Rebel Traders
August 22, 2010

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Recently I commented on the outflow of money from mutual funds and the increase in 401K hardship withdraws.

Today the New York Times carries the story further by stating that investors have simply given up on the stock market. While this may indeed be true that investors simply don’t trust it anymore, and who could blame them, I contend that there is still a significant percentage of those pulling money from stocks who need the funds to live.

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.

Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday. {…}

“At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.” {…} (NYTimes)

What is also at play here is the long bear market rally that began in March 2009. As the major indices rose more and more investors who lost substantial amounts of capital began withdrawing funds while they had an opportunity to recoup a portion of their losses. Perhaps forever never trusting the stock market ever again.

There was a significant outflow of funds in 2008 at the height of the economic uncertainty. The new rise in outflows of funds this year I view as being two parts now, the first is the continued mistrust of the financial markets, and the second is the increase hardship the financial disaster is having on Americans. And for this reason the stock market is becoming the new ATM where withdraws are being utilized to pay the bills.

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The reality of the ‘real economy’, as measured by people, not Wall Street, is a deteriorating economy where any source of funds is fair game to be tapped into. Due to the rise in financial hardships across the nation thoughts of that long term nest egg have turned to ‘I need it now’.

An old expression was that people invested money and saved for a rainy day. Well it has been raining non stop for nearly three years and people are using that money for everyday living expenses. What happens when the rainy day savings are depleted?

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