Surging Retail (And ETF) Outflows Mean Worst Quarter For Wall Street Since 2008 On Deck

"After two months bankers would like to forget, Wall Street may need a September to remember to avoid closing the books on the worst quarter for investment banking and trading revenue since the peak of the financial crisis." So begins a Bloomberg piece highlighting why the ongoing boycott by retail investors (who incidentally hold the bulk of the S&P's market cap) of terminally broken capital markets may finally achieve more than all futile campaigns to pull deposits out of the TBTF banks ever could. It is no secret that regular, non computerized, investors have now shut out Wall Street as they now have absolutely no faith left in capital markets, a phenomenon we have been tracking since its inception. The "joke" that are capital markets has led such asset manager as Jim Rickards to tell his clients to pull their money from the stock market. He won't be the last. Yet incidentally, this simplest form of denial to participate in the ponzi is precisely the stake that will go right through the heart of the various vampire entities controlling capital formation. The alternative is a toxic spiral whereby low revenues, mean more Wall Streeters get fired, leading to yet lower revenues, and so forth, once again demonstrating that just like any natural system, you can only push the balance out so far, before the system snaps right back. Ironically, this will happen without any regulation or intervention whatsoever, as the regulators have become as corrupt as the markets they are supposed to oversee, leading investors (and not speculators) to take matters into their own hands. The pain for Wall Street is just starting... It couldn't have happened to a nicer group of people...

From Bloomberg:

For the number of shares traded on U.S. exchanges to match last year’s third quarter, average daily volume for the rest of the month would have to top that of any trading day in the last three years. Debt trading also needs to pick up, as corporate bond trading in July and August was down 8 percent from the same period in 2009, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority...The result may be the lowest revenue from investment banking and trading for the five largest Wall Street banks since the fourth quarter of 2008, when they had combined negative revenue of $3.35 billion.

“Activity levels in the last three weeks of September should be a lot better than July and August, but it would have to almost be off-the-charts good to save the third quarter,” said Jeff Harte, a Chicago-based analyst at Sandler O’Neill & Partners LP. “I don’t think there’s going to be a lot more clarity about the macro environment, and that’s what people seem to be wrestling with before activity picks up.”

Ah yes, a sad side effect when Wall Street's entire business model is that of a glorified flow (and prop) trading operation. Alas, what Wall Street forgets is they need someone on the other side: transacting with each other can only push the market up only a few hundred points from fair value.

And trading volumes continue to plunge. The resultant surge in stock prices on no volume melt-ups having no credibility is only a tangential side effect of the general abdication of stock markets by the population:

While the dollar value of completed mergers and acquisitions is up slightly for the first two months of the quarter from the same period last year, debt and equity underwriting totals have fallen. And trading has come to dwarf investment banking on Wall Street: The five firms booked more than five times as much revenue from trading in the first half as from advisory and underwriting.

Trading volumes dropped in July and August as investors weighed data that hinted at a stalled economic recovery. Growth in gross domestic product in the second quarter was cut to 1.6 percent from the initial 2.4 percent. Sales of new homes in the U.S. dropped in July to the lowest level on record, and consumer confidence that month had the biggest decline since 2008. The Federal Reserve said on Aug. 10 that growth will likely be at a “more modest” rate than anticipated.

Equity investors have traded a daily average of 14.2 billion shares on U.S. exchanges so far in the third quarter, according to Bloomberg data. That’s the worst start of any quarter since the first three months of 2009, when the Standard & Poor’s 500 Index touched its lowest point in almost 13 years, and 25 percent less than the average for last year’s third quarter, the data show.

To match the volume of the third quarter of 2009, investors would have to trade an average of 30.6 billion shares a day for the rest of September. That’s more than twice the daily average so far this quarter and higher than any single day since 2006.

Trading of U.S. equity options has declined for each of the past three months after jumping to a record 405 million contracts in May. Average daily volume on U.S. exchanges in the third quarter has fallen to 13.3 million contracts a day, down 23 percent from the prior quarter, according to data compiled by Bloomberg and Options Clearing Corp., the Chicago-based firm responsible for settling all U.S. options trades.

The average daily dollar amount of U.S. Treasuries traded in July and August was down 1.7 percent from 2009’s third quarter and 13 percent from last quarter, according to data from ICAP Plc, the world’s largest inter-dealer broker.

Alas, the expected volume surge is not happening. We have pointed out that there are now 17 weekly sequential outflows from domestic mutual funds, in the longest dry spell for Wall Street on record, which is causing outright panic among the asset manager community. And contrary to misguided reports elsewhere in the media, ETF outflows have followed suit, with total outflows from the ETF/ETN sector hitting $11 billion in the month of August.

NSX.com reports:

August 2010 net cash outflows from all ETFs/ETNs totaled approximately $1.9 billion, with year-to-date net cash inflows totaling $47.6 billion. Total Global/Int’l Equities led all product categories with over $4.5 billion in net cash inflows. Total U.S. Equities had net cash outflows of over $10.9 billion for the month of August 2010.

The biggest loser with $6.6 billion in outflows: the SPY. Whether this is an outright redemption driven move, or merely more usage of the ETF as a natural pair-trade hedge utilized by hedge funds, as we have pointed out previously is unknown, and very much irrelevant: what is certain is that outflows are outflows, and absent a pick up in actual underlying stock values, set the stage for ongoing toxic spirals as more unwinds breed yet more unwinds. (Incidentally, one of the biggest winners in August: GLD).

All that is left is for faith in the decoupling meme to dissipate and for outflows from international funds to commence: that could well be the last nail in what is left of the biggest profit center for Wall Street over the past two years. But have no fear - the imminent, and just around the corner, surge in M&A activity (cause you know everyone wanted to bid on 3Par deep inside to show just how little faith in organic growth corporate America really has) will promptly fix Wall Street's soon to be ailing top and bottom lines. We are waiting with bated breath.