Trimtabs rundown on liquidity--i remark that Trimtabs had been bullish for a short period of time because of the stock-buyback rate--but that you will see has dropped in a major way
This news is an edited version of our weekly liquidity research report published on Monday.
November 26, 2001
CORPORATE LIQUIDITY WEAKENS FURTHER. $5.6 BILLION HOLIDAY WEEK NEW OFFERINGS. NEW BUYBACKS SLUMP. FUND INFLOWS SLOW. PERSONAL INCOME DOWN 1.0% SINCE SEPT.
Corporate liquidity, the most important liquidity indicator, slumped mightily last week. $5.6 billion of new offerings poured out of underwriters despite the fact that most of Wall Street left on Wednesday. No surprise 58% of the new offerings, $3.3 billion, were convertibles - where institutional buyers do not have to put up any cash via short selling. By comparison, between August and December 1998 - when the stock market plunged from August until early October, there were just $26 billion in new offerings, for a $1.2 billion weekly rate.
The cash portion of newly announced takeovers of public companies again was less than $1 billion. Indeed, unless there's a big new cash takeover announced this week, this category will set a two-month low not seen since 1995. In November and December 1998, cash takeovers averaged over $3 billion weekly.
Even new stock buyback announcements - which set an all time one month record in September at $54 billion - were only $1.3 billion last week. Since the start of October new buybacks have averaged $4.4 billion weekly. In 1998, between August and November new buybacks averaged $5.5 billion weekly, 22% higher.
INSIDER SELLING REBOUNDING, BUT DATA CONFUSING DUE TO WASHINGTON MAIL PROBLEMS.
Insider selling rebounded in October. One survey we saw reported that insider selling tripled in October vs. September. Another service was suspicious of the insider sales rate in October and November since mail delivery of required #144 forms to the SEC in Washington DC has slowed for obvious reasons.
In September there were $2.7 billion in share sales by insiders required to file #144 forms with the Securities and Exchange Commission. A triple would be $8 billion monthly. We have been estimating that all insiders sales are about twice #144 sales. Therefore, two x $8 billion = $16 billion in monthly selling by all insiders. Divide that $16 billion/4.4 weeks per month = a $3.6 billion weekly sales rate.
TRADING FLOAT GREW $14.5 BILLION PAST FORTNIGHT VS. $50 BILLION YEAR-TO-DATE GAIN.
The trading float of shares, what we call corporate liquidity, grew by $14.5 billion over the past two weeks. That assumes that insiders sold $3.6 billion in new offerings each week and that newly announced stock buybacks is roughly equal to the actual amount of outstanding shares bought back by companies. The above number also assumes that new cash takeovers reduces the trading float the week they are announced.
That $14.5 billion compares with our estimate of $50 billion in the growth of the trading float so far this year; and a $144 billion trading float gain during all of 2000. By comparison, the trading float shrunk steadily starting in 1995 through October 1999 - except for 1997 when it was unchanged.
US EQUITY FUND INFLOW SLOWED LAST WEEK. HOWEVER, BIG MONDAY FLOW EXPECTED. GROWTH & INCOME FAVORED. HIGH YIELD FLOOD OF FRESH CASH COULD MEAN TOP.
US equity funds received about $600 million over the four days ended last Wednesday. Since global had an estimated $1.9 billion outflow over those same four days, all equity had an estimated $1.3 billion outflow. The most conservative sector, growth and income - primarily value & index funds - got all the fresh cash. Aggressive Growth and Growth had estimated outflows.
Even bond funds had redemptions last week given the 1.1% drop in average bond fund net asset value. How many of the $81 billion in bond fund buyers this year realize that if interest rates go up, the principal value of their funds could plunge?
Flows into High Yield funds slowed recently after they received an estimated $1.2 billion the prior week and a half. The High Yield funds we track daily have $21 billion in assets. All High Yield funds had $95 billion in assets at the end of September according to the ICI. A $1.2 billion flow over a week and half is equal to $47 billion annualized. That could mean that individual investors again are signifying a market top in the high yield market by buying heavily.
According to various sentiment indicators reported weekly in Barrons, individual investors have become more and more bullish over the past few weeks. At the same time, Ameritrade (www.ameritradeindex.com/amtd.html) reports its customers turned bullish for the first time starting last Tuesday and bought consistently through last Friday. Therefore, we would expect a hefty Monday inflow into equity funds. If so, that could also be another indicator of a market top.
CONVENTIONAL WISDOM SAYS BULL MARKET HAS STARTED. WE DISAGREE.
Conventional wisdom --- based upon leading indicators that have worked in the past -- says that the US economy is rebounding. One of the key leading indicators is that a new bull market has started. We agree that in the past that has worked - but not this time.
We disagree that a new bull market has started as well as that the US economy has hit bottom.
At prior market bottoms, corporate investors were heavy buyers. Currently corporate investors are heavy sellers. The only buyers we can find are pension funds rebalancing and hedge funds speculating.
COMMERCIAL PAPER DOWN $200 BILLION YTD. INSTITUTIONAL FUNDS UP $330 BILLION YTD.
Other leading indicators that might have been accurate past predictors but are flawed today include the pop in the Federal Reserve's monetary indicators, M2 and M3. M2 is soaring because individuals are not investing in equity funds, just $32 billion YTD vs. $270 billion YTD a year ago. Rather, individuals are pumping after tax income into savings accounts, $344 billion YTD vs. $103 billion YTD last year.
M3 is rising due to plunging short term interest rates and the drop in commercial paper. When the Fed cuts short rates, yields on institutional money market funs lag the decline in commercial paper and treasury bills. Also, there's been an absolute decline in commercial paper outstanding, down $200 billion since the start of this year to $1.33 billion currently. Commercial paper outstanding is not included in any of the M's. Yet when commercial paper drops, those funds have to go somewhere.
Another false leading indicator is auto sales. Reportedly, at the bottom of prior recessions auto sales picked up. However, the pickup in car sales this time has more to do with the deflationary cut in auto prices - via 0% interest on most car loans - than a real pick up in final demand.
The jury is obviously still out as to what kind of Christmas retailers will experience. If incomes keep dropping, even if only by 1% to 2%-- what we expect -- then retail sales will be down a bit to flat at best.
Income and employment taxes withheld by all employers over the three days ended Tuesday, November 20, 2001 rose 25% over the amount reported the three days ended Tuesday, November 21, 2001. That almost compensated for the prior week's 14.7% plunge. However, combining the last two weeks, withheld income and employment taxes are down 1.5%. That is consistent with the four week moving average, which is down 1.4%.
The October Monthly Treasury Statement reports that withheld income and employment taxes received in October rose 2.9% from the amount collected in October 2000. However, there was one extra day this October, a Wednesday. The average Wednesday collection is about $5 billion. Reducing the $116.2 billion by $5 billion, makes for a 1.5% year over year decline. That -1.5% is within 0.1% of the last four week moving average - which includes mostly November data. In other words, it can be said that withholding has been down by about 1% to 2% since the start of October.
For the record, year over year withholding rates are down by about 0.5% due to the tax cut. Therefore, reduce withholding by 0.5% to determine pre-tax income.
BOTTOM LINE: WE REMAIN BEARISH. HISTORICALLY, WHENEVER MARKET GOES OPPOSITE CORPORATE LIQUIDITY, BUBBLE BURSTS BIG.
We remain bearish. The bulls say because the stock market is rising, we are therefore both in a bull market and the economy has bottomed. We disagree.
Corporate investors are bearish and until they turn bullish, at some point soon this stock market bubble will burst. Individual investors are just now starting to get more bullish. Yet, all the rebalancing by pension funds is winding down.
Over the next four weeks underwriters will work real hard to sell as many new offerings as possible before the month long corporate finance hiatus starts at Christmas.
Historically, stock market liquidity turns extraordinarily bullish at year-end. Taxable income spikes at the end of December due to bonuses, etc., and there are no new offerings for at least a month. Will that bail out investors this January? We doubt it, unless there is a pick up in both corporate liquidity and taxable income.
If the year end flows keep going into savings accounts and institutional money funds while the US economy keeps dropping , that can mean only one thing - we are becoming just like Japan.
trimtabs.com |
