TrimTabs Liquidity News - Latest
This news is an edited version of our weekly liquidity research report published on Monday.
November 19, 2001
PENSION FUND REBALANCING ADDS PERHAPS $45 BILLION TO STOCK MARKET THIS QUARTER. NEW BUYBACKS SLOW. CASH TAKEOVERS STILL NON-EXISTENT. NEW OFFERINGS KEEP COMING.
Most liquidity measures remained bearish last week except for a pop of new cash, $5 billion, into US equity funds. Liquidity, both corporate and cash flow types, have been consistently bearish since the start of October. Yet, the overall market cap rose 1.8% last week and is up $1.9 trillion, a 16% gain, from the September 20 lows. We admit to having been quite perplexed as to the source of the buying power.
We now believe that as much as $45 billion from pension fund rebalancing is the likely source of the buying power fueling the market rally. The November 12 issue of Pensions & Investments reports that since September just 11 large pension funds have already pumped $10.3 billion into the stock market. Calpers led with $3 billion, the state of Florida $1.7 billion, Washington $1.2 billion, NY $1 billion, etc. etc. etc. That issue estimates that as much as $90 billion in total is likely to flow into equities during the 4th quarter of 2001.
LIKELY MOST OF 4Q REBALANCING ALREADY DONE. HOW DO YOU SPELL LEMMINGS? MINDLESS INVESTMENT SCHEMES USUALLY LEAD TO MAJOR BUST WHEN CARRIED TO EXTREMES.
A large % of the $3.2 trillion in public and private pension funds requires rebalancing when the ratio of stocks to bonds falls. P&I quotes a Goldman Sachs report that estimates that at the end of September pension funds were between 3% to 7.6% underweight in stocks. Therefore, P&I estimates that perhaps $90 billion in stock buying is necessary. However, if bonds are sold while stocks are bought, only $45 billion is required.
From P&I: "Monica Butler, director of US consulting at Frank Russell Co., Tacoma Wash. said the 3Q equity swoon knocked most Russell clients outside their target ranges. Since then, however, she said most clients have been rebalancing back into equity ranges, particularly those with policies that require them to rebalance as soon as allocations go outside their ranges…. She said sponsors are rebalancing in part because it's a good equity buying opportunity, but also they are sticking to their optimum asset allocations over the long term. 'If you don't rebalance and the market does rebound then you're going to miss the rebound.' She said."
The 11 pension funds quoted in the story said that they had already bought the $10.3 billion in equities required for them to rebalance. If those 11 are typical of the rest of the pension fund "lemmings" then perhaps most of the buying has been done; given the herd type mentality of funds using mindless trading rules.
CORPORATE SELLERS WILL SOON SUCK ALL THE REBALANCED FRESH CASH OUT OF MARKET.
As soon as the rebalancing is mostly done, and if corporate investors continue to sell as many new offerings as there are buyers, then at some point soon, the stock market will again take a major dump. If stocks then again sell off by 20%, or $2 trillion, even if bond prices remain unchanged, then pension funds will again be unbalanced. For example, if the $3.2 trillion in all pension funds average a 50%-50% "required" stocks to bond ratio, a 20% drop in stock prices with bond prices remaining unchanged would have the following impact. The $1.6 trillion in stocks - 50% of $3.2 trillion - would drop to $1.28 trillion. If the $1.6 trillion in bonds remained unchanged, the stocks would be equal to just 44% of the total portfolio requiring further rebalancing.
The next bout of required rebalancing would then again mysteriously boost the overall market. If the overall economy has not improved at that point in time, then corporate types would be able print huge amounts of new offerings, again sucking all that fresh cash out of the stock market.
REBALANCING MAKES SENSE IN VACUUM, BUT NOT WHEN 10+% OF MARKET DOES IT TOGETHER.
Obviously pension funds are long term vehicles that should have certain rules for prudently managing the underlying assets. Making long term assumptions about debt and equity returns and therefore, balancing assets between the two classes makes sense - in a vacuum. However when 10+% of total stock market rebalances together, that has to create an imbalance.
Of course, if corporate investors turn bullish before the current rebalancing ends, then pension funds could have the best of all words. However, if corporate investors remain bearish then all the pension funds will have done is to make sure that they all have horrible returns together as they, lemming-like, go off a cliff.
US EQUITY FUNDS GOT $5 BILL. LAST WEEK. OCTOBER US EQUITY FLOW REVISED UP TO $9 BILL.
The ever rising market over the past two months finally has equity fund investors bullish again. Over the past week, we estimate US equity funds had inflows of $5 billion, while global had a small outflow. We revise October's all equity fund inflow to +$4.3 billion from a negative $3.1 billion. US equity funds received a revised estimate of $9.0 billion vs. $1.6 billion. The revision is a result of analyzing Oct. flows at Vanguard, Fidelity, Janus and Schwab.
Bond fund flows slumped last week, given the big selloff in debt instruments. If it weren't for the $844 million inflow into High Yield funds, all other bond funds would have had a $500 million outflow. Retail money funds have had $3.6 billion in outflows the past four weeks. Where'd the money go? Over $50 billion went into savings accounts between Oct. 20 and Nov. 5.
Income and employment taxes withheld by all employers slumped over the week ended Thursday, November 15 vs. the amount paid during the week ended Thursday, November 16, 2000. The main reason was that many employees who are paid twice-monthly get paid on either the 15th and 16th. Therefore, this coming week's collections, which includes November 16th, for the four days ended Wednesday - Thursday being Thanksgiving - should be higher than same the year ago four days. The real test will be how much income and employment tax collections dropped over the past two weeks combined. Our guess: -2% to -3%.
Conventional wisdom says that the US economy has already reached bottom at best, or will bottom soon. That is one of the justifications for the stock market's recent rally. We disagree.
The US economy, which may or may not have been bottoming during the 3Q, suffered a severe shock September 11. Coach potatoes hunkering down and not spending other than for bargains such as zero interest rate autos, have decimated a large portion of the US economy. That data is not yet being reflected in the official stats. Our guess is that withheld income and employment taxes will keep dropping year over year through at least year-end. Well before that the rebalanced pension fund cash will be gone, and so will the current rally.
BOTTOM LINE: WE REMAIN BEARISH. WHEN PENSION FUNDS FINISH REBALANCING, LOOK OUT BELOW.
We remain bearish. There might still be some pension funds that have not yet rebalanced their ratio of stock holdings to bonds. Our guess is that sort of buying will be finished before December rolls around.
Our bearish conviction will be strengthened if fund investors pour in lots more fresh cash over the next week. Already many sentiment indicators, such as the AAII and a recent Gallup poll, say most investors believe the market will be lots higher a year from now.
Yes the Taliban appear beaten. Even if Bin Laden surrendered tomorrow, the US economy still has to hit bottom before rising. The bottom is not likely until well into next year and won't be known until after the US economy has turned up.
TrimTabs Liquidity News Weekly Update is posted on Wednesday after the close.
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