"Great Rotation"- A Wall Street fairy tale?

An exterior shot of the New York Stock Exchange in New York December 20, 2012.

Credit: Reuters/Andrew Kelly

By Edward Krudy

NEW YORK | Fri Feb 1, 2013 8:24pm EST

NEW YORK (Reuters) - Wall Street's current jubilant narrative is that a rush into stocks by small investors has sparked a "great rotation" out of bonds and into equities that will power the bull market to new heights.

That sounds good, but there's a snag: The evidence for this is a few weeks of bullish fund flows that are hardly unusual for January.

Late-stage bull markets are typically marked by an influx of small investors coming late to the party - such as when your waiter starts giving you stock tips. For that to happen you need a good story. The "great rotation," with its monumental tone, is the perfect narrative to make you feel like you're missing out.

Even if something approaching a "great rotation" has begun, it is not necessarily bullish for markets. Those who think they are coming early to the party may actually be arriving late.

Investors pumped $20.7 billion into stocks in the first four weeks of the year, the strongest four-week run since April 2000, according to Lipper. But that pales in comparison with the $410 billion yanked from those funds since the start of 2008.

"I'm not sure you want to take a couple of weeks and extrapolate it into whatever trend you want," said Tobias Levkovich, chief U.S. equity strategist at Citigroup. "We have had instances where equity flows have picked up in the last two, three, four years when markets have picked up. They've generally not been signals of a continuation of that trend."

The S&P 500 rose 5 percent in January, its best month since October 2011 and its best January since 1997, driving speculation that retail investors were flooding back into the stock market.

Heading into another busy week of earnings, the equity market is knocking on the door of all-time highs due to positive sentiment in stocks, and that can't be ignored entirely. The Standard & Poor's 500 Index .SPX ended the week about 4 percent from an all-time high touched in October 2007.

Next week will bring results from insurers Allstate (ALL.N) and The Hartford (HIG.N), as well as from Walt Disney (DIS.N), Coca-Cola Enterprises (CCE.N) and Visa (V.N).

But a comparison of flows in January, a seasonal strong month for the stock market, shows that this January, while strong, is not that unusual. In January 2011 investors moved $23.9 billion into stock funds and $28.6 billion in 2006, but neither foreshadowed massive inflows the rest of that year. Furthermore, in 2006 the market gained more than 13 percent while in 2011 it was flat.

Strong inflows in January can happen for a number of reasons. There were a lot of special dividends issued in December that need reinvesting, and some of the funds raised in December tax-selling also find their way back into the market.

During the height of the tech bubble in 2000, when retail investors were really embracing stocks, a staggering $42.7 billion flowed into equities in January of that year, double the amount that flowed in this January. That didn't end well, as stocks peaked in March of that year before dropping over the next two-plus years.

MOM AND POP STILL WARY

Arguing against a 'great rotation' is not necessarily a bearish argument against stocks. The stock market has done well since the crisis. Despite the huge outflows, the S&P 500 has risen more than 120 percent since March 2009 on a slowly improving economy and corporate earnings.

This earnings season, a majority of S&P 500 companies are beating earnings forecast. That's also the case for revenue, which is a departure from the previous two reporting periods where less than 50 percent of companies beat revenue expectations, according to Thomson Reuters data.

Meanwhile, those on the front lines say mom and pop investors are still wary of equities after the financial crisis.

"A lot of people I talk to are very reluctant to make an emotional commitment to the stock market and regardless of income activity in January, I think that's still the case," said David Joy, chief market strategist at Columbia Management Advisors in Boston, where he helps oversee $571 billion.

Joy, speaking from a conference in Phoenix, says most of the people asking him about the "great rotation" are fund management industry insiders who are interested in the extra business a flood of stock investors would bring.

He also pointed out that flows into bond funds were positive in the month of January, hardly an indication of a rotation.

Citi's Levkovich also argues that bond investors are unlikely to give up a 30-year rally in bonds so quickly. He said stocks only began to see consistent outflows 26 months after the tech bubble burst in March 2000. By that reading it could be another year before a serious rotation begins.

On top of that, substantial flows continue to make their way into bonds, even if it isn't low-yielding government debt. January 2013 was the second best January on record for the issuance of U.S. high-grade debt, with $111.725 billion issued during the month, according to International Finance Review.

Bill Gross, who runs the $285 billion Pimco Total Return Fund, the world's largest bond fund, commented on Twitter on Thursday that "January flows at Pimco show few signs of bond/stock rotation," adding that cash and money markets may be the source of inflows into stocks.

Indeed, the evidence suggests some of the money that went into stock funds in January came from money markets after a period in December when investors, worried about the budget uncertainty in Washington, started parking money in late 2012.

Data from iMoneyNet shows investors placed $123 billion in money market funds in the last two months of the year. In two weeks in January investors withdrew $31.45 billion of that, the most since March 2012. But later in the month money actually started flowing back.

(Additional reporting by Caroline Valetkevitch; Editing by Kenneth Barry)

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Wall Street left to rebuild Obama ties after backing Romney

n">(Reuters) - Wall Street firms gambled on Mitt Romney and lost. Now, faced with the prospect of even tougher regulations in President Barack Obama's second term, they have to build better ties with the new financial regulators he will appoint.

Obama lost the support of many bankers in the aftermath of the 2008 financial crisis and the passage of the 2010 Dodd-Frank financial reform law, which sought to shore up the financial system but also cost banks billions of dollars in annual profit.

The Democratic president has openly stated his distaste for "fat cat bankers" who "don't get it", and bankers fears more losses ahead if they cannot influence how the Dodd-Frank rules are implemented.

"He will continue to increase regulation, demonize and vilify businesses, and spend a lot of money, and tax people, and so forth," said Dick Kovacevich, a former Wells Fargo CEO and supporter of Republican challenger Romney.

Wall Street firms are also worried about Elizabeth Warren, whose victory in the Massachusetts Senate race may galvanize her to push for more regulations on bank lending to protect consumers. Warren was instrumental in creating the Consumer Financial Protection Bureau, which critics say could weigh down the economy with new regulations.

"I think the Obama win, along with Elizabeth Warren, will lead to more accountability and tighter regulation on Wall Street," said Chris Tobe, who advises pension plans as a principal at Stable Value Consultants and is a trustee of the Kentucky state pension fund. "Especially after a big shift to Romney from Wall Street, Obama I believe will be less likely to hold back on regulation this term."

People working in the U.S. securities and investment industry gave $20 million to Romney's campaign, versus $6 million to Obama, according to the Center for Responsive Politics. Four years ago, Obama received $16 million and Republican nominee John McCain only attracted $9 million.

"I voted for Obama in 2008 but obviously believed that Romney would be better able to handle the problems that we're confronting," said Scott Sperling, co-president of private equity firm Thomas H Lee Partners. "It is incumbent on us to work with the administration in a productive way to deal with these issues."

RELATIONS WITH REGULATORS

Some banking industry lobbyists say their focus will be on the key regulators Obama is expected to name in his second term.

Among the financial industry's top complaints are the Volcker rule, which prevents banks from making big bets in financial markets with their own money, and the Durbin amendment, which limits the fees they can charge merchants for processing debit-card transactions.

Banks also want to scale back capital requirements, which cut into the returns banks can earn on their equity capital.

As key details of Dodd-Frank have yet to be ironed out, the banks need good relations with regulators to influence their interpretation of the rules.

Chairmen often determine agendas at agencies such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), so Obama's choices to fill any open spots could affect how quickly new rules are rolled out.

"If there was a different chair who had a different agenda, you could slow things down," said Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission.

CHANGING CAST OF CHARACTERS

Major power players under Obama, including Treasury Secretary Tim Geithner, are expected to step down, offering Wall Street a chance to reset relations.

One possible replacement for Geithner, who has said he will not stay for a second Obama term, is White House Chief of Staff Jack Lew, a former Citigroup Inc banker.

"I hope Obama puts someone in who understands fiscal issues and who will have stature to work on the Hill to negotiate some type of package on fiscal reform," said Sheila Bair, former Federal Deposit Insurance Corp chairman.

SEC Chairman Mary Schapiro's term does not expire until June 2014, but speculation about her departure has been swirling for well over a year. Last month, she attempted to shoot down the rumors, saying she had not thought about her post-SEC plans.

SEC watchers speculate the job could go to SEC Commissioner Elisse Walter, a close friend of Schapiro's and a former executive at the Financial Industry Regulatory Authority, an industry-funded watchdog.

CFTC Chairman Gary Gensler's term technically expired in April. He is allowed to stay on as chairman until the end of 2013 and his renomination is an open question.

Gensler has been assailed by Republicans over his implementation of Dodd-Frank and criticized by lawmakers on both sides of the aisle following the collapse of futures brokerages MF Global and Peregrine Financial Group.

Some Democratic politicians have also criticized Gensler for not doing enough to crack down on oil market speculators, with a few going so far as to suggest he should not be renominated.

FISCAL CLIFF

Much of Wall Street's regulatory agenda, however, is set to take a back-seat in the short term due to the looming fiscal cliff -- a package of tax increases and federal spending cuts that will begin in January unless lawmakers act.

Bankers are worried an impasse in solving the issue could spark an economic downturn that would hit the value of assets and make banks more reluctant to lend.

In the longer term, banking lobbyists and other opponents to Dodd-Frank will try to beat back some rules with technicalities.

Paul Atkins, a Republican and former SEC commissioner, said he expects Dodd-Frank reform critics may have some success making narrow legal challenges and seeking to throttle reforms through congressional oversight.

"Dodd-Frank assigned a lot of powers to the regulatory agencies, so there is not much that Congress can do," he said.

"I expect that the Republican House would keep the pressure on through hearings, like they are doing now. People will also certainly take the fight to the courts."

(Reporting By Emily Stephenson and Sarah N. Lynch in Washington, D.C., Rick Rothacker in Charlotte, Lauren LaCapra, Dan Wilchins, Olivia Oran and Katya Wachtel in New York, and Aaron Pressman and Ross Kerber in Boston; Writing by Greg Roumeliotis; Editing by Paritosh Bansal, Tiffany Wu and Richard Pullin)

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Wall Street cuts gains, turns negative

1 of 10. A trader works on the floor of the New York Stock Exchange following its reopening, October 31, 2012.

Credit: Reuters/Brendan McDermid

NEW YORK | Fri Nov 2, 2012 10:31am EDT

NEW YORK (Reuters) - Stocks cut their gains to turn negative on Friday despite a stronger-than-expected payroll report.

Still, the S&P remained on track for its best week of the past four.

The Dow Jones industrial average was down 42.77 points, or 0.32 percent, at 13,189.85. The Standard & Poor's 500 Index was down 1.89 points, or 0.13 percent, at 1,425.70. The Nasdaq Composite Index was down 8.43 points, or 0.28 percent, at 3,011.63.

(Reporting by Ryan Vlastelica; Editing by James Dalgleish)

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Insight: A giant storm and the struggle over closing Wall Street

1 of 2. Sandbags block the entrance of the New York Stock Exchange in downtown Manhattan as super storm Sandy made its approach in New York October 29, 2012.

Credit: Reuters/Andrew Kelly

By John McCrank

NEW YORK | Tue Oct 30, 2012 3:15am EDT

NEW YORK (Reuters) - At 6:30 p.m. on Sunday night, with Hurricane Sandy bearing down on the U.S. East Coast, New York Stock Exchange operator NYSE Euronext had more immediate problems: a revolt from the trading firms that are its lifeblood.

NYSE officials, including global head of sales Christine Sandler, told the firms that while the exchange would shut down its physical trading floor it was planning to open for business on Monday as an electronic-only trading venue for the first time.

But dealers trading shares were skeptical, according to interviews with about a dozen people privy to discussions including senior exchange officials, Wall Street executives, traders and other sources.

The final choice after more than two days of discussions, these sources said, came down to this: whether to use an unproven system to keep the markets open while risking employees' safety, or close for the day and play it safe.

If the NYSE had opened for business its electronic systems may have had to handle more than double the volume it had averaged in recent weeks, a prospect that worried market participants already reeling from a series of embarrassing market snafus this year.

The firms also did not want their employees to have to report to work in the midst of the worst storm to hit New York City since at least 1938, a storm that was forecast to bring flooding, punishing winds and widespread power outages.

"It was, 'Please don't do this. The market is not ready'," one of the sources said.

Late on Sunday night, the NYSE and other exchanges finally decided to close the market on Monday, the first time the Big Board had done so for bad weather since Hurricane Gloria in 1985. While the NYSE took the lead in closing trading in stocks and options, the final decision was collectively taken by all the exchanges, including Nasdaq OMX and CME Group Inc.

In the end, most market participants agreed that NYSE, other exchanges and regulators made the right call, but many on Wall Street still griped about how long it took to reach that decision.

The fact that such a choice took a series of long, complicated discussions signals the enormity of what was at stake. In the event, the storm made landfall on the U.S. East Coast on Monday evening, bringing widespread flooding and extensive power outages to many areas, including Lower Manhattan, home to Wall Street and the exchange.

As the trading closure extends into Tuesday and possibly beyond, analysts estimate that exchanges and banks are losing tens of millions of dollars in revenues every day. Numerous companies have postponed their earnings announcements, and plans of at least six firms to go public have been disrupted.

Late on Monday night, NYSE and Nasdaq said that on Tuesday they would run tests as part of a new contingency plan to see if an electronic-only market could resume equity trading in major names as soon as Wednesday, if the NYSE floor is not reopened.

Overall the storm is likely to cause tens of billions of dollars in economic losses, according to estimates from disaster modeling firms and economists.

NYSE's contingency plan was put in place several months ago in coordination with its member firms, a spokesman said. The concerns that were voiced on Sunday by brokers were largely due to the fact that the hurricane was approaching and New York's subways, buses and other transport were being halted that night.

The firms had already reduced the number of staff who were expected to come into their offices, and that was going to make it difficult to properly monitor the changes required for the new routine, the spokesman said. The concerns were amplified by the risks posed to employees themselves by the storm.

STILL THE BIG BOARD

The weekend discussions are also a symptom of how much stock trading in the United States has changed. When Gloria hit in the 1980s, the New York Stock Exchange was by far the biggest game in town, and could essentially make decisions about the market unilaterally.

Over the past 10 years, however, dozens of alternative exchanges and other trading venues have popped up, taking market share away from the NYSE. That meant the NYSE had to consider if it could afford to be left out if the alternative trading venues that are all electronic were to open for business as usual.

The NYSE remains the largest stock exchange in the United States, however, responsible for more than 25 percent of U.S. equity trading volume, and had the biggest voice in the talks.

All this was playing out against a backdrop of technical problems this year, including Nasdaq's inability to process Facebook Inc orders fast enough when the social media company was going public and Knight Capital Group's near collapse due to a trading glitch that cost it $461 million.

Exchange officials insisted that their decision to shut down the market was ultimately led by concerns about the safety of the financial community.

"This is not the time to be thinking about your own pocketbook, first you think about what is best for the markets," an exchange official said.

CONTENTIOUS DISCUSSIONS

The discussions around what to do as the storm approached started as early as Friday, the sources said. But they intensified as the weekend progressed and the storm stayed on course.

Often these discussions were contentious, as participants sought to further their own agendas.

Even within the major Wall Street banks, for example, different business units were sometimes at loggerheads over the best course. Fixed income desks were insisting the markets open, as there was a major U.S. Treasury auction on Monday. But the equities desks were uncomfortable, several participants on the calls said.

By Sunday afternoon, NYSE had held a series of discussions with floor brokers, NYSE employees and city officials, deciding that it should close its floor trading operations and move all NYSE-listed stocks to the electronic venue.

Even that decision was not unanimous. The number of people in favor of keeping the floor open and the number opposed were about even, with some saying the trading floor should never be closed, while others argued that people should not be expected to put themselves in harm's way.

"People worried about the system and making sure there is enough liquidity, but this had more to do with human life and putting people in harm's way," said a trading firm executive who was involved in the discussions. Others noted that both safety and technical questions were big issues for people on the calls.

NYSE's decision to open, which was announced around 4 p.m. on Sunday, was short-lived, as trading firms grappled with their own contingency plans. Moreover, the exchange's back-up plan had not been tested since March 31, a worry after the market snafus of this year.

As the weather reports grew more dire on Sunday night, the Securities Industry and Financial Markets Association, which represents securities firms, banks and asset managers, added to the disagreement, voicing significant concerns about proceeding with trading.

Throughout the weekend, officials from the U.S. Securities and Exchange Commission were also on calls with the exchange operators and other market participants. SEC Chairman Mary Schapiro participated in at least one call with Nasdaq Chief Executive Robert Greifeld. She was also in email contact with NYSE CEO Duncan Niederauer.

The substance of their conversation could not be learned. But sources familiar with the situation said the SEC did not make the decision to shutter the markets and the view presented on the various calls was uniform about the need to close.

NO HEROES

By the time Sandler and other NYSE officials got on the 6:30 p.m. call, not only was the New York's transport system about to grind to a halt but a large area of lower Manhattan, edging right up to the boundary of the New York Stock Exchange at 11 Wall Street, faced a mandatory evacuation ordered by Mayor Michael Bloomberg. For the trading firms it was time to speak up.

Some of them, including Goldman Sachs Group Inc, CME's NYMEX, and Citigroup Inc, were squarely in the flood-prone evacuation zone.

At 7:30 p.m., senior NYSE officials, including Niederauer, arranged for yet another call, this time with other industry participants - from rival exchanges to regulators - on the line.

"There was a healthy discussion about what-ifs, and scenarios and any way we could open the market," said an official from a rival exchange.

A consensus quickly formed that the markets may have to close, said executives from three exchanges.

"This is not about, 'hey, you have a floor, you couldn't do it, we're electronic and we could', we are not going to make a competitive issue about it," said one person on the call.

By 10 p.m., Niederauer and SEC Division of Trading & Markets Director Robert Cook, among other market participants, had hammered out the plan to shut down fully.

"Sometimes you have to ask, 'Guys, why are we trying to be heroes here? The risk-reward just doesn't look too good'," said one NYSE official.

At 11 p.m. on Sunday, the exchanges announced the stock and options markets would be closed on Monday. Employees of some firms did not get alerted about the decision until after midnight.

(Additional reporting by Sarah Lynch, Ryan Vlastelica, Jessica Toonkel, Carrick Mollenkamp, Jed Horowitz; Writing by Dan Wilchins and Paritosh Bansal; Editing by Jennifer Merritt, Martin Howell and Alex Richardson)

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