Friday, September 9, 2011


In June nearly $21 billion was redeemed from domestic equity funds. Last month, almost $29 billion was redeemed and, in August, it has been estimated that more than $35 billion poured out.

The $85 billion of outflows from June to August will likely approach the previous three-month record of $88 billion, which came out of domestic equity funds between September and November of 2008!

Thus far in 2011, individual investors have sold about $75 billion of domestic equity funds, only $10 billion less than last year's total outflows.

Astonishingly, since the beginning of 2007, domestic equity mutual funds have had net outflows of more than $400 billion (in the same period, $835 billion of fixed-income funds have been purchased! (Hat tip Steve)).That spread between stock outflows and bond inflows -- $1.235 trillion -- is unprecedented in the annals of financial history.
-- Doug Kass, "The Newest Financial Weapons of Mass Destruction"

Recent data suggest that hedge funds have also become noticeably bearish. According to ISI's Hedge Fund Survey (released last night), hedge fund net long exposure (falling to 45.7% from 47.0%) is now at the lowest level since summer 2009.

There are two ways of looking at the hedge fund community's loss of confidence in the equity markets. Either it's bullish that hedge funds are so bearish, or there are some very good reasons why hedge funds (and retail investors) are bearish.

While the bearishness on the part of both retail and institutional investors has normally been associated more with market bottoms than market tops (and thus seen as bullish), four critical factors suggest that both investor groups might stay on the sidelines until they are somehow resolved:

1. The market's continued volatility and instability is scaring investors, who have not yet gotten over the economic/market experience of 2008-09.
2. The growing sovereign debt contagion in Europe and the failure of leaders/central bankers to respond intelligently remains a wild card.
3. Continuing political partisanship and the failure of our leaders to properly confront our fiscal imbalances and to promote pro-growth policy threatens business and consumer confidence.
4. An inability to gauge whether the erosion in the August sentiment measures -- influenced by the chaos in the U.S. stock market and domestic/overseas economic uncertainties -- will translate into weakness in hard domestic economic data.

Back in June 2010, Ara Hovnanian, chairman of Hovnanian Enterprises (HOV), waxed enthusiastically about housing and the prospects for his company on CNBC's "Fast Money." Here is the tape of his appearance in which Hovnanian dismissed talks of a housing double dip and suggested his company was on firm financial footing.

At the time of his interview, the shares of his company were trading between $6 and $7 a share. They now trade at $1.65 a share.

Kass: "Housing will recover but I am less certain that his company will. Hovnanian has $450 million of cash but $1.75 billion of debt -- so the company's net debt is about $1.3 billion. And here are the income statements for the last three years. Ergo, I would challenge his assertions that Hovnanian is positioned to thrive in this environment."

Hovnanian followed up with additional positive comments on CNBC about housing and his company on several additional occasions since last summer:

* On "Squawk Box" on Sept. 10, 2010, he talked about improving momentum in July and August because of better housing affordability.
* Again on "Squawk Box" on Oct. 13, 2010, Hovnanian said that momentum is even better.
* On Jan. 18. 2011, Hovnanian expressed more optimism about his company and the residential real estate market in response to some tough questions by CNBC's Melissa Lee on "Fast Money" (again!)
* The ubiquitous Hovnanian again appeared on "Squawk Box" on Feb. 8, 2011, telling Carl Quintanilla that traffic and sales "really picked up ... as momentum builds" to the upside.

Last night Hovnanian reported large losses for the three-month period ended July 31 and for the year to date. It was not a pretty picture, with three-month losses of more than $50 million and a year-to-date loss of $1.92 a share, or $194 million.

Here were Hovnanian's comments in last night's press release:

"The housing market remains challenging primarily due to uncertainty caused by general domestic economic and political concerns, stock market volatility and turbulent international economic conditions, all of which are taking their toll on consumer confidence... Despite this difficult backdrop, our deliveries, revenues, gross margin and cash flow for the third quarter were in line with our expectations. However, we see very few indicators that any recovery in the housing market has begun. As such, we are taking appropriate steps to run our business based on current market conditions, with a focus on maintaining adequate liquidity."

As i mentioned previously, HOV's stock is currently trading at $1.65 a share and the company appears on the financial brink, even despite a series of capital raises (naturally at much, much higher prices).

So what are the lessons of this column and of Hovnanian's very-wrong-footed commentaries over the past several years?

1. What manager has been bearish on his company's prospects? But Ara Hovnanian's consistent and misguided optimism may take the cake in the pantheon of executives.
2. Make your own investment decisions and put the often predictable cheerleading by company managements that you might see during conference presentations, conference calls and in the media in perspective.
3. CNBC should never invite Hovnanian back on air. Never.
4. And, never, ever should an investor listen to Ara Hovnanian.

The continued bad news was that initial jobless claims came in at 414,000 -- about 10,000 more than expected. Meanwhile, last week's data were revised up by a few thousand claims.

Continuing claims fell by 30,000 but were still worse than consensus.

The good news came on the trade deficit front. Coming in well below expectations at $44.8 billion (consensus was $51 billion), it could add as much as 0.4% to third-quarter GDP.

The political rancor isn't dying down. We are seeing more friction between the two parties, as highlighted in the report that the Republican Party will not respond to the administration's proposal on jobs tonight. In response, Rep. Nancy Pelosi is quoted as saying, "The Republicans' refusal to respond to the president's proposal on jobs is not only disrespectful to him but the American people." In response, House Speaker John Boehner spokesman Mike Steel said the president's proposals tonight "will rise or fall on their own merits" and that a Republican response wasn't needed. Roy Blunt, Republican of Missouri, said to Fox News there will be no formal response as "the speaker doesn't expect to hear much to respond to."

I remain pessimistic, especially as move closer to the November 2012 elections, that our politicians will provide the necessary leadership (and compromise of principles) -- which would, in turn, produce a boost to business and consumer confidence.