy IPOs is more profitable for the Street than selling them a 20-year bond that may never be traded again.
The Bloomberg article was written with the interests of the financial complex uppermost, not the interests of the public at large.
To that mindset, I say, on this Christmas Day: ”Bah, humbug!”.