By Charles Biderman, TrimTabs.com
Liquidity continued to slump last week. There were few newly announced cash takeovers and U.S.
equity funds saw an estimated outflow of $1 billion.
About $2 billion in new offerings continued to run at about half last year's pace, as a couple of large
sized American Deposit Receipts (ADRs) on Friday boosted the week's total to close to $2 billion.
That all helped the Trim Tabs Market Cap Index drop to $16.09 trillion, breaking below April 14's
$16.19 trillion close. The Trim Tabs Market Cap Index measures the market value for all NYSE,
NASDAQ and AMEX stocks. Trim Tabs Market Cap Index does not include ADR's.
All told, corporate float change activity has slumped lately. We know why new offerings are way
down. CommScan tells us that it expects no more than $3.5 billion of deals this week.
We doubt that many will get done. Cash takeovers and new buyback announcements are running less
than we would have expected given the sharp decline in stock prices. Last week's combined total of
$3.3 billion is less than half our hoped-for pace. Perhaps bank tightening of lending is crimping cash
takeovers and buybacks.
SMALL ESTIMATED EQUITY FUND OUTFLOW
Our preliminary estimate is that there was a small outflow from equity funds in the last five days of
November. However, given that the Investment Company Institute reported much larger equity fund
inflows during October than we had estimated, we expect that our November flow data is also too low.
We are working on our regression analysis to determine what kind of adjustments we need.
We have now entered into capital gains season. Our earlier estimate for a drop in distributions this
December might be optimistic. Remember, December inflows in the past have been depressed by the
desire of fund investors to avoid paying capital gains taxes on their funds' trading profits.
CASH KEEPS BUILDING AS MARKET SELLS OFF; IS MARGIN DEBT FINALLY
WINDING DOWN?
Last week, we documented that cash at the end of October at U.S. equity funds grew by $69 billion
since the end of March. What's more, that $69 billion is more than half the entire $133 billion inflow
into U.S. equity funds between last March and October.
Indeed, in November our guess is that the entire new flow and then some went directly to the sidelines.
That means cash has grown by $80 billion to $90 billion since March. That is such an enormous
buildup, equal to .6% to .7% of the total U.S. market capitalization. If portfolio managers all
stampeded into stocks at the same time, as they're likely to do, we'd have the "Mother of all Rallies."
The main question is what will be the spark that sets off all the buying?
DERIVATIVE WIPE OUTS RELATED IN PART TO GOLDMAN, LEHMAN & MERRILL
FISCAL YEAR-END?
Margin debt at the end of October 2000 was still some $50 billion higher than at the end of October
1999.
Remember, November 1999 was when the big tech stock rally started that lasted until mid April.
Margin debt rose by close to $100 billion between the end of October 1999 and the end of March
2000. Our guess is margin debt dropped dramatically in November as declines in many formerly hot
tech stocks reached critical levels.
Much of the increase in margin debt apparently was not due just to speculative buying. Rather, insiders
at many a former highflyer had worked derivative deals with their brokers either to avoid reporting a
sale to the SEC or to evade the lock-up provisions.
Virtually all that derivative stuff involved margin-related loans on one side or the other. As those former
highflyers dropped by up to 75% in value, those derivatives have become unwound, further driving
down stock prices and eliminating massive amounts of margin debt.
Reportedly, Goldman Sachs fiscal year end was the day after Thanksgiving. Lehman and Merrill Lynch
fiscal years ended November 30. Given the Wall Street tradition of throwing out the baby with the
bathwater, we would not be surprised if much of the recent carnage was due to those firms unwinding
huge amounts of derivative activity related to former highflyers before their fiscal years end.
We expect that margin debt at the end of November was likely down by a record amount, perhaps as
much as $30 billion. During last March and October, margin debt dropped by $17 billion each time. In
fact, given our bullish stance, we hope that margin debt drops by more than $50 billion both in
November and December. If this happens, it would be close to completing the round-trip cycle and
wipe out the prior $100 billion increase.
SLOWER GROWTH OR HARD LANDING? WE SAY MILD SLOWDOWN, AT WORST
Conventional wisdom says we are experiencing a major economic slowdown that could result in a
recession or worse. The financial media all agree that the economy is slowing dramatically.
We disagree.
Last week, our least favorite Washington bureaucrats, the Bureau of Economic Analysis (BEA),
reported October personal income stats. The Wall Street Journal headlined that personal income
slumped.
Really?
The report did say that due to a decline in Federal transfer payments to the agricultural sector the
BEA's version of income was down a tad from the prior month. However, if one looked inside the
BEA numbers, one would see that wages and salaries, particularly the private industry category, not
only increased over September but actually climbed 6.8% compared to October 1999.
BEA ECONOMIST CAN'T EXPLAIN DIVERGENCE BETWEEN NIPA & WITHHOLDING
On the other hand, payroll withholding taxes this past September and October together rose a
whopping 10.5% over the same two months in 1999. Long-time readers know we have railed ad
nauseam that the BEA data on incomes is understating economic growth.
Last week, we tried again to discover the reasons for the discrepancy between the double-digit gains in
withholding and employment tax collections and the much more modest personal income growth
reported by the BEA.
We spoke with BEA economist Kurt Kunze, who is in charge of the Wages and Salaries section. Our
question: How do you explain the discrepancy between the 9.9% growth in withholding and
employment tax collections year to date vs. the BEAs much lower estimate of personal income growth?
He gave us the same answer as did former BEA Chief Statistician Robert Parker, now retired. The
answer was that he has no idea why those two series continue to diverge.
He did offer the suggestion that perhaps taxpayers are asking employers to withhold extra taxes to
cover their expected stock market gains. However, if that was so, this year refunds should have
zoomed.
Guess what? Refunds during fiscal year 2000 ending September grew all of $12 billion, maybe
accounting for 1% of the growth rate in withholding taxes.
Mr. Kunze did say that the BEA was aware of the discrepancy but couldn't say anything more other
than he felt that his wage and salary numbers were correct.
IF INCOME GROWTH IS SLOWING, THEN WHERE DID THE $150 BILLION INTO
SAVINGS & STOCKS COME FROM?
Private industry salary and wages, according to the BEA, grew by $260 billion over the last 12 months.
That translates into $65 billion quarterly.
We asked Mr. Kunze, how did he explain the $82 billion that flowed into savings accounts ($43
billion), small CDs ($21 billion) and retail money market funds ($18 billion) over the three months
between August and November, according to the Federal Reserve's H6?
That $82 billion into savings, etc. does not include the $50 billion or so that poured into equity funds
during those same three months, nor another $20 to $30 billion direct investments into stocks.
His answer: He had no explanation.
WITHHOLDING TAX SLOWED OVER THANKSGIVING
Withholding and corporate tax collections slumped the last eight days of November when compared
with the same eight days of 1999.
The reason was related to the number of days before and after Thanksgiving, year over year. Still, all of
November's tax collection grew by just 5.8% vs. November 1999. However, if the decline was due to
the timing of Thanksgiving, then we would expect a healthy year-over-year gain the first week of
December.
This would make sense, unless of course the economy really is slowing rapidly.
SERVICE ECONOMY EQUALS TWO-THIRDS OF THE US ECONOMY & GROWING
Yes, everyone now says the U.S. economy is slumping dramatically. Go back and read the financial
press during November of 1998 just after the Long-Term Capital debacle. Everyone back then was
sure the global economy was crashing. We demurred at that time and today also disagree with
conventional wisdom.
Yes, we are overstocked.
Yes, there is excess capacity in autos, chips, PC's etc.
So what? Will employment in those sectors drop? Probably, but not by much.
Even so, we still say that the U.S. economy is on track to do what the Federal Reserve would like to
have happen. The froth is gone and what's left is quite healthy.
Want to win a bet with any Wall Street pro? Ask him or her how much the NYSE market cap is down
year-to-date. No one will believe the correct answer: less than 2%.
BOTTOM LINE: WE STAY LONG-TERM BULLISH; WHEN SELLING ENDS, AN
EXPLOSIVE RALLY IS LIKELY
We remain long-term bullish. We are optimistic because underlying liquidity remains bullish. Sideline
cash is building and the economy remains strong.
We would feel lots more confident if we do see a pick-up in new cash takeovers and stock buyback
announcements. However, given that insider selling and new offerings are also down big time, we are
not as concerned.
At some point, the current wave of seemingly forced liquidation of stocks will end. That may happen by
Christmas or by the end of the year. At that point we expect a huge rally. |
