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BORDER="0"></a><font face="Verdana,Arial" size="1"></font></td> </tr> </table> </form> <div align="left"><table border="0" cellpadding="0" cellspacing="0" width="125"> <tr> <td bgcolor="#006633" height="45" width="125" colspan="2"><img src="/archive/images/also_on.gif" alt="Also on CBS MarketWatch" border="0" width="125" height="45"></td> </tr> <tr> <td bgcolor="#CCFFCC" valign="bottom" width="5"></td> <td bgcolor="#CCFFCC" valign="bottom" width="125"><font size="2" face="Arial"><a href="/news/current/stwatch.htx?source=blq/">StockWatch</a><br> <a href="/news/current/erdman.htx?source=blq/">Erdman's World</a><br> <a href="/news/news_index.htx?source=blq/">News Index</a><br> <a href="/news/columns.htx?source=blq/">More columns</a></font></td> </tr> <tr> <td valign="top" bgcolor="#CCFFCC" width="125" height="24" colspan="2"><img src="/archive/images/also_on2.gif" width="125" height="24"></td> </tr> </table> </div><p>  <table border="0" cellpadding="0" cellspacing="0" width="125"> <tr> <td bgcolor="#CCFFCC" colspan="2"><img src="/archive/images/new_on.gif" alt="New Features" border="0" width="125" height="55"></td> </tr> <tr> <td bgcolor="#CCFFCC" valign="bottom" width="5"><img src="/archive/images/pixel.gif" width="5" height="1"></td> <td bgcolor="#CCFFCC" valign="bottom" width="120"><a href="/news/current/jokeday.htx?source=blq/"><font face="Arial" size="2">Joke Of The Day</font></a><br> <font face="Arial" size="2"><a href="/news/current/gadfly.htx?source=blq/">The Gadfly</a><br> <a href="/news/internet_page.htx?source=blq/">Internet Economy</a><br> <a href="/news/current/sidelines.htx?source=blq/">Sports Biz</a></font></td> </tr> <tr> <td bgcolor="#CCFFCC" valign="bottom" colspan="2"><font face="Arial" size="2"><img src="/archive/images/also_on2.gif" width="125" height="24"></font></td> </tr> </table> </td> <td valign="top" width="445"><strong><font face="Arial"><font size="5">Beware of bulls bearing theories<br> </font><font size="3">Flow of funds shows</font> big investors' impact<br> </font><br> </strong><div align="right"><table border="0" cellspacing="0" width="100%"> <tr> <td width="66%"><em>By <a href="mailto:mbecon@ix.netcom.com">Michael J. Bazdarich</a>, CBS MarketWatch</em><br> <font size="2"><em>Last Update: 2:09 PM ET Dec 14, 1998</em></font></td> <td width="34%" valign="top" align="right"><small><font face="Arial"><a href="/news/current/bonds.htx?source=blq/">Bond Report</a></font></small></td> </tr> </table> </div><p>LOS ANGELES (CBS.MW) -- It was a sickening third quarter for stocks, with the <a href="/data/squote.htx?TICKER=$dj&TABLES=EXTEND&SOURCE=blq/">Dow Jones Industrial Average</a> sliding from 9300 in July to the mid-7000s by late-September. </p> <p>Recently released Federal Reserve data on the flows of funds among asset groups paint a telling picture of this period. The table below summarizes third-quarter flows in equities. </p> <p>Right off, the table debunks the popular myth that the 1995-98 bull market was driven by individuals' purchases. Households have been net sellers of stocks since 1985, and they have sold at an extraordinary rate since 1995, to an annualized pace of more than $500 billion in early-1998. </p> <p>However, households actually slowed down their sales of stocks in Q3, while prices were sliding. Households in fact stepped up their demand for stocks in the quarter.</p> <table border="0" cellpadding="0" width="425"> <tbody> <tr> <td width="166" valign="bottom"><font face="Arial"><big><strong>Who bought and who sold </strong></big><small>(in billions)</small></font></td> <td width="87" valign="bottom"><p align="center"><strong><small><font face="Arial">1997</font></small></strong></td> <td width="89" valign="bottom"><p align="center"><strong><small><font face="Arial">1st half 1998</font></small></strong></td> <td width="75" valign="bottom"><p align="center"><strong><small><font face="Arial">Q3 1998</font></small></strong></td> </tr> <tr> <td width="166"><strong><font face="Arial"><small><p align="center"></small><small></small></font></strong></td> <td width="87"></td> <td width="89"></td> <td width="75"></td> </tr> <tr> <td width="166"><strong><font face="Arial"><small>Households </small></font></strong></td> <td width="87"><p align="left">($-490.2)</td> <td width="89" align="left"><p align="left">($-540.3)</td> <td width="75"><p align="left">($-297.3)</td> </tr> <tr> <td width="166"><small><strong><font face="Arial">Financial institutions</font></strong></small></td> <td width="87"><p align="left">$4.8</td> <td width="89" align="left"><p align="left">$7.0</td> <td width="75"><p align="left">$6.3</td> </tr> <tr> <td width="166"><small><strong><font face="Arial">Insurance companies </font></strong></small></td> <td width="87"><p align="left">$76.7</td> <td width="89" align="left"><p align="left">$74.2</td> <td width="75"><p align="left">$65.7</td> </tr> <tr> <td width="166"><small><strong><font face="Arial">Pension funds </font></strong></small></td> <td width="87"><p align="left">$104.1</td> <td width="89" align="left"><p align="left">$60.3</td> <td width="75"><p align="left">($-1.4)</td> </tr> <tr> <td width="166"><small><strong><font face="Arial">Mutual funds </font></strong></small></td> <td width="87"><p align="left">$160.6</td> <td width="89" align="left"><p align="left">$197.3</td> <td width="75"><p align="left">($-10.8)</td> </tr> <tr> <td width="166"><small><strong><font face="Arial">Foreign investors </font></strong></small></td> <td width="87"><p align="left">$64.2</td> <td width="89" align="left"><p align="left">$79.8</td> <td width="75"><p align="left">($-29.0)</td> </tr> <tr> <td width="166"><small><strong><font face="Arial">Corporations </font></strong></small></td> <td width="87"><p align="left">$81.8</td> <td width="89" align="left"><p align="left">$117.7</td> <td width="75"><p align="left">$266.7</td> </tr> <tr> <td colSpan="4" width="423"><small><font face="Arial"><small>Source: Federal Reserve Board</small> (<small>All flows are stated as annualized rates.)</small></font></small></td> </tr> </tbody> </table> <p>Now, throughout 1995-97, households' direct sales of stocks far exceeded their "indirect" purchases through pension and mutual funds. It was huge corporate buybacks that powered the stock market then. Interestingly enough, corporate buybacks actually increased in Q3 1998, to a massive $267 billion. </p> <div align="right"><table border="0" cellpadding="0" cellspacing="0" width="135" align="right"> <tr> <td align="right" width="135"><img src="/archive/images/pixel.gif" width="1" height="5"></td> </tr> <tr> <td align="right" width="135"> <table border='0' cellpadding='0' cellspacing='0' width='125' bgcolor='#339966'> <tr> <td align='right'><table border='0' cellpadding='5' cellspacing='0' width='124' bgcolor='#FFFFFF'> <tr> <td bgcolor='#339966'><strong><font face='Arial' size='2' color='#FFFFFF'>Breaking News</font></strong></td> </tr> <tr><td><font face='Arial' size='2'><a href='/news/newsroom.htx?dist=snap?source=blq/&dist=hdlnbug'>Wall Street gets the jitters</a></font></td></tr><tr><td><font face='Arial' size='2'><a href='/archive/19981214/news/current/silicon.htx?dist=snap?source=blq/&dist=hdlnbug'>Tech shares socked by Internet stocks</a></font></td></tr><tr><td><font face='Arial' size='2'><a href='/archive/19981214/news/current/rd.htx?dist=snap?source=blq/&dist=hdlnbug'>Royal/Dutch Shell hustles to cut costs</a></font></td></tr><tr><td><font face='Arial' size='2'><a href='/archive/19981214/news/current/grid.htx?dist=snap?source=blq/&dist=hdlnbug'>National Grid buys NEE for $4.2 billion</a></font></td></tr><tr><td><font face='Arial' size='2'><a href='/archive/19981214/news/current/stwatch.htx?dist=snap?source=blq/&dist=hdlnbug'>Half-full or empty, investors wonder</a></font></td></tr> <tr> <td><a href='/news/news_index.htx?source=blq/&dist=hdlnbug'><font face='Arial' size='2'>More top stories</a>...</font></td> </tr> <tr> <td><a href='/news/columns.htx?source=blq/&dist=hdlnbug'><font face='Arial' size='2'>CBS MarketWatch Columns</a></font></td> </tr> <tr><td><font face='Arial' size='1'>Updated:<br>12/14/98 1:07:36 PM ET</font></td></tr> </table> </td> </tr> </table> </td> </tr> <tr> <td align="right" width="135"><img src="/archive/images/pixel.gif" width="1" height="5"></td> </tr> </table> </div><p>So the household and corporate (buyback) demand for stocks actually rose in Q3 by a total of over $390 billion. So who was behind the rising selling pressure? Professional and foreign investors. Financial institution and insurance demand for stocks fell very slightly, by about $10 billion. However, mutual funds' demand plunged by over $208 billion, fiduciary demand (pensions and trusts) fell by nearly $62 billion, and foreign demand fell by nearly $109 billion. </p> <p>The sum of all these flows is zero. It has to be, since every seller has a buyer and vice versa. Still, with equity prices valuations falling about $1.5 trillion in third quarter, it is clear that selling pressures (reduced demand) were the driver in Q3, and these pressures clearly centered on Wall Street (and foreign) professionals, not individuals on Main Street. </p> <p>Market analysts have long worried about whether individual investors accustomed to rising prices could hang in there during a bear episode. Market bulls, meanwhile, have claimed that any bear challenge would be stemmed by steady demand from individuals. The flow-of-fund facts disparage both these views. </p> <p>Apparently, it wasn't skittish individuals but professionals who drove the sell-off. Meanwhile, despite households stepping up their demand for stocks and despite a huge spate of corporate buybacks, prices plunged anyway. </p> <p>Now, the bulls may laud individuals' fortitude and cite the partial Q4 rebound in equity prices as a vindication of bull trends. My own take, however, is equity prices are extremely high and likely overvalued,  households' expectations for the market are unrealistically optimistic, and earnings are already well into a sustained deterioration. </p> <p>As expectations come back to Earth, households will shift portfolio shares out of equities, and this will drive a prolonged stock correction. 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