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Exodus And Mutual Fund Cash Crisis By Charles Payne

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It's seven and counting…the Dow, (the home of the cream of the crop) which holds the biggest, most stable, and most bulletproof companies in America, is in a deep slide.

The decline has been orderly and predictable for the most part, perhaps making the result an unavoidable prophecy to a certain degree. Earnings reactions have been the main reason for the tumult, but valuations were near perfection levels. Beyond the trapdoor, springs are associated with disappointing earnings and there is a sense this is all overdue.

It's all good, but the depth of the selling points include additional factors that have little to do with fundamentals and everything to do with timing and hunches. The dollar is intangible, but then it becomes tangible. Because the change is recurring so often, even the non-generally accepted accounting principles (GAAP) cannot mitigate its impact. The Federal Reserve is said to be prepared to hike rates, even when the jobs picture is muddled and disappointing in the real world.

Getting out of this down spiral is going to be very difficult, but it is easier than pulling out of an all-out panic. Those might be the two options this week, however. Either the market will be turning the Dow Jones Industrial Average (DJIA), closing above 17,800, or this snowball becomes a boulder.

Cash Flows

It's been like clockwork for this year's money pouring into mutual funds for managers to put to work. However, those fund companies have developed more products to house that cash, but now there are so many options that some fund categories go begging. Who would have imagined the category would be funds designated to invest in American based companies?

Sure, the majority of U.S. mutual fund assets are invested on equities, but the majority of that has gone into funds that invest in non-domestic companies. Since 2007, the overwhelming exodus of equity mutual funds has found a new home in exchange-traded funds (ETFs).

The word is out that mutual funds are running out of money.

The mutual fund crisis speaks to the skepticism that has haunted the rally from day one; it also means that we could see panic selling if there is a bump in redemptions

Throughout the end of June, American investors pulled $50 billion from domestic mutual funds and the pace has picked up with July outflows near $28 billion.

Mass Exodus
Domestic Mutual Funds

Out Flows

July 1, 2015

-$5.4

July 8, 2015

-$2.4

July 15, 2015

-$11.4

July 21, 2015

-$3.2

July 29, 2015

-$5.2

Total

-$27.6

Moreover, I am not sure where this crisis will go or how big of an impact that it will have on the market. However, there is something unnerving about the situation that does not speak well of how Americans feel about the country. The irony of it all is that so many stock market bears point to an irrational exuberance for stocks among the average investor…the same investor that has taken billions of dollars out of the market.

Today's Session

Will today be the day the Dow Jones Industrial Average finally breaks the 7-day losing streak? And if it does, will it be able to maintain its gains? The major equity index is indicating higher this morning, along with the NASDQAQ and S&P 500. The movement is encouraging, however, let's keep the powder dry this morning and watch from a distance.