A tsunami is a wall of water that wipes out everything in its path, typically caused by earthquakes. But first, the water actually disappears from the usual shoreline, leaving land where there should be sea.
If you are on the shore and see that happen, the correct response is to run for high ground. Tragically, though, people often rush toward this new and unusual sight. It's hard to blame them; we humans are drawn to the unknown. This impulse explains much of our progress, but it has costs, too.
Right now, the stock market is in the land-where-there-should-be-sea phase. What we don't know is when the wave is coming. Maybe there's time to venture out and see what treasure was hidden beneath the waves... or maybe not. Prudence would suggest that we go searching for treasure on higher ground.
This is an age-old investor conundrum. How do you balance risk and reward? You have clues, but you can't be certain of what is coming, or when it will arrive, or what it will look like. You know you need positive returns, but you also need to avoid major losses. The answers are never easy. You take your chances, no matter what you do. Today we'll see what some of my favorite market wizards see on the horizon.
First, I'm pleased to announce the Strategic Investment Conference ticket counter is officially open. We are only two and a half weeks away from (virtual) curtains up. I can hardly wait, and I think once you see our all-star list of 45+ presenters and panelists, you will feel the same. We have pretty much wrapped up our faculty and agenda—now we are down to the last details.
I'm going to give you a quick list of some names you know. But just as important, the names that you don't know are going to be the ones that will simply amaze you. My team and I have spent countless hours listening to videos and working our contacts to assemble an incredible fountain of knowledge over the five days of the conference, just for you.
By the way, you'll know many of the names but take note of the new ones, too. Trust me: I have good reasons for bringing them. Think of them as undiscovered gold.
My team and I have spent countless hours and a lot of elbow grease creating an event that, I believe, will wow both seasoned SIC fans and first-time attendees. We added even more panels and fireside chats, plus an extra half-day of programming... all for the same low price as last year. Order your discounted SIC 2021 Pass here.
Now on with today's topic.
When Every Lot Is Odd
One sign the water may soon rush out of stocks, indicating tsunami, is the amount of money rushing in. My friend Doug Kass recently shared this staggering chart. It shows the inflows to stock funds since November exceed the total inflows of the last 12 years. Doug helpfully pointed out that one of the legendary Bob Farrell's rules is that "individuals buy most of the top and buy the least at the bottom."
Source: CNBC
Note also, this is just stock funds. It doesn't include individual trading accounts, and I suspect the amount entering the market via those is equally staggering.
Where is the money coming from? The obvious answer is from the Federal Reserve and government stimulus. But Danielle DiMartino Booth gives us a visual chart to understand just how completely out of historical context the current levels are (from Quill Intelligence):
Yes, some of this is showing up in retail sales (which were gonzo last week), but clearly some of it is showing up in stock purchases (see some reasons why below). We see well over three times the normal tax refund and stimulus number (pushing $700 billion), and I assume this doesn't even include state unemployment and other indirect stimulus. Also, notice the tiny blip on income tax deposits. The differential is even more stark.
When markets change, as they clearly have in the last two years, you want to ask if something else changed that might explain it. Federal Reserve activity and COVID stimulus payments are obvious factors, but I think something else is contributing. Some history may clarify it.
Way back in ancient times, which some of us can remember, stocks traded in 100-share "round lots." If the share price was $30, you had to invest $3,000, or $6,000, or some other multiple. You could trade in smaller increments but brokers frowned on it and some charged higher commissions, which back then were already extremely high compared to today. And odd lot orders often got executed at inferior prices, too.
(I have a friend who once ran serious money for a family office, focused entirely on buying bonds in odd lots. He didn't need to find odd lots, as they had plenty of money. He could simply get 1 to 2% more yield for the little bit of extra work.)Over time, "odd lot" trading became a sign of amateur activity, to the point some used it as a contrary indicator. More odd lot activity meant uninformed people were entering the market and a top was approaching.
By the 1990s, back office technology had made the whole round lot preference obsolete. Brokers stopped caring how many shares you traded. In effect, a "round lot" became one share. But now it is even less. Robinhood and many other trading platforms let users trade fractional shares, as little as 1/1,000,000 of a share. I believe this may be more consequential than is generally recognized.
Look at the share prices for of some of today's top companies: Apple (AAPL) is around $130. In the old round-lot world, you would have needed $13,000 to trade it efficiently. Now you need less than a penny. This vastly expands the universe of people who can trade Apple shares. And Apple is low-priced compared to some other popular names like Tesla (TSLA) around $750, or Amazon (AMZN), which is over $3,000 per share.
We have, without really noticing, severed the connection between share price and liquidity. This matters in ways I think we may not fully understand. Combine it with game-like mobile apps that let people buy and sell in individually tiny amounts that add up to the big numbers once reserved for giant institutions. And without any kind of institutional decision-making process to constrain rash moves.
Further add trillions in government cash payments, often to people with time on their hands because they are unemployed, and who need ways to generate income. Of course, some turn to stock trading. It's an attractive "side hustle" for a time when Uber driving is less attractive. If all you have is $100, that's okay.
We have raised a generation playing adrenaline-charged video games. For a relatively small stimulus check, they get to play in a game where Dave Portnoy assures them that stocks only go up, or they can "stick it to the man" in GameStop. Sigh….
In the bigger picture, all those small accounts add up to enormous sums of hair-trigger money. Some of it has much higher risk tolerance. The app users don't see it as a nest egg to preserve. In their minds, it's more like buying gas to get to work—something you have to burn. The whole concept of a stock being overvalued or undervalued doesn't apply. They just want it to move.
Where all this leads is uncertain but I suspect it won't be good.
A Key Difference
One of the first rules my mentors taught me: All it takes to create a bull market is for buyers to show up. All it takes to create a bear market is for the buyers to disappear. Just reading the zeitgeist, I don't think they're going to disappear for a while.
Dave Rosenberg at Rosenberg Research has also been following these inflows, and finds them problematic. He added another perspective in his latest monthly chartbook. The line in this chart shows current equity exposure in the AAII Asset Allocation Survey going back to 2002.
Commenti
Posta un commento