Speaking of Fund Flows, That's What Is Bothering US Equities…
The classic market supply-demand cycle is where the market first recovers on monetary stimulation. History has shown that when the FED starts easing, a market rally almost inevitably follows. We've had the rally, but the movement from January has been less than inspiring. The bears will tell you that its because the economic recovery is smoke and mirrors, or that accounting changes because of the Enron scandal are classic signs of an ex-bubble malaise.
That may be true, but the real malaise is a supply-demand malaise.
According to Trim Tabs data, the amount of US shares available in the US market are higher than at the end of the bull market in 2000 by US$255 billion. This is because sales by insiders and new issues now overwhelm stock buy-backs, cash takeovers and investor demand. The recession has weakened corporate free cash flows, so a dearth of corporate demand for equity is exacerbating the reluctance of the investing public in the US to buy stocks. US equity funds attracted only US$82 billion since 2001, according to Trim Tabs, versus US$247 billion in 2000. Stocks in the S&P 500 now have 291 million shares outstanding, which is 50% higher than early 1999. Conversely, the trading float shrank by some US$100 billion between 1995~1999, but since has grown by some US$255 billion. Shrinking demand versus increasing supply during ex-bubble hangovers is like the liquidity Catch-22 that corporations face vis-à-vis their bankers. Firm demand for loans actually increases during an economic downturn, but that is precisely when bankers become increasingly cautious about loaning money. When the market or a stock is hot, there is unlimited liquidity. During a downturn, liquidity dries up, exacerbating the fall.
In other words, the stock market is going through an inevitable short-term liquidity crunch as the fundamentals shift from excess liquidity to an earnings-driven market. There is simply not enough liquidity available now to support stock market levels that existed during the bubble…
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