Everyone Fleeing Into Stocks and Bonds Not a Good Sign - IRA

In "Goldman Sachs: The "Smart" Money?!" I called attention to the fact that the banks team at one of Wall Street's best known firms has not exactly been on target with its calls on the sector (e.g., they were negative when the stocks were trading at their lows).

However, one firm that has been ahead of the curve as far as financial sector realities are concerned is Institutional Risk Analytics (IRA), which specializes in providing "customized risk management solutions and advisory services to global enterprises."

As it happens, Yahoo! Finance's Tech Ticker yesterday featured an interview with a principal of IRA, entitled "The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says," in which he expressed views that were in marked contrast to those of the gang that couldn't rate straight.

Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo (WFC), Comerica (CMA) and Capital One (COF).

But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally.

"Why is liquidity going into the financial sector? It's because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign."

Comments

[Michael Clark:]

Great article, Michael. Is it time to short? Maybe not yet, but soon.

Oct 07 06:48 AM

[User 353732:]

Main St investors are being told by Wall St and its pet poodle, the financial MSM, " rush into stocks because this is your one opportunity in a lifetime to recoup the equity losses you have suffered over the past decade: get in now, get fat, get in big, otherwise the markets will surge and the opportunity window will close"

Retail investors , frightened by their loss in net worth and greedy for regaining the happy times when their portfolios ascended while they slept, are receptive because they desperately want to believe. Not all, of course, are beguiled and drugged by the financial hallucinogens and toxic vapors of Govt propaganda, Wall St deceits and MSM falsehoods.
Not all retail investors are prepared to ignore the following 6 truths:
1. Consumer credit is shrinking at the fastest pace since records were kept, which means that the appetite and/or the capacity to spend is compressing
2. Business revenues are well below a year ago and quarterly profits are inflated by non-recurring cost cuts, which means that the intrinsic value of a great majority of businesses is lower than a year ago
3. Small businesses are failing at an astonishing rate and new business formation has atrophied because of credit starvation and public policy hostility; which means net new job creation is stifled, which means that embedded unemployment/underempl... in the US economy is rising sharply
4. Bank loan loss provisions for bad CRE loans is less than 40% , which means many more bank failures and serial bailouts loom, which means more savage distortions in resource allocation away from job and income creating companies and into job and income destroying financial companies
5. Rising overt and, especially covert, taxes , fees and charges at the local, state and federal levels is further eroding the already level of after tax discretionary income for 90% of American households
6. Dollar debasement is creating the conditions for rising import, particularly energy , prices which act as an unrebated tax on American households

Oct 07 06:58 AM

[Michael Clark:]

This about says it all. Get ready to short -- not now, but soon.


On Oct 07 06:58 AM User 353732 wrote:

> Main St investors are being told by Wall St and its pet poodle, the
> financial MSM, " rush into stocks because this is your one opportunity
> in a lifetime to recoup the equity losses you have suffered over
> the past decade: get in now, get fat, get in big, otherwise the markets
> will surge and the opportunity window will close"
>
> Retail investors , frightened by their loss in net worth and greedy
> for regaining the happy times when their portfolios ascended while
> they slept, are receptive because they desperately want to believe.
> Not all, of course, are beguiled and drugged by the financial hallucinogens
> and toxic vapors of Govt propaganda, Wall St deceits and MSM falsehoods.
>
> Not all retail investors are prepared to ignore the following 6 truths:
>
> 1. Consumer credit is shrinking at the fastest pace since records
> were kept, which means that the appetite and/or the capacity to spend
> is compressing
> 2. Business revenues are well below a year ago and quarterly profits
> are inflated by non-recurring cost cuts, which means that the intrinsic
> value of a great majority of businesses is lower than a year ago
>
> 3. Small businesses are failing at an astonishing rate and new business
> formation has atrophied because of credit starvation and public policy
> hostility; which means net new job creation is stifled, which means
> that embedded unemployment/underempl... in the US economy is rising
> sharply
> 4. Bank loan loss provisions for bad CRE loans is less than 40% ,
> which means many more bank failures and serial bailouts loom, which
> means more savage distortions in resource allocation away from job
> and income creating companies and into job and income destroying
> financial companies
> 5. Rising overt and, especially covert, taxes , fees and charges
> at the local, state and federal levels is further eroding the already
> level of after tax discretionary income for 90% of American households
>
> 6. Dollar debasement is creating the conditions for rising import,
> particularly energy , prices which act as an unrebated tax on American
> households
>

Oct 07 07:56 AM

[CautiousInv...:]

Individual investors, as measured by the flow of funds into mutual funds, are ignoring the siren song of MSM, brokers and government apparatchiks and avoiding equities. They are, though, piling into Treasuries

"Equity funds had estimated outflows of $4.16 billion for the week, compared to estimated outflows of $7 million in the previous week. Domestic equity funds had estimated outflows of $3.15 billion, while estimated outflows to foreign equity funds were $1.01 billion.

Hybrid funds, which can invest in stocks and fixed income securities, had estimated inflows of $548 million for the week, compared to estimated inflows of $489 million in the previous week.

Bond funds had estimated inflows of $12.06 billion, compared to estimated inflows of $9.84 billion during the previous week. Taxable bond funds saw estimated inflows of $9.67 billion, while municipal bond funds had estimated inflows of $2.39 billion."

Amplifying what Whalen is fearing, the Fed themselves have have considerable concerns about the collapse of CRE: "In a just-revealed presentation to banking regulators last month, the Fed lamented that U.S. banks "are slow" to book losses on commercial real-estate loans being battered by slumping property values and rental payments (see below for more on commercial rentals). "Banks will be slow to recognize the severity of the loss - just as they were in residential," the Fed warned, suggesting banking regulators are girding for a rerun of the home-lending breakdown. NY Fed chief Bill Dudley echoed similar concerns in a speech this week, saying, "More pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures."

Oct 07 09:10 AM

[Joseph L. S...:]

Those fleeing into financials may soon wish they hadn't. Bankers seem to have an errant gene which makes them, obsessively-compulsively sweep reality under the rug until the pile grows big enough to trip them as they walk by.

The latest fiasco they are trying to hide / ignore / pretend will go away is commercial banking. In 2007, banks held $1.58 in reserves for each $1 of bad loans -- recognizing that there were more shoes waiting to drop out there. Today?? Today they have set aside just 38 cents for every $1 of bad loans on their books. And more than half of their total loans are tied up in commercial real-estate!

Did the economy somehow improve during the past two years and none of us noticed?

Of course not. It's just the bankers doing what they do best: investing in spin doctors rather than facing reality. The reality is that office rents fell 8.5% in the September quarter from the same period a year ago -- for those few still lucky enough to have their commercial properties rented.

"Whistling past the graveyard" is NOT an investment strategy...

Oct 07 09:52 AM

[Old Trader:]

Agreed that there may be pain ahead in equities, but I suspect there're still pockets of value in fixed income.

Oct 07 07:49 PM