Weekly Liquidity Update
Weekly Liquidity Up Date
Monday, February 12, 2001 - 5.00 PM ET.
In LIQUIDITY TRIM TABS published on Monday, Charles Biderman wrote…
LIQUIDITY SLUMPS FOR 2ND WEEK DUE TO HUGE NEW OFFERINGS & LACK OF CASH TAKEOVERS. ESTIMATED BIG DECLINE IN SIDELINE CASH AFTER TWO FED RATE CUTS ALSO A CONCERN.
Liquidity has been horrible over the past fortnight at negative $17 billion. The main reason has been $19 billion of new offerings virtually all mammoth secondaries and an almost complete lack of large new cash takeovers of public companies. That negative scenario has created lots of stock market volatility and the net result has been a down market with a small estimated outflow from US equity funds over the past two weeks.
Historically, corporate investors have always been the best leading indicator of future market activity. That said, the lack of buying and huge amount of selling is quite worrisome going forward. We had been expecting that with the resurgence in junk bonds, new cash takeovers would surge this year. So far, other than one big deal in January, that hasn't happened yet. We keep reading about all the recently funded LBO funds. Perhaps this time buyers are doing more due diligence than just kicking tires, meaning we’re too impatient.
US EQUITY FUNDS CAN'T KEEP NEW MONEY FROM LEAVING, GIVEN MARKET VOLATILITY.
JUNK BOND FUND INFLOWS STOP ALTHOUGH OTHER BOND SECTORS DO BETTER.
Flows into US equity funds rebounded a bit over the five days ended Thursday from a modest outflow the prior week. However, for the fortnight combined there was no flow. No surprise then that retail money funds got a hefty $10.4 billion flood of fresh cash.
It’s significant that junk bond funds, after attracting big flows up until two weeks ago, got virtually no new cash last week. That’s not surprising since High Yield NAV’s dropped 1.4% over the five days ended Thursday. But, it is interesting to notice that other bond fund categories did get an estimated $700 million inflow even though NAV’s were flat.
Unless the stock market picks up, equity fund inflows won't either.
FLOAT STARTS GROWING AGAIN IN FEBRUARY AFTER TWO MONTHS SHRINK
The trading float of shares in the US stock market will start growing again in February, rising an estimated $12 billion, after a brief two month $44 billion shrink. That shrink followed a period of mostly float growth since the start of the 4Q of 1999. Prior to that the trading mainly shrank since 1995 which was also when the prior bull run began.
The trading float changes as a result of corporate investors buying or selling. The float shrinks whenever stock buybacks and cash takeovers exceed new offerings and insider selling.
We include a new cash takeover the month it is announced even though it could take as long as a year before the deal concludes. The reason: arbitrageurs usually quickly buy up 2/3 the float of a target. Also we include the entire announced stock buybacks amount even though it could take over a year to complete. The reason: there is no way of tracking completed buybacks other than by via the 10K’s and 10Q’s of all the thousands of existing buy back plans.
Our February estimate of a $12 billion float gain includes perhaps an over optimistic expectation of flat buybacks and cash takeovers vs. January; if those two categories don't start growing soon.
WITHHELD INCOME TAX GREW 7.3% PAST TWO WEEKS. CALIFORNIA ALSO GROWING FASTER.
income taxes withheld by employers and paid to the us treasury surged to a 13.5% growth rate over the same year ago week also ending on a Thursday. the two week 7.3% year/over/year pace was up from a 5.0% gain over the prior two weeks ending January 25. indeed, just counting receipts from the 1st., eight days of February this year and last, the rate of gain is a quite astounding.10.5%. recession? what recession?
ECONOMISTS GET IT WRONG AGAIN. CALIFORNIA TAX COLLECTIONS GROWING FASTER THAN EXPECTED.
we almost feel guilty picking on the economist again, but they seem to be the perfect foil since they appear to specialize in the erroneous conventional wisdom about the us economy. two weeks ago we picked on the economist for predicting a us credit crunch at the same time as there was a boom not only in price but also junk bond fund inflows and new offerings for those same high yielding pieces of paper.
in the February 10 issue, there’s a story entitled, “California on the couch.” “power cuts, the dotcom bust, a strike in Hollywood, Tom and Nicole splitting up: no wonder California is having a bout of self-doubt.”
the truth is despite the political impediments created by the Sacramento parasites, also known as elected officials, state income tax collections are still growing at a phenomenal pace. last Friday we spoke with our good friend ted Gibson, chief economist at the California finance department. ted informed us that state income tax collections during December and January grew by 16% year/over/year, vs. a 6.5% gain in federal income tax collections over that same two months. for all of 2000, California collections grew14% vs. a us gain of 8%. what’s more, he said since the middle of January, withholding is coming in ahead of forecast.
In short, ted also says he is not seeing a recession.
TRIMTABS PREDICTED 1990 RECESSION & CALIFORNIA REAL ESTATE SLUMP.
Some background about ted Gibson and our relationship might be useful. in the spring of 1990, the year trimtabs began, we were the first to recommend shorting the major California banks since we were predicting a collapse in the overheated California real estate market. (we were refugees from the east coast at the time as our NJ based real estate development business went bust in 1989 due to the RTC refusing to extend our loans nor even give us partial releases.) we first met Mr. Gibson in the spring of 1990 when he confirmed to us that the California economy particularly employment -- was growing slower than federal employment data was saying. later that year, the labor department dramatically revised downwards 1990 job growth.
now we both are on the same side again, saying there is no recession. two years from now the bureau of economic (dis)analysis will revise upwards 2000 wages and salaries and the 2000 negative savings rate will become positive, just as the 1998 negative savings rate disappeared after wages were revised upwards.
INCOME TAX COLLECTIONS SLUMP LED 1990 RECESSION. SIMILAR SCENARIO TODAY?
income taxes collected monthly between December 1989 and may 1990 grew by just 2.8% over the prior six months. income taxes were actually lower three out of those six months. then tax collections picked up, growing 6.1% between June and December 1990 just as we started the recession. tax collections then actually dropped by 1% between march 1991 and September 1991.
the S&P 500 slipped 4.2% overall between December 1989 and April 1990. over the rest of 1990, the S&P 500 rose 1.1%. between march 1991 and September 1991 the S&P 500 rose 5.9%. that might seem strong given a slump in collections, however for all of 1991 the S&P 500 soared 24.7%.
by the way, Alan green span’s federal reserve first started lowering interest rates in June 1989 and didn't stop for several years. those rate cuts sucked hundred of billions out of what were double digit interest rate small cd’s and helped jump start the surge of interest in mutual funds.
INCOME TAXES GREW 10.4% 1ST 10 MONTHS OF 2000. SINCE NOVEMBER, 6% GROWTH RATE.
a similar pattern to 1990 seems to be happening today, although from much higher income growth rates. income tax collections grew 10.6% the first 10 months of 2000. since November, the growth rate has been close to 6%. while 6% is not exactly a recession, it is down significantly from 10.6%. the magnitude of that drop has created a slump in demand for lots of hard goods. slower sales have created an inventory problem for many manufacturers who were prospering over the prior five year growth spurt.
in other words, first came the slump in incomes -- mostly due to lots less stock market gains, including option conversions. that has created a slump in certain industries. those industries have now cut jobs and production significantly. despite all those cuts both job creation and tax collections are still growing. yes, when jobs are eliminated “firing” bonuses’ boost taxes temporarily. however, steady job growth and a recent pickup in collections belies that concern. that says that we are not close to having a recession right now.
BOTTOM LINE: WE TURN SHORT TERM BEARISH. REMAIN LONG TERM BULLISH.
We break our two month streak and turn bearish, although we did turn cautious 10 days ago. The new offering calendar two European telecos, Orange and France Telecom, are raising $10 billion this week by selling stock and convertibles in the global market scares us. So does the lack of new cash takeovers. If we were to see the long expected pick up in LBO’s and other cash mergers, that could enhance the bullish liquidity picture. However, the need for cash by global telecoms could trump anything positive. portfolio managers and reported that cash positions had slumped dramatically at the end of January. The Fed rate cuts have sourced lots of buying of equities by portfolio managers. Unless the float stops growing, there will not be enough cash to not only buy the new offerings but keep the overall stock market from dropping.
Yes the economy is not entering into a recession. However, until companies stop selling billions of new shares weekly, it won't matter.
In our model portfolio we will sell our longs and go short the same number of contracts. |
