Fed rate cuts seen behind US equity outflows-EPFR
Fri Feb 8, 2008 1:40pm EST
By Daniel Bases

NEWYORK, Feb 8 (Reuters) - Investors pulled nearly $10 billion out of U.S.equity funds in the week ended Feb. 6 and moved a significant amount ofcash into short-term money market funds, data from fund tracker EPFRGlobal showed on Friday.

The data period coincides with a half apercentage point cut in the U.S. benchmark federal funds rate by theU.S. Federal Reserve in a bid to stave off what looks increasingly likethe development of a U.S. recession.

The Fed's move on Jan. 30followed the surprise 75-basis-point reduction in rates in a rareintermeeting cut on Jan. 22 that offered only a brief respite fromselling in stocks.

"Having had a few days to digest the U.S.Federal Reserve's aggressive rate cutting, the upshot is it has raisedmore questions for investors than it has answered," said CameronBrandt, global markets analyst at Boston-based fund tracker EPFR.

"They are interpreting it as a clue that things are actually worse than they might appear on the surface," he said.

EPFRdata showed investors put $24.4 billion into money market funds in thelatest week, up from $12 billion in the prior period.

Nearly allmajor geographical equity fund categories saw outflows, while U.S. bondfunds suffered a net outflow of cash for the first time in five weeks.Investors pulled $705 million out last week.

U.S. large-capexchange traded funds had outflows of $5.97 billion, but the move maybe related to just one or two large ETF's that trade the Standard &Poor's 500 benchmark index, Brandt said.

In the reporting time period, the S&P 500 .SPX lost 2.1 percent in value.

"Itis used as a holding pool for large chunks of institutional cash thatpeople are parking as they decide on their next move," Brandt said.

WesternEuropean funds saw a net outflow of cash for the 23rd week in a row.Investors pulled $144.56 million out in the latest week.

Japanesefunds had an eighth straight week of outflows. Investors pulled $502.8million out, while Latin America, the region that brought in the mostcash last year, had a fifth straight week of outflows, this time $131.4million.

Long-only dedicated emerging market equity funds saw anet outflow of $67.7 million. In this same period, an early rise in theMSCI emerging markets stock index .MSIEF was eroded by selling, leavingjust a 1.1 percent gain.

In the fixed income category, emergingmarket debt funds took in a net $35.29 million. Emerging market hardcurrency bond funds had outflows of $247.8 million. However localcurrency emerging market debt funds took in $220 million and blendedemerging market debt funds added $63 million.

"The latest datacame in hand with ongoing market uncertainty which saw the U.S. 10-yearTreasury yield rally 12 basis points week-over-week," said DavidSpegel, global emerging markets strategist at ING in New York.

"Thismostly explains the 16 basis point of (JP Morgan Emerging Market BondIndex Global) spread widening, leaving some room for negative marketeffects," he said

^NEW 2/8/2008 1:24:58 PM

Needthe money to stay afloat financially. I will say this though, there areplenty that took the ride down last time and I think there is a line inthe sand, like giving up a years money in the SPX or Dow. We are therenow. The 2002-2003 bottom took the market back to levels seen last inearly 1997 and had they gotten out on the rate cut rally in January2001, the exit on the Nasdaq would have been about 2600, the Dow around10,700 and the SPX around 1400, all numbers lower than a year earlier.Had they drawn 5 years of interest or for that matter, cashed out ofthe bonds in a couple of years, they would have been able to buy backin at or below exit until late 2004 and the Nasdaq would have peakedthis past year about where they could have exited, meaning many stoodon no gain for 7 years. In fact, I think the Nasdaq went all the wayback to levels not seen since 1995 or 1996.

The point here isa lot of people around or into retirement just aren't going to takethat trip again. I brought up dividends below and there isn't anythingthat says that dividends don't get cut before this one is done. The USAis in a credit crunch with commodity prices running wild and this isquite likely to create a worldwide depression, as merely the prices fornecessities are going to quash demand for everything. The same willhappen overseas and the driver of demand will quite likely leave thebuilding.

There are few that believe in even the potential ofdeflation. I think the government could stop deflation to the pointthat they would eventually be deemed bankrupt and become suddenlyineffective in doing so. Credit would then collapse totally, papermoney would be worth absolutely nothing and demand for everything wouldcrash, mainly because sellers wouldn't want our stinking paper. I don'tthink the government and the Fed are going to put themselves out ofbusiness to please the people. It is much easier to brainwash them andthe other rotation of the ruling hunta would merely stand in. It isgoing to sink in that the amount of new credit to keep the game goingexceeds the rational repayment capacities of the borrowers, bankers andthe economy. The only choice will be to batten down the hatches and seewho survives the storm.

I don't think we can stand the chickenand egg game that is going on right now for long. Commodities can go upas long as the perception is that America can take on and create creditas far as the eye can see. We know China and India can create thedemand, but only to the extent that they can consume most of what theyproduce, export enough to pay the import bills for these minerals andfoodstuffs and create the credit necessary on their own dime to keep itgoing. The American consumer, especially when it comes to big ticketitems and as far as that goes, big Merry Christmas's is going to take along snooze. I think a lot of people are starting to realize this andgetting their chips off the table.