Biderman’s Daily Edge: Investors Selling Because They Need the Money

Nov
01

Individual investors have been getting out of US equity mutual funds for most of this year. And the pace of outflows has been soaring recently. Outflows for all of 2012 now stand at $100 billion. Half of that, $50 billion, came out during the last three months. Flight from the funds is not a new trend. In fact, about $134 billion flowed out of equity mutual funds in 2011. What’s really puzzling is that despite these heavy outflows, stock prices have gone up.

 

What is going on here? I really do not know. I have opinions, but I do not think anyone really knows since investors do not need to tell anyone their reasons for selling. I can think of three reasons why shareholders have been bailing. The most likely reason is they need the money. The second one is they are selling stocks to buy something else, such as bonds. And third, they are selling because they are just scared that stock prices will collapse again.

 

Let us look at these three explanations one at a time. There are two types of investors who have been selling because they need the money. The first are retirees my age and up. The second are the unemployed.

 

The nouveau retirees are regularly selling stocks to pay bills. The demographic twist has occurred. There are about 90 million Americans in the retiring baby boom generation,. Their children only number about half of that. So more and more retirees will be selling stocks than their children even in good times would be adding to their retirement accounts. We have been tracking consistent selling of US stocks by pension funds for the past three years for these self-same demographic reasons. How big is demographic selling? Big. Probably at least several billion dollars per month.

 

As for the unemployed. When you lose your job, obviously you sell whatever you can when you have to. Is it in the billions? Maybe, but probably not more than $1 billion.

 

The second group of sellers moving from equities could be switching into other asset class. Over the past two years, while $10 billion per month has been leaving US equity mutual funds; a much bigger $20 billion per month has been flooding into bond funds. Even more startling is that an incredible $40 billion per month is gushing into bank savings accounts that basically earn nothing.

 

So while some of the $10 billion per month stock sales must have gone into bonds, it certainly cannot be anywhere near the main source of the money going into bonds.

 

The third group of sellers might be those frightened by the risk of lower stock prices. However, I really do not think that is a very big segment, although that is just my guess. I know most Wall Street journalists like to point to a decade of stock market volatility as the reason why investors are sellers, but I do not think that is the case.

 

Normally flow follows performance. Stocks go up and more money goes into stocks. But that is not the case here. The Federal Reserve has flooded the markets with zero-cost cash, which has been keeping a floor under stock prices. In other words, while stocks are staying up because the Fed is manipulating the stock market, the economy still sucks. And, the lousy economy is forcing people to sell stocks.

 

That’s why you can’t conclude that investors are merely avoiding stocks. The bottom line is I think investors have been selling because they need the money. It could just be that simple.

 

 

Charles Biderman
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)

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8 Responses to Biderman’s Daily Edge: Investors Selling Because They Need the Money

  1. A Bell on November 1, 2012 at 9:10 am

    What do you think explains the rise in stock prices.Who is doing enough buying to more than counter the outflow of mutual fund money?

    Thanks

    • cbiderman on November 1, 2012 at 10:35 am

      Companies buying back shares sole source of new money.

    • George Bamford on November 1, 2012 at 12:04 pm

      The Bernanke/Geithner ponzi scheme is proping up the market. I agree with Biderman re People need the money. I also think, like myself, people don’t trust this manipulated market. Just as there are physical laws, there are economic laws and Bernanke, as “clever” as he may be, thinks he can break these laws. But there will be devestating consequences.
      George Bamford

      • Ed_B on November 2, 2012 at 3:04 am

        Indeed there will, George. In fact, we have a prime example of what happens when bureaucrats think that their edicts can supersede economic law. The USSR tried that and eventually collapsed. Are we so much more special than they that we can flaunt economic law with impunity? Somehow, I don’t think so.

        As to why sell stocks… as Biderman suggests, there are multiple reasons and each of us will have our own. In my case, it is not about needing the money, it is about preserving my wealth in the face of multiple economic and fiscal challenges in this distorted and manipulated market. The confluence of Fed manipulation, idiotic government policies, a presidential election with all of its assorted hoopla, Europe staggering towards collapse, China slowing, the fiscal cliff, a massive debt that looks unpayable, falling US productivity, etc. indicate to me that the risk / reward ratio is too skewed to remain in the market. By about mid-Feb to mid-March, however, sufficient clarity may return to the market so that money can begin flowing back into equities. Until that time, financial self-preservation is the order of the day.

  2. [...] Charles Biderman: Investors are selling stock funds mainly because they need the money.  (TrimTabs) [...]

  3. FredB on November 1, 2012 at 4:12 pm

    I’m selling 1)because I need the money 2) because I don’t want to be caught in the Bernanke stock bubble when it bursts.

  4. David henderson on November 1, 2012 at 11:34 pm

    I’m selling stocks because I dont want to get caught in the downwash when the T-bond bubble pops.

    What I’m buying: I-bonds through Treasury Direct, oil & gas unit trusts, short term treasuries, trading in&out of gold. Some PM miners.

  5. Andrew on January 9, 2013 at 10:39 am

    The reason stock prices go up when the productive people sell to nonproductive investment/hedge funds like in 2012 is that these financial institutions need to be paid more for what they bought than they paid for it, otherwise the system that allows these institutions to feed of the producers like parasites doesnt work. If the producers ever made money of their money on aggregate, then they would stop producing and the financial institutions wont take their place (you can take that to the bank).
    I believe that if people start selling out of stocks at an increasing pace while financial institutions take on those shares onto their balance sheet, the market will go parabolic and if volume picks up the pump and dump operation will be completed without the need for high inflation to devalue the money the people received for their shares. Either way you look at it, the game is rigged, the people at the bottom of the pyramid by definition are those who will always be holding the bag on aggregate, whatever they own will always depreciated in value while the financial elite able to create money and change net present values of financial products through the adjustments of interest rates, government policies, insider dealings and other means will always rain supreme within the system.

    Great site. Thanks Mr Biderman.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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Mr. Charles Biderman is an associated person of Trim Tabs Asset Management, LLC, an SEC-registered investment adviser. All opinions expressed by Mr. Biderman on this website are solely those of Mr. Biderman and do not reflect the opinions of Trim Tabs Asset Management, LLC, Trim Tabs Investment Research, Inc., their affiliates (collectively, “Trim Tabs”), or any other associated persons of Trim Tabs. No part of Mr. Biderman’s compensation from Trim Tabs is related to opinions which he expresses on this website, elsewhere on the internet, or in any other medium.

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