Wednesday, February 29, 2012

The Curious Case of the Disappearing NYSE

In what I would consider one of my top 5 economic pieces of this blog I tie the majority of the stock market's movement NOT to profits, earnings or dividends (as it should be) but rather to the volume of retirement dollars flooding the stock market. The ramifications, of course, is "what will happen to stock prices when the baby boomers retire and withdraw their trillions of dollars?"

Economics would tell us "go down" but what's funny is markets are not rational all the time. Matter of fact they can remain quit bubbly for extended periods of time. ESPECIALLY when the market participants (AHEM AHEM, COUGH COUGH - AMERICANS) are addicted to "high asset prices" because it fools them into thinking they don't have to work for a living. Asset prices just magically go up without the necessary production and profits to rationalize the price increases. And this can go on "forever" or at least until the delusional (and lazy, I might add) Americans retire.

We see this today where the dividend yield is still at a historic low going back to 1890 and the PE ratio is still above it's historic average of 15x's. The profits are simply not there to rationalize the lofty prices. However, there is something more amiss going on beyond the simple "retirement dollars flooding market" and it may not be obvious to the naked eye.


With the DJIA breaking 13,000 and the economy showing signs of a tepid recovery, you would think the market would be doubly flooded with money. The monies flowing in from automotonic 401k retirement drones AND the new monies flowing in from people with new-found hope that the economy is indeed turning around and America has a future once again.

There's just one problem - the volume isn't there to support it.

If you look at the volume of the NYSE, it's cratering. It's lower than it has been in over a decade

This doesn't jive with the prices we see in the market. In basic economic theory, the more trading volume there is in a market, the higher prices should be in that is shows a demand for those stocks. Additionally, with increased volume comes increased "liquidity" which in itself provides a premium that should translate into higher prices. We are now getting the opposite.

So what is happening?

Well, your humble Captain has a theory.

The reason volume is tanking is because, despite what heavily-spun news you might hear about GDP, consumer confidence, the reality is that the economy still sucks. Unemployment, though down, is still 2 full percentage points above the WORST it ever was under George Bush. If you want to consider the "underemployment" argument, that many people have left the labor force, you could argue unemployment is closer to 11%. Additionally, even with today's revision of 3% RGDP growth, it's nothing compared to the booming quarters we had after most recessions (even the hated, incompetent,evil puppy-kicker GW managed a quarter above 6%). Also delivering a dose of realistic doom to the economy is the massive amounts of debt we have. And finally, unemployment is particularly high amongst the youth, who are not only necessary to bail out older generations via their public pensions, but whose retirement dollars are also necessary to keep the 401k Bubble/Ponzi scheme going as well. But just like the housing market, you need jobs in order to afford a house. And so, I'm sure if you looked at it, a huge reason for the lower volume is the lack of "new blood" entering the retirement/401k market, plus the fact people just don't plain have the disposable income to afford IRA contributions.

While this explains the collapse in volume, it doesn't explain why prices are still so high. And here is the nefarious side of the theory:

Something nefarious is going on.

When you see Apple with a market cap of 1/2 trillion dollars, you start to wonder why Apple is so valuable. And as it turns out it's because hedge funds and mutual funds all want to own Apple. No real financial reason for it, hedge fund managers, mutual fund managers and other incompetent perma-bubble Wall Street dolts like shinny new electrical doo-dads just like their spoiled brat, humanities-majoring children at home in Connecticut do. But what this shows you (or at least alludes to) is that it is institutions, not individuals, that are accounting for the majority of the buying and selling of the stocks. You also throw in electronic trading programs or "computerized trading" and it's no longer real investors with real money, as much as it is a potentially rigged beast of its own trading on itself.

It reminds me of a now-deceased publication called "Lake Minnetonka Magazine." This magazine was basically the socialite magazine for Minneapolis' uber-rich western suburb. Here is where Cargill, Carlson Companies and many more firms are based, as well as the hundreds of trust-fund babies these empires spawned. The magazine itself though was a self-absorbed love fest within itself. Written by the trustfunders about the trustfunders and all the parties they went to and who bought what Italian car or what worthless trophy wife opened up what worthless trinket shop with her hubby's money. Essentially it was a club or an entity that didn't produce anything and when its founder (ahem ahem-Tom Petters) was arrested for what was then the largest fraud in the history of the US (soon to be outdone by Bernie Madoff), the magazine went bye bye (ironically, shortly after, there were a LOT of for sale signs on the prestigious Lake Minnetonka, what handsome, dashing, chiseled motorcycle riding, fossil-hunting, bad-boy economist would have predicted that!).

In short, the stock market is being artificially inflated, if not, limped along, by the sanctimonious (or perhaps, oblivious) yutzes trapped in their own nepotistic, inbred echo chamber called "The East Coast." They trade amongst themselves, they believe that the stock market is a finite, mathematical beast that can be predicted. They have NEVER seen a real stock market crash, as they're perpetually bailed out by Dotcom Bubble after Housing Bubble after QE-LXI Bubble. They are truly oblivious to all the work, toil, labor and entrepreneurialism that gives those worthless pieces of paper (they so love to trade and sell and take commission on) value.

The question is if you wish to join this little clique or social party. Do you want to "hang" with all the fake and plastic of the paper-rich, asset-poor, and soon to be bankrupt class? Then by all means, throw that $16,500 max of your money into an inflated stock market every year. You'll be one of the cool people. But if you're more like me and want to hang out with your non-stab-you-in-the-back buddies at a reasonably priced bar, entertained with good intelligent conversation, and darn fine food, you may want to look elsewhere and hang out where there is real value.

In the meantime, enjoy the decline!


Anonymous said...

So where are you going to put your money?

Captain Capitalism said...

Rumpleminze, precious metals, commodities, oil/mining firms, foreign currencies, guns, bullets and education/skills.

peterj said...

Well put as usual. One of the overlooked anchors on economic recovery is the fact that most of our industrial facilities have been outsourced overseas. In days gone by, the engine of recovery meant firing up idle production facilities and putting people back to work. Hand in hand. The facilities are in other countries now and the engine is broken. The jobs that created the middle class are largely gone and the social programs that hinged on the taxes derived from them are unsustainable. Cheap goods were beneficial to almost everyone for many years but as the tax base diminished due to lost jobs at home, the end result was inevitable. The numbers say we will crash and burn.

GaryinWpg said...

Thanks Capt, came over from SDA, I've always wondered why the Dow was going up despite what I read about the US economy and world events, plus Kate's periodic links to the Baltic dry index. By no means am I an financial guru, but after the '08 "crash" or market adjustment, some analysis's and the odd guest on Coast to Coast AM (yeah, I like my conspiracy theorys)said that the Dow would return close to its pre '08 levels, suck in everyone's money and then crash and crash hard, might go below 4,000 possibly stop at 2500. Honestly I do not think there is a safe place for anyone's money except maybe to buy after the crash.

Thanks, I enjoy your blog.


Anonymous said...

As the late Joe Bageant would often say: "The only currency that counts is the Calorie."

Rowan said...

Why won't men man up!? waaaaah!

Pat Sullivan said...

Another big point regarding the NYSE; in real money the index has been in a decline for a long time. When the Dow is priced in terms of gold, the decline is very apparent.
And with big Ben printing ever more US dollars at The Federal Reserve, you can expect that trend to continue.
Buy gold my friends.

Pulp Herb said...

We see this today where the dividend yield is still at a historic low going back to 1890 and the PE ratio is still above it's historic average of 15x's.

While I agree about the over-valuing I no longer consider dividend yield to be a valid measure to consider. The Federal Gov't has so disadvantaged dividends as to drive them out of existence even when profits are present (look at the history of Microsoft).

I've argued this is in no small part how you get Enron style fraud. If you are selling stock on capital gains not dividend yield it's easy to get several good years on phony accounting. Once you have to write actual checks things start to break down.

Tying that into your theory, that may be part of what is keeping valuation up. While the Bush tax cuts did return some value to dividends it wasn't enough and sunsetting kept them from getting too big. But, if no one has to write checks no one has to make real, substantial profits to fund them and the lack of the same won't translate into prices.

In theory, the price of any financial instrument should be the sum of discounted future cash flows plus any intrinsic value. For stocks, dividends plus book value, both driven by profits. However, with dividends gone we're guessing at book value more and more.

When you see Apple with a market cap of 1/2 trillion dollars, you start to wonder why Apple is so valuable. And as it turns out it's because hedge funds and mutual funds all want to own Apple. No real financial reason for it, hedge fund managers, mutual fund managers and other incompetent perma-bubble Wall Street dolts like shinny new electrical doo-dads just like their spoiled brat, humanities-majoring children at home in Connecticut do.

If you're not familiar with them, read up on The Nifty Fifty. Apple, Google, et al are just the latest iteration. Just like the Nifty Fifty, most had peaked in terms of value for the price long before they become the no fail buy.

Andrew Tobias had an interesting discussion of how, by the time they joined the group, most were producing sub-optimal yields in earlier editions of The Only Investment Guide You'll Ever Need. I do not know if the continues (especially now that it and its sequel The Only Other Investment Guide You'll Ever Need have been combined for several editions).

Anonymous said...

Well, let's be honest: "hedge fund managers, mutual fund managers and other incompetent perma-bubble Wall Street dolts" may not be good at investing but they are GREAT con artists. That is how I see the present NYSE action.

Anonymous said...

I am with you on the cause for the appreciation of stock values above their otherwise underlying value being increased demand for returns. Returns are like any other goods, and when more people with more money are trying to use that money to buy returns, the price for those returns goes up.

What are your thoughts on what happens with the money as the boomers cross the savings threshold and stop working? It seems to me that there are only so many things that can happen to the money tied up in the market now. 1) It is spent, presumably on health care and vactions. 2) It is saved and passed on death to the next generation who will presumably leave it in savings, but who might also spend it. 3) it is used to retire debt accumulated by the boomers.

1) Seems most likely, but if we can get enough young people out to vote we might get 3) via clawbacks on old age benefits and health benefits.

Anonymous said...

I think that part of the problem is that you are looking at the volume of stock traded on the NYSE, not the stock that make up the index. I can't comment so much on the NYSE, but on the Toronto Stock Exchange there have been times in the past (Bre X, Nortel) where the value of the index soared, but is was all because of a couple of stocks within the index rather than being broad based. One of my tenets of investing is that you do not buy a market, you buy a stock. In a down market it is harder, but still possible. There is a lot of data available and it can be hard to wade through, so I focus on dividend yield and price earning ratio. IE are they paying me income, and are they making enough money to continue to pay me the dividend. This has worked well for me over the years. minuteman

Anonymous said...

Hey captain, Paul here from SDA as well , i really enjoy your comment's/thoughts on these subjects as you are very knowledgable in this field, just have a question for you kinda on the topic but alos off the topic.

It has to do with mainly canadian investmeants abroad and in canada , i am currently doing a finacial strategy called the smith manouver , now on paper i am in debt hugley massivley so it looks like to the statisic guy's that i have levereged my huge leverage of my home , so i look really really bad on paper to the stats guy's , (you know thwe guys that say canadian house holds are up to there eye balls in debt), there are over 400k canadians doing this smith manouver and it is literally melting my mortgage away i will be finished my 338k mortgage in just under four years and i put down on my home 100k when i bought it. can you speak to this at all maybe that has something to with some of the canadian side of the economics debate here in canada i know ameicans can write of there intrest on there mortgages but we in canada cannot so this basically allows us is pretty risky but iti s also very high rewards . anyway just thought i would poke this out to you see if you felt like speaking to it at all.

Captain Capitalism said...

I'd have to look at it, but shoot me an e-mail to remind me to do it.

jova said...

The NYSE volume is falling due to several factors

1. More shares are traded on other exchanges , which did not even exist 5 years ago, such as BATS, EDGX, EDGA, YBAT
2. More shares are traded on Dark pools. Currently there are over 40 dark pools trading US stocks.
3. Less money flow into mutual funds

You need to look at total equity volume, which is a better metric, and is falling, but not near as dramatic as the fall in NYSE volume.

Ping Jockey said...

Rowan --


Why won't men man up!? waaaaah!"

Followed the link and found the same old rubbish from some undoubted washed-up former carousel rider, complaining about how she can't find any male whom she deems worthy of her fabulous self.

Read it if you want to have a good laugh.

"Same old song -- only the jukebox has changed."

Anonymous said...

Cappy - once again you nail it, BUT .... might there also be one other factor in the rise of the stock market?

The DECLINE of the US$ due to the govt's relentless printing of paper money renders the actual 'value' of those rising stock prices not higher than before the recently higher inflation set in.

In short, one share of Apple at $500pps has no more buying power in terms of gold / oil / yen than back in the day when that same share of Apple had a pps of only $400.

Yes? ... no? ... help!


Philanthropist said...

The government owes me a bubble...

Anonymous said...

Unemployment is around 18% , 11% ?no way that's what too low, not a chance

Aurini said...

The Apple investments really tickle my funny bone.

Just look at Google, and Microsoft - after their leader(s) left and they went full corporate, they started making some incredibly stupid decisions. Now, with Steve Jobs gone, Apple is going to go down the same route.

I never liked their products, but I could see the genius in them - usability for the non-computer-literate, and slick marketing.

Now be ready for useless feature-creep, and even more problems with installing 3rd party software.

Yeah - great place to put your money!

Anonymous said...

So it it time to pull all of my money out of my 401 yet? lol

your pdf was good but the only thing missing from the concept was COMPETITION! hehe :)