WHO IS BUYING?

... and maybe more importantly - WHY?

Published 06-12-14

IS EVERYONE GETTING OUT OF DODGE?

So who is presently buying? We have known for some time who it isn’t.

It isn’t hedge funds, institutions or the smart money!

Pension funds have also been selling stocks and buying bonds this year but the pace has outstripped most estimates. The recent release of the Federal Reserve Flow of Funds report showed pension funds sold $42 billion of equities during 1Q ($168 billion annualized). The outflow is already 7x the initial 2014 annual estimate of $25 billion. Public rather than private pension funds dominated the equity selling. Assets shifted to short-term bonds.

Even though the 'private client' shown in the first illustration above appears to be positive, recognize that it is still in negative contraction territory.

The public always comes into the market when it nears its peaks ... but this time less so!

Investors pulled a net $921 million from U.S. stock mutual funds in the week ended June 4, and $451 million the previous week, according to Lipper. But on overall, U.S. stock funds still brought in cash, since exchange-traded-fund investors put more money into stocks than mom and pop yanked out.

Let's not forget that 10,000 Baby Boomers are retiring daily with 75M to go. They now plan to live off their investments versus additional savings and investments. They are potentially becoming a drag to stock appreciation and certainly have lost their appetite for risky market 'plays'.

A SHRINKING PARTICPATION RATE

WHO IS BUYING?

So who is buying? Two fold.

1-CORPORATE BUYBACKS

First it is unquestionably corporate buybacks. Enormous amounts of stock buybacks are being conducted by the S&P 500 companies. Last year the S&P 500 companies bought $475 billion of their own stock and in the first quarter purchased another $160 billion.

Close to 80% of all the profits of the S&P 500 companies are being recycled into the hands of shareholders through buybacks and dividends, and this is probably the most powerful force pushing the market higher.

You wonder why the market doesn't have any pullbacks—it’s because the major corporations are buying on all dips and they've got plenty of firepower with low borrowing rates.

Buybacks are still projected between now and the end of the year to possibly be another $350 billion which is truly significant.

2-THE SHORT SQUEEZE FRENCY

Secondly it is a trading strategy of squeezing the shorts in a way that I can never recall happening before. It has become so prevalent that a new ETF has emerged which targets exactly this strategy.

The shorts appear as a consequence to be throwing in the towel and quitting. This leaves everyone on the same side of the boat. We all are acutely aware of what happens when everyone is on the same side of the boat!

CONCLUSIONS

A 70% Consumption based economy such as the US cannot support an elevated Household Wealth Effect without Real Disposable Income increasing at a sufficient rate as to support elevated asset prices.

When we consider the degree to which margin is being used once again in the equity markets, we see not only the excess but that investors have never been poorer while falsely believing themselves to be rich!

A GAME LEFT TO LEVERAGED SPECULATORS - Not Investors

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Gordon T Long    
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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments.

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