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Comstock Partners, Inc.
Public Participation 9
August 02, 2002
Sorry this comment is so late. The response from yesterday’s interview on CNBC was overwhelming. This economic forecasting business is getting easier: witness our prediction of the disappointing employment report yesterday. We have to wonder if we would be as good if we were economists. The non-farm employment grew by a disappointing 6,000 while Morgan Stanley had a forecast of 120,000 additions. We probably aren’t looking at the correct statistics to make the forecast, but doesn’t it make sense that if there were 2 million layoff announcements during the calendar year 2001 and less than 1 million people actually laid off, that there would be a weak employment environment? This year there were 538,000 announced layoffs according to ISI and there were, so far, 144,000 people actually laid off. It has to be more complicated than this. The ECRI weekly leading index also dropped substantially and the Factory Orders fell to a disappointing negative 2.4% in June and were revised down in May. Instead of a disconnect between the stock market and the economy, it looks like they are joined at the hip. In Public Participation 8 we quoted from the Investors Business Daily front-page article about the amount of money still invested in equity mutual funds. Some of the numbers were not correct and hopefully this comment will clear up the exact situation as to potential selling by the individual investor. As you know from the past “Public Participation” comments, we are very concerned about the unwinding of the frenzied buying of equity mutual funds during the bubble years. We are concerned because every time the public acts “en masse” they eventually get slaughtered. There was actually $56 billion invested in equity mutual funds at the peak of the market before the last major bear market in 1972. After the approximate 50% decline in the market the $56 billion dropped to $31 billion at the end of 1974. Each of these figures represented about 5.5% of the total stock market capitalization (measured by the Wilshire 5000) of $1 trillion and $570 billion respectively. These same mutual fund holders continued selling the funds throughout the rest of the decade (see attachment). At the peak of the market in 2000 the total amount invested in equity mutual funds was about $4 trillion ($3.75 trillion came in during the 1990’s decade) and the total market capitalization represented by the Wilshire 5000 was about $15 trillion. The $4 trillion represented 27% of the total equity market capitalization. Today the total amount invested in equity mutual funds is $3.4 trillion on a total stock market capitalization of $8 trillion, representing 43%. These are worrisome statistics on their own, but combine these with the fact that the cash in mutual funds is at a very low level of 4.5% and you have a formula for panic selling not only by the individual mutual fund holder, but also by the fund managers who will have to liquidate stocks to meet redemptions. The fact that the unrealized capital gains accumulated over the decade of the 1990’s by equity mutual fund holders has just dropped from over $800 billion at the peak to just about $160 billion makes the situation even worse. Once these gains turn into losses that could be the catalyst for the panic selling we are concerned about.

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