There are three types of people buying stocks right now. People who don't know much about the market and don't know any better. Desperate gamblers who need stocks to go up and are doubling down to make up their losses. And finally the totally insane. I have an uncle who used to be in a mental institution and once when I visited him there was a patient who told me he was a stock broker who went crazy in the 1987 crash....
This is the most alarming language I've ever seen in a trimtabs report. Remember how Maria Bartiromo used to cite them all of the time to say the market was going up. Now she never mentions it and their is no chance in hell she'll mention this one. Not fit for CNBC. And if you fit in one of the three categories I mentioned above you may want to read no further. Just go outside and bury your head in the sand or worship your Greenspan idol.
March 25th, 2002 TimTabs
TRADING FLOAT GROWS BY ESTIMATED $50 BILLION 1ST Q 2002, YET INVESTORS REMAIN BULLISH. LIQUIDITY SO WEAK THAT ANY SIGNIFICANT BAD NEWS WILL CREATE MAJOR SELL-OFF.
Corporate liquidity, the net change in the trading float of shares, turned even more bearish last week then the already low levels of the prior fortnight. New offerings sold in the US popped to $8.2 billion, somewhat less than the $10 billion we had estimated, but well above the $5.7 billion of the prior week. The reason for the shortfall: we had inadvertently included the $3+ billion of new shares sold outside the US in our estimate.
New cash takeovers and stock buybacks remain at historic low levels. Over the first 12 weeks of 2002 there have been less than $3 billion of new cash takeovers of public companies announced. Not only is that the least since we have been watching, but between January 1997 and October 2001 there have been just four individual months where there has been less than $3 billion of new cash takeover activity in one month, not three.
Stock buybacks announcements have also stopped so far this March, with just $1 billion announced during the last three weeks, the lowest month for new buybacks since early 1997 was $4.3 billion in August 2000 -- the month that the NYSE and TrimTabs Market Cap Index made their all time highs.
INSIDERS SOLD ESTIMATED $4 BILLION FIRST WEEK OF MARCH.
Insider selling, the other way besides new offerings that the trading float grows, has been rising steadily according to Thomson First Call's Paul Elliott. The most recent data available indicates that #144 sales in February totaled $4.7 billion, up from $3.6 billion in January.
Last week, a client sent us a Bloomberg item listing the top 30 insider buys and sells of February. The sells totaled $960 million while the top 30 buys were just $136 million - a 7-1 ratio. Interestingly, two of the largest buys were the two top dogs at Tyco buying a half a million shares each at $29.32. Did they pay cash, use margin debt or borrow from the company?
During the first week of March, Thomson First Call tells us that insiders required to file #144 forms with the SEC sold close to $2 billion of never before traded shares. Since there is no way of verifying the relationship between officers, directors and major shareholders sales of #144 shares and total insider selling, historically we have been doubling #144 sales to derive our estimate of total insider selling.
For the record, between 1999 and 2000 when post-IPO-lockup shares sales and option conversions were soaring, we lowered the ratio of #144 sales to total insiders to 40% from 50%. We went back to 50% in 2001.
CORPORATE LIQUIDITY -$8 BILLION 1ST WEEK OF MARCH, AT LEAST -$15 BILLION SINCE.
With the surge of insider selling, during just the first week of March corporate liquidity was negative by $8 billion, adding $4 billion of insider selling to $4.6 billion new offerings; minus the $600 million of buybacks and cash takeovers.
Compare that one week estimate of $8 billion with the $44 billion growth in the trading float for 2001. In all, during the first 12 weeks of 2002, the trading float appears to have grown by close to $50 billion. That is more than during all of 2001 and more than 1/3 the $144 billion record float gain during 2000.
While we don't have reliable insider selling data since the first week of March, the other three legs of corporate liquidity, buybacks, takeovers and new offerings, were -$11.4 billion over the past fortnight. Add in at least $4 billion of insider selling and the net negative liquidity number is over -$15 billion.
The bottom line: corporate liquidity over the first 12 weeks of this year is -$50 billion. There is no corporate buying and tons of corporate selling. Yet those that follow the conventional - and never accurate - paradigm that its all about earnings, keep buying stock.
SPECIAL REPORT AVAILABLE MIDWEEK DETAILING HOW CORPORATE LIQUIDITY PREDICTS MARKET TURNING POINTS.
We keep saying that corporate investors have been the best leading indicator of future market directions. The proof is in the historical record. We will start to aggregate all the times when liquidity did predict a market turn and will post them on our web site later this week.
LAGGING INDICATOR, EQUITY FUND FLOWS, REMAIN STRONG DESPITE NEUTRAL MARKET.
US equity funds received a healthy $4.1 billion estimated inflow over the five days ended last Thurs. That's the sixth straight week US funds have had inflows as opposed to redemptions. Global funds have not been doing as well.
Those followers of the conventional paradigm, i.e. those that believe it's all about earnings, "know" that there's a huge amount of sideline cash - owned by greater fools --waiting to rush into the market. The recent inflow has been keeping their spirits up, even though the NDX and the S&P 500 are still below their early December highs.
Historically, equity flows are a lagging indicator. When flows peak, so does the market and vice versa.
CONVENTIONAL PARADIGM: IPOS ARE GREAT FOR FLIPPING. BUYBACKS ARE JUST PR.
Last week we turned even more bearish due to the expected huge amount of new offerings led by the Travelers IPO. When several money managers were questioned on the air if they were worried about all the IPOs, they said no. Most PMs love IPOs, particularly when they can get enough of a good one to make it count.
All PMs love a free return from a good IPO. That's good for the underwriter since they make 7% on an IPO and last week great for buyers of both Alcon and Travelers who flipped them after making a 5% to 8% return.
Most PMs don't consider that a raft of IPOs and secondaries, huge insider selling, and no corporate buying is actually bad for the market overall.
Reuters carried a story this past weekend saying that while stock buybacks are down, half don't happen, and it doesn't necessarily mean anything. Of course, the Reuters reporter never bothered to check the relationship between high and low levels of stock buybacks and turning points in the US stock market. But then again, that reporter talked to those who follow the conventional paradigm.
For the record, the top market cap stocks buy back about 100% of announcements. We have checked the actual buybacks done by the top 100 market cap stocks over the past three years. The top 100, equal to about half the total US stock market capitalization, have bought back about half the buy backs announced by all companies over the prior 12 months.
Those bullish say that there are other reasons why there's few cash takeovers and buybacks. Tougher accounting is one popular excuse. So is the slump in bank lending. However, if corporate America saw a dollar that could be bought for 25¢, they would find a way.
CONVENTIONAL PARADIGM VERY BULLISH. LIQUIDITY ANALYSIS VERY BEARISH.
Most PMs now believe in their heart of hearts that the US economy has turned upwards and therefore earnings are going to increase next year over this, thereby justifying their current fully invested position. For the record, mutual funds have just over 5% in cash, an unusually low level given how far down the average former hot fund (read: Janus) is since the start of 2000. Between 1988 and 1996 mutual fund cash was never below 6% and started 1990 at 11.5%. In other words, the conventional paradigm says this is the time to be very bullish.
Liquidity analysis says just the opposite.
WITHHOLDING DROPS 4.7% PAST FORTNIGHT. CORPORATE DECLINE LEVELING OFF.
Income and employment taxes withheld from the 110+million Americans receiving salaries dropped 4.7% over the past two weeks - which includes the mid-month pay period - from the same year ago fortnight. That decline is roughly in line with what has been experienced since February.
Translated, after backing out the 4% reduction in withholding, wages and salaries subject to taxes are down 0.7%. Refunds have been helping keep after tax incomes flat, but the refund cycle ends this week.
APRIL 15 UNLIKELY TO IMPACT STOCK MARKET NEGATIVELY. COULD SEE FLOW BOOST, THOUGH.
Will income tax payments due April 15 impact the stock market this year? Upon reflection, we doubt it. During bull markets, investors want to keep as much money working as long as possible, therefore mid April saw stock sales to pay taxes. During bear markets, investors sell stocks early. Given the current bullish bent of investors, there could be some late selling. However, a pick up on inflows into equity funds is likely, if the market doesn't collapse, and could counteract any minor selling.
Margin debt at NYSE member firms, including on NASDAQ stocks, dropped to $147 billion at the end of Feb from $150 billion at the end of January. Margin debt made its recent low of $144 billion in September. The fact that it is up a bit since then is not unusual given the more rapid rise in stock prices.
Margin debt as a % of market cap is now down to 1.035%, vs. the Feb. 2000 1.52% peak. While relatively low, margin debt spent most of 1993 below 1%, and during most of the mid 1990's was just over 1.0%.
BOTTOM LINE: WE REMAIN BEARISH. VIX DROP TO BELOW 20 LAST WEEK EVIDENCE OF EXTREME BULLISHNESS.
We remain bearish. Not only is corporate liquidity at historic low levels, but bullish sentiment is peaking. The VIX dropped below 20 last week, closing at 19.65. That's the lowest reading since August 2000. Before then the VIX closed below 20 in November 1999 and during the summer of 1998 - right before the LTCM induced meltdown.
However, while the market remains vulnerable to bad news, the holiday reduced new offering calendar could help over the short term. Dealogic reports there are only a few deals currently scheduled for this week.
With next week being a holiday, it is unlikely that new offerings will be supersized then either. Add the possibility of a boost in April 15 flows, and there could be a rally due to the short term absence of negative corporate liquidity.
That is unless there is some bad news, such as discovery of some serious balance sheet related financial problems during 1Q earnings releases. |
