What U.S. Markets Sorely Lack: Investors' Faith

lost confidence among investorsHave American investors lost faith in the nation's financial markets? Statistics from mutual fund trade group Investment Company Institute suggest the answer is yes. Investors have been pulling their money out of U.S. equities for 24 straight weeks, last week withdrawing $623 million from U.S. stock funds and investing $1.45 billion in overseas equity funds instead.

Mutual funds that invest solely in U.S. stocks have reported a massive $92 billion outflow as Americans give up on the stock market, despite its huge run-up from the lows of March 2009. The numbers offer a more accurate indicator of investor sentiment than polls that survey a tiny percentage of investors. Institutional money managers and individual investors alike have been voting with their feet and abandoning the market for both equity funds and mortgage-backed securities.

Twice Shy


With stocks and corporate profits rising, and pundits reporting that U.S. corporations have huge amounts of cash, why aren't investors jumping into the bull market?

For one thing, U.S. stocks have crashed twice in less than nine years -- between 2000 and 2002 and between 2008 and 2009 -- handing investors 40% to 80% in losses. As the old adage goes: "Once bitten, twice shy." Stock investors have been bitten twice.

On top of that history, investors may no longer trust the transparency of the nation's financial markets. First of all, Wall Street has become dominated by short-term traders who can instantly react to news. As Peter Cohan recently reported on DailyFinance, 70% of the trades on U.S. exchanges are held for an average of only 11 seconds, and that makes long-term investors vulnerable.

Follow the Money

Then there's all the insider selling, which by some accounts has reached the breathtakingly bearish ratio of 1,169 to 1, meaning insiders are selling 1,169 shares for every one they're buying. Insiders are presumed to have the best information about their own companies' prospects. So, if they're selling, what does that suggest about rosy forecasts for future profits? What do you believe: What insiders say, or what they do with their own money? Understandably, investors seem to be more influenced by the latter.

In addition, much of what passes for facts in the financial news doesn't pass the "sniff test": As blogger Mish Shedlock recently reported, many stories about corporations sitting on vast stashes of cash neglected to look at the other side of the balance sheet: liabilities. While the top 50 market-cap companies in the country collectively report $3.7 trillion of cash on hand, they also owe a total debt of $4.45 trillion, bringing the net cash balance to negative $749.6 billion, according to Shedlock. All together, corporate debt has skyrocketed to $7 trillion.

Meanwhile, the mortgage market hasn't proven that it deserves any more trust than the stock market. As Richard Bowen, former senior vice president of CitiMortgage, testified before the Financial Crisis Inquiry Commission in April, his company "continued to purchase and sell to investors even larger volumes of mortgages through 2007," even though defective mortgages increased rapidly in 2007.

"This is not just errors and omissions," testified Joshua Rosner, managing director at independent research consultancy Graham Fisher. "This appears to be a massive fraud perpetrated on the investing public on a scale never before seen."

So, it's no wonder that the market for mortgage securities that aren't government guaranteed is dead in the water. From a peak of $2.3 trillion in mortgage-backed securities that weren't issued by Fannie Mae or Freddie Mac in June 2007, according to Bloomberg, only $15 billion were backed by banks and other private firms last year, while 99%, or $1.5 trillion, of mortgage securities came from government-backed loans.

It's clear that institutional money managers don't think mortgages are worth much at this point: Many of the mortgage-backed securities sold as low-risk AAA-rated investments are now trading for pennies on the dollar, and even the top deals are selling for just 50 cents on the dollar.

Seeking Shelter

With the stock market dominated by opaque high-frequency trading that's inaccessible to average investors, and a mortgage market still struggling to recover from a history of fraud and misrepresentation of risk, investors' loss of faith in American financial markets is hardly a mystery.

Until the markets are restored to trustworthy transparency and insider trading and fraud are vigorously prosecuted, it might be wise for investors to pull their money out and keep it safe.

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July 22 2013 at 1:42 PM Report abuse rate up rate down Reply
chris1011

The Republicans and tea partiers want to get rid of regulation! It was the lack of regulation that allowed all these nutty and inexplicable financial "instruments" to explode and almost cause another Depression. People are furious with the bank bailout. Sure, me too. I'm also angry about the enormous bonuses given to CEO's who allowed their companies to fail in a spectacular way. The whole thing stinks. But -- I don't know any sensible person or anyone with knowledge of finance who feels it would have been right to just let all the banks fail.

October 29 2010 at 1:50 PM Report abuse rate up rate down Reply
1 reply to chris1011's comment
wwj745

I am glad you are mad at salaries and bonuses. By the way. Did Obama let you know that while he was yelling about the 5-8 million the CEOs were making in pay and bounses. OUR TAX DOLLARS paid the head of freddie 55 millionover 5 years in pay and bouneses? Thats 11 MILLION per year. You people REALLY need to wise up. The government is NOT serving the Countrys best interest.

October 30 2010 at 6:50 PM Report abuse rate up rate down Reply
chris1011

The Republicans and tea partiers are all offering: tax cuts, tax cuts! Because we all saw how Bush's tax cuts made for more jobs, right? No, wrong. The job loss happened in the last years of Bush, because of: 1) the cumulative strain of two wars with borrowed money from China and 2) because of corporations getting tax benefits for moving American jobs to foreign countries (partially because they don't like to pay for health care for their workers, or pay minimum wage) and 3) because Wall Street changed from an entity that invested in actual businesses, and became instead a bizarre gambling casino, where the money made was never anything real, it was Ivy League graduates creating derivatives and credit default swaps and "chopping up debt" and putting it into investments that no one knew they were even in and where the regulators claimed they were first rate investments when they were actually garbage..

October 29 2010 at 1:49 PM Report abuse -1 rate up rate down Reply
chris1011

BEWARE WHAT YOU ASK FOR - YOU MAY GET IT! Nouriel Roubini, the New York University economics professor with the nickname "Dr. Doom," has written an editorial in the Financial Times titled: A presidency heading for a fiscal train wreck. In it, Roubini gives plenty of credit to President Obama and his administration for preventing another depression, but he fears the president's policies were too short-term. And with the looming political change in Washington and two years of gridlock in prospect, those policies will not only expire, leaving fiscal pain, but new ones won't be implemented. "Obama," Roubini says, "inherited the worst economic crisis since the Great Depression," as well as a large budget deficit. "His stimulus package, together with a backstop of the financial system, low rates and quantitative easing from the Federal Reserve, prevented another depression." Further, Roubini supports Obama's "growth now," rather than an "austerity now" path. And Obama did all that with a Republican party "trapped in a belief in voodoo economics," which blocked him every step of the way.

October 29 2010 at 12:10 PM Report abuse rate up rate down Reply
vobox3343

Aren't you glad the elite have given the middle-class and poor a place to invest their money (where they can get robbed, actually) - Casinos

October 28 2010 at 4:44 PM Report abuse rate up rate down Reply
vobox3343

Thanks to mega tax breaks, they've made more money than they will ever need in two lifetimes. No need to invest. Invest, why?

October 28 2010 at 4:16 PM Report abuse rate up rate down Reply
Tropical Oasis

Unless U.S. consumer goods manufacturers produce locally and within NAFTA markets such as Mexico and Canada, the struggle of unfair gap with China will continue to hurt the U.S. efforts to gain the trust of foreign investors. We are China dependent, so foreign investors do not think th U.S. economy can recover fast enough or that it will ever recover unless we as a nation start to buy products made here, Mexico or Canada. NAFTA will help in strenghtening the local economy by creating jobs for those consumers that can eventually buy U.S. or NAFTA made products instead of MADE in CHINA goods. China can be dangerous because the are financing plenty of U.S. projects and that can eventually sink our ship. Foreign investors will continue to withdraw from U.S. markets because we are being drained by the chinese.

October 28 2010 at 11:19 AM Report abuse +1 rate up rate down Reply
frank1946

Smith, you need to listen to your other AOL Journalists, we just need more time for Hope and Change to come to us ! What's the matter with you ? You sound like another angry white man who is not getting any benefits ? Bailouts and insider deals are the wave of the future...........you just don't get it !

October 28 2010 at 8:03 AM Report abuse rate up rate down Reply
expresselectric0

Wonder why? We all know the liberals cant figure out 12th grade economics. I always love it when liberals and Obama tell me what I need. Not one of them ever signs the front of A CHECK! only the back! But tell me what I need, please fill me with your infinite wisdom of failure after failure. Never really cared for Bush but man Im really starting to miss him now!

October 27 2010 at 8:33 PM Report abuse +1 rate up rate down Reply
1 reply to expresselectric0's comment
chris1011

I'm a "liberal" if you can call it that. I run a small Midwest manufacturing company. We had our best year in 2009 and will have another record year this year. How did we accomplish this with "12th grade economics" as you say? We did it by treating our employees right and our customers right. We have a loyal following who buy from us in good times and bad. We also have a loyal crew here who bend over backwards to do their jobs in a timely manner. To me, these are true conservative values, not the rape, pillage and shaft policies that I see in too many companies. Yes, it may improve the bottom line, and yes it may result in larger executive bonuses, but NO it will not result in a better country. Go ahead and vote in the crazy tea bagger politicos. Have at it! You will get shafted in the long run.

October 29 2010 at 12:07 PM Report abuse rate up rate down Reply
mikersales

Maybe Wall Street has killed the goose that layed the golden egg. We're pissed because we've found out the game is rigged. Message to the SEC: REGULATE THE DAMN MARKETS!

October 27 2010 at 6:55 PM Report abuse +1 rate up rate down Reply
1 reply to mikersales's comment
chris1011

Don't you want the government off your back? Isn't that what all you right wingers are hoping for? I'm hoping you get it, myself.

October 29 2010 at 11:56 AM Report abuse rate up rate down Reply