Three week lagged Trim Tabs:
December 1st , 2003
THANKSGIVING HOLIDAY SLOWS NEW OFFERINGS TO JUST $1.7 BILLION. FEW BUYBACKS AND CASH TAKEOVERS. FUND INFLOWS HALVED FROM WEEK EARLIER.
The Thanksgiving holiday made for a relatively quiet week on both sides of the liquidity ledger. The net change in the trading float of shares (L1) remained bearish, increasing by $2.5 billion during the week ended Wednesday, November 26 (the stock and bond markets were closed for the Thanksgiving holiday on Thursday, November 27).
This past week’s net float growth was the lowest in four weeks. Since it was a holiday week, many of the new offerings that would have debuted during this past week probably emerged during the previous week or will emerge during this coming week. Nevertheless, net float growth averaged $5.5 billion weekly during the past fortnight, a figure that is only slightly less than the $5.6 billion weekly average during the past four weeks. Note that we revised net float growth significantly higher to $8.5 billion from $6.9 billion for the week ended Thursday, November 20.
We hesitate to read too much into anything that occurred during this past week, as most stock market players and insiders were on vacation after Tuesday, November 25. While new offerings slowed dramatically, we expect that they will rapidly increase during this coming week and that they will total roughly $20 billion in December, about the same as November’s pace. If fund flows remain strong, this level of activity by itself will not be sufficient to burst the bubble. We envision a major sell-off only if an exogenous shock—a terrorist attack, a sharply falling dollar, or sharply rising interest rates—sends inflows plummeting.
NEW CASH TAKEOVER AND STOCK BUYBACK ACTIVITY REMAINS WEAK.
ArvinMeritor withdrew its takeover bid for Dana after Dana’s board rejected its sweetened $18-per share offer. Backing out this potential $2.2 billion deal drove the weekly total of new cash takeovers into negative territory. The largest deal announced during this past week was Independence Community Bank’s acquisition of Staten Island Bancorp for $1.5 billion in cash and stock, continuing the trend of consolidation in the banking industry. Cash takeover activity continues to decline after reaching a near-term peak during the week ended Thursday, October 30. The low levels of new cash takeovers during the past three weeks indicates that companies currently see few reasons to buy other companies for cash.
Just $1.1 billion in new stock buybacks were reported during this past week, a decline from the previous week’s $1.7 billion. Most notably, CIBC announced that it would repurchase 18 million shares over the next year. Yum! Brands and Mattel also announced that they were adding $300 million and $250 million, respectively, to existing buyback authorizations.
NEW OFFERINGS PLUMMET TO $1.7 BILLION, LEAST SINCE WEEK ENDED OCTOBER 23.
Only $1.7 billion in new offerings were sold during this past week. The largest of these new offerings was a $447 million initial public offering for Sirva. Last week’s total is the least amount of new offerings since the week ended October 23. Obviously the Thanksgiving holiday was responsible for most of the decline in new offerings. Over the past four weeks, the new offering calendar has averaged $5 billion weekly, a pace that we expect will likely be exceeded somewhat during the next three weeks before the Christmas holiday.
Dealogic reports that only five deals for roughly $1 billion are scheduled for the upcoming week. While this figure is the smallest amount of deals listed at the beginning of the week in some time, the rush to offer new shares before the Christmas holiday, as well as overnight deals, will ensure that this dollar amount increases substantially. We would be very surprised if new offerings amount to less than $3 billion during the upcoming week.
$50 BILLION PER MONTH IN INSIDER SELLING + NEW OFFERINGS BEGINNING IN FEBRUARY WILL PRESSURE STOCKS.
By February, new offerings should top $30 billion monthly, or $7.5 billion weekly. Remember, Wall Street underwriters did not really begin to boost their deal capability until this past summer. Since bringing a deal from “meeting the company” to selling new shares requires six to nine months, the fruits of this hiring will be felt beginning early next year.
Adding $20 billion monthly in insider selling to $30 billion monthly in new offerings yields $50 billion monthly leaving the stock market, which is more than the new savings grow each month. With this amount of cash leaving the market, anything deemed “bad news” could be enough to end inflows and prick the bubble.
INSIDER SALES LIKELY TO SUBSIDE IN DECEMBER/JANUARY DUE TO TAXES & EARNINGS RELEASES. WE ANTICIPATE HEAVY INSIDER SELLING BEGINNING IN FEBRUARY 2004.
During bubbles, the smart money—public companies and the insiders who run them—is selling while the dumb money—individual investors and pension funds forced to adhere blindly to their investment policies—is buying. This bubble has been no different.
Insider selling probably will subside as we move through December. Insider selling typically slows in December and does not pick up until February. In December, insiders are reluctant to sell and incur a tax liability due the following April, so they wait until the next year to sell. In January, insiders must wait until December quarter earnings are released before they are allowed to sell.
By February 2004, however, we expect insider selling to balloon to $5 billion weekly. Why? Insider selling has been averaging around $4 billion weekly during the past few weeks and should grow by February if the market rises.
STOCK SALES TO PAY TAXES COULD TOP $50 BILLION IN APRIL
So far this year, the U.S. stock market capitalization has increased more than $3 trillion. Assuming that only 10% of this gain will be realized in 2003, trading profits of $300 billion would be generated. These profits in turn would generate over $80 billion in taxes due by April 15, assuming that half of the gains are long-term and half of the gains are short-term, plus an additional amount of state income taxes.
This amount is merely a guess. We have no idea whether or not it is accurate. It seems conservative, however, to estimate that taxpayers will be selling a great deal of appreciated stock in April to pay taxes. A figure in excess of $50 billion seems likely.
Even if the bubble survives through April, it likely will burst in April, assuming that at least $40 billion to $50 billion in stock will be sold to pay taxes.
U.S. EQUITY FUND INFLOW FALLS BELOW $3 BILLION FOR FIRST TIME IN EIGHT WEEKS.
U.S. equity fund flows declined to $1.7 billion during this past week, the first time in eight weeks that such flows have fallen below $3 billion. Still, this inflow is equal to the weekly average inflow so far this year—not too shabby for a holiday-shortened week. Small- and mid-capitalization stocks continue to attract the most new cash, both directly and through mutual funds. Large-capitalization mutual funds that we track daily (growth, value, and blend funds combined) had net outflows every day during this past week.
While many media outlets continue to lavish attention on the mutual fund “scandal,” we attribute the decline in inflows to other factors. First, many individual investors turn their attention away from the stock market during the days immediately preceding Thanksgiving. Second, U.S. income tax regulations require U.S. mutual funds to distribute trading gains over the fiscal year ending in October as a taxable distribution to investors in December. Thus, many investors wait until January before investing year-end bonus money. December’s equity fund inflow is among the lightest—7.2 percent of the annual total flow—while January’s equity fund inflow is the largest—13.3 percent of the annual total flow.
After reviewing several weeks of data, we are confident that the mutual fund uproar has not seriously damaged investor confidence. Global funds—the focus of most stale price trading investigations—received a $600 million inflow during this past week, the third straight week of inflows since the $1.2 billion outflow during the week ended November 6. Unless extraordinary new charges emerge, we do not expect lasting damage from this issue.
ICI REPORTS $19.4 BILLION FLOWED INTO U.S. EQUITY FUNDS IN OCTOBER.
This past Tuesday, the ICI reported U.S. equity inflows of $19.4 billion for October. Our estimate, based solely on the funds that we track daily, was $15.2 billion, which we revised from $15.6 billion in mid-November after Fidelity, Vanguard, and other major fund companies released their October data.
After the third week in October, we had estimated that U.S. equity fund inflows in that month would be more than $30 billion based upon the relationship that prevailed from May through September between the ICI actual total and our estimates based upon the funds that we track daily. Given all the cross currents in fund flows—particularly in those families that lost assets to non-mutual pension funds—we were certain only that inflows were heavy.
The ICI also reported that global funds received $6.1 billion in October versus our estimate of $5.3 billion. Bond and hybrid funds received $2.6 billion versus our estimate of $4.6 billion.
Over $130 billion has flowed into U.S. equity funds between March 2003 and the beginning of December 2003. Assuming that direct investment in equities equals equity fund inflows, individual investors have shoveled over a quarter of a trillion dollars into U.S. equities over the past nine months.
WAGES AND SALARIES INCREASE 4.9% LAST TWO WEEKS, 5.9% LAST FOUR WEEKS.
Wages and salaries continue to grow at a healthy pace. Accounting for the impact of the 4% cut in tax rates effective July 1, 2003, wages and salaries subject to withholding grew by 4.9% over the past fortnight and 5.9% over the past four weeks. Both of these figures are comfortably above the four-week moving average of year-over-year growth.
Given the potential for holiday week distortions, however, we will wait until after this week’s data is reported before we update our table of four-week gains in wages and salaries subject to withholding.
While all income tax collections are now rising year/over/year, the rate of gain is slight. Indeed, the monthly budget deficit should remain over $40 billion. That has to hurt both the US dollar and interest rates eventually.
BOTTOM LINE: WE REMAIN CAUTIOUSLY BULLISH. NEW OFFERINGS PROBABLY WILL NOT BE HEAVY ENOUGH TO BURST THE BUBBLE BEFORE SPRING.
We remain cautiously bullish, although the decline in new offerings during this past week was due more to the Thanksgiving holiday than to any lack of corporate interest in selling as many shares as possible before the bubble bursts. Three key factors will determine whether the bubble will survive through the end of the year: the amount of new offerings sold during the next three weeks, whether the U.S. dollar continues to collapse, and whether long-term interest rates spike or remain stable.
Despite this past week’s decline in new offerings, we continue to believe that roughly $20 billion in new offerings will drain the checking accounts of stock market players in December. Yet because so much fresh cash is pouring into the market, this amount of new offerings will not be sufficient to burst the bubble and reduce the likelihood of year-end bonus money flowing into equities. Granted, fund flows did slacken somewhat during this past week, but it was a holiday-shortened week. While mutual fund inflows could slow in December, as fund investors wait until after receiving their taxable distributions before investing more, both pension funds and direct investment should be big.
Of course, if interest rates rise dramatically, the stock market could sell off. Also, if the U.S. dollar continues to trend lower—the euro pierced the crucial $1.20 level during this past week—foreigners will become even more reluctant to purchase U.S. securities. At this point, it appears that the bubble will survive the end of this year intact. After January 2004, though, watch out!
-Charles Biderman |
