Redemptions Roll On

On December 23rd, I wrote this post which eventually snow-balled into a substantial media controversy. It’s an intriguing mystery: how can the S&P 500 rise while the mutual funds were reporting a tidal wave of redemptions? Even more fascinating was that CNBC had a guy on every day claiming that money was pouring into mutual funds. Did this man not look at what the mutual funds were reporting? Was his ponytail tied to tightly?

On December 28th, my meme had captured the brain of Bob Pisani, who put the smack down on Ponytail. But then something curious happened. The very next day, CNBC ran a story proclaiming: “US Equity Fund Inflows Hit 79-Week High.” Bob Pisani had to back-peddle on “Fast Money” that night, and Ponytail was triumphant.

But that was a Tuesday – one day before the ICI publishes the weekly fund-flows data. How did CNBC (and EPFR Global) know what the ICI would be reporting? It also struck me as curious that Pisani was made to back down so promptly. Nevertheless, the ICI did indeed report that the wave of redemptions had ended, and that money flowed into mutual funds that week.

And now comes the good part.

The next week, the ICI made some revisions. It turns out that they forgot to put the negative sign onto the number from the previous week. So, not only were that week’s inflows revised into outflows, but the following week showed even more outflows, and the outflows of the previous three weeks were revised upward.

See the “Domestic” line on the ICI’s table here. Take that Ponytail!

That table shows five weeks, but the string of redemptions now extends to 20 straight weeks.

On January 5th, research firm TrimTabs was infected by my meme and accused the government of stuffing the futures to prop-up the market. Barry Ritholtz weighed in and said that TrimTab’s accusations were nonsense:

“The idea that this is magic is nonsense,” said Barry Ritholtz, market strategist at Fusion IQ and a market veteran. “This was a normal behavior in a recessionary bear market. We saw the Dow plunge 5,000 points in 6 months, which had never happened before and created a dramatically oversold market.”

Barry is certainly right about the market being oversold at the bottom of the bear market. But consider this: was the market oversold in August 2009? Not so much, right? That’s when this wave of redemptions began.

The SPX was around 1025 in mid August, and since that time mutual funds have suffered 20 straight weeks of redemptions totaling $50.4 billion. And the SPX has advanced to 1145.

You have to admit that, any way you slice it, that is indeed curious. So, what’s the answer? I don’t know, but one thing that we do know for sure is that $50.4 billion is a drop in the bucket in a world of trillion-dollar bailouts. There is quite a lot of funny money floating around out there.

The real takeaway from this issue is that Joe Sixpack is likely liquidating stocks to raise cash and stave off foreclosure until he gets a job in 2012. Normally, that would have a negative impact upon the stock market. But these are not normal times. Even if the government is not pumping up the market directly, the printing presses are certainly a large part of this rally.

In fact, the CFR told us that this was the plan back in September: mass unemployment and a soaring stock market. Click the first link in this post.

Note: On January 8th, my meme made it to the mainstream media in this ABC News story.

This entry was posted on Sunday, January 10th, 2010 at 11:35 am and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.