Trim Tabs on three week lag:
Liquidity news is an edited version of TrimTabs Weekly Liquidity Research. It is published here at TrimTabs.com on a three week delay.
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November 10th, 2003
L1 TURNS DECIDEDLY BEARISH THIS WEEK. NEW STOCK BUYBACKS SLUMP TO $722 MILLION. INFLOWS REMAIN STRONG, BUT GLOBAL FUNDS APPARENTLY SUFFER FROM MUTUAL FUND UPROAR.
The outlook for the stock market deteriorated during this past week. The net change in the trading float of shares (L1) turned bearish again, rising $5.6 billion. L1 growth has not been stronger in nearly two months, when it grew $6.0 billion during the week ended September 11.
The modest decline in the net float during the week ended October 30 appears to be an aberration rather than the beginning of a trend. If L1 continues to grow at this past week’s pace or accelerates over the next few weeks, the stock market bubble may burst sooner rather than later.
CASH TAKEOVERS DECLINE TO $2 BILLION FROM $6.5 BILLION LAST WEEK, BUYBACKS PLUMMET TO $722 MILLION.
Five new cash takeovers were announced during this past week, the largest of which was Teva’s purchase of Sicor involving $1.1 billion in cash. The remaining four takeovers were micro-caps. At $2.0 billion, this week’s takeover activity was well below last week’s $6.5 billion.Nevertheless, this week’s activity was stronger than all but two weeks during September and October. Last week, we expressed doubt that a new boomlet of cash takeovers was beginning. This week’s activity appears to support our view, although we will need to see a few more weeks of data to be sure.
Just five buybacks for $722 million were announced. This total is the lowest level of buyback activity since the week ended October 2, when $548 million of buybacks was announced. Obviously the “house” in the stock market—public companies and the insiders who run them—does not see many reasonable values at these prices.
NEW OFFERINGS SURGE TO $5.7 BILLION, MOST SINCE WEEK ENDED SEPTEMBER 25.
New offerings are surging once again. During this past week, eighteen deals for $5.7 billion were announced, led by a $900 million secondary for Newmont Mining. This amount is the highest since the week ended September 25, when a massive $10.6 billion in new offerings was announced.
According to Dealogic, nineteen new offerings worth $2.8 billion are scheduled for this coming week, led by a $605 million secondary for Ameritrade. The online brokers appear eager to cash in on this bubble even if their customers remain oblivious to it. Of course, overnight deals could boost the amount of new offerings, since less than half of recent new offering activity has appeared on the calendar at the beginning of the week.
We are wondering if the new offering calendar will continue to expand or if this week’s amount is the highest level that new offerings will reach during the next several weeks. If new offerings increase much more, we will turn bearish.
NET FLOAT HAS BALLOONED ESTIMATED $77.3 BILLION SINCE APRIL 2003. HOW LONG WILL GREATER FOOLS SURVIVE? THE BUBBLE INFLATES WITH STRONG GROWTH IN BOTH NET FLOAT AND MARKET CAPITALIZATION.
Due to scant corporate buying and massive corporate selling, the net float (L1) increased an estimated $77.3 billion from the end of April through the end of October. During the same period, the market capitalization of all U.S.-based companies rose nearly $3 trillion, from $11.6 trillion to $14.5 trillion. When the market capitalization continues to rise rapidly after the net float surges, one can be reasonably certain that a bubble is forming.
Individual investors continue to chase the rally. U.S. fund flows (L2) have remained above $12 billion monthly for the past seven months, and they have held above $15 billion monthly for the past five months. While this year’s peak monthly inflow into US equity funds—$19.1 billion—occurred in July, our preliminary $15.6 billion estimate for October was likely light by half based upon the past four month relationship between our preliminary estimate and the final ICI reported total. In other words, our best guess is that October’s US equity fund inflow was just over $30 billion.
In September, a decline in margin debt at NASDAQ member firms offset an increase in margin debt at NYSE member firms. Thus, margin debt declined in September by $880 million. We do not know if the drop in NASDAQ margin debt was due to a drop in debt to purchase stocks or a drop in debt to purchase bonds, but we will attempt to find out. Significantly, margin debt has risen $15.3 billion so far this year. Margin debt is on track to increase for the first year since 1999.
NEW CASH TAKEOVERS PICK UP, NEW BUYBACKS REMAIN FAIRLY STEADY.
New cash takeovers reached $8.0 billion in October, the third-highest monthly total this year and a significant increase from activity in August and September. At $41.7 billion, the year-to-date total of new cash takeovers is nearly double the $22.6 billion year-to-date total at the same time last year. Figures for new stock buybacks are not quite as encouraging. In October, $11.8 billion of buybacks was announced, only a slight decline from the $13.2 billion of buybacks announced in September and from the monthly average so far this year. Yet the year-to-date total is only barely larger than the year-to-date total at this time last year.
LACK OF NEW SHARES AVAILABLE TO BURST STOCK MARKET BUBBLE.
Several clients have asked us why we remain cautiously bullish while contending that the stock market is a growing bubble waiting to burst. Our answer is simple. So far, layoffs in Wall Street corporate finance departments have prevented the sale of enough new shares to burst the bubble. Yet if the net float (L1) continues to increase by amounts equal to or greater than this week’s gain, this situation might change. Nevertheless, we believe that December will be the earliest time that enough new shares could be printed to burst the bubble.
STALE PRICE TRADING ALLEGATIONS PROBABLY SPOOKED GLOBAL FUND INVESTORS.
Reports of late trading and market timing at mutual fund families such as Strong and Putnam have unnerved individual investors. Global funds are most amenable to market timing, so it is reasonable to assume that individual investors are primarily responsible for outflows at these funds.These outflows also may be due, however, to hedge funds and other market timers exiting global funds to avoid publicity and regulatory scrutiny. In any case, we will be observing global fund flows closely during the next several weeks to gauge the impact of the recent mutual fund allegations. Significantly, this week’s $2.5 billion inflow at bond funds was nearly 50% higher than the average weekly inflow so far this year. Perhaps investors sought shelter from the mutual fund controversy in bonds.
WAGES AND SALARIES ROSE 3.3% LAST TWO & FOUR WEEKS.
Accounting for the impact of the 4% cut in tax rates effective July 1, 2003, wages and salaries subject to withholding grew by a respectable 3.3% over the past fortnight and 3.3% over the past four weeks. The year over year rate of growth has been consistent at just over under 4% for the recent past.
CORPORATE INCOME TAX COLLECTIONS INCREASED 15.1% LAST SIX MONTHS.
Wages and salaries subject to withholding comprise about two-thirds of what the Bureau of Economic Analysis (BEA) terms personal income. The remainder of the BEA data should be disregarded. After adjusting for the cut in tax rates effective July 1, 2003, withholding has increased by 4.4% over the past three months. However, $2 billion of the gain, or 0.6% was due to a month end October calendar quirk – which reduces the year over year rate of gain to just under 4% -- as we reported above below the weekly chart.
In April 2003, corporate income tax payments began to rise consistently year-over-year. Corporate payments have increased 15.1% during the past six months from the same period a year ago. This data supports the view that the economy is recovering, but we remain skeptical that the economy will grow anywhere near enough to justify recent increases in the market capitalization.
SAVINGS AS PERCENTAGE OF MARKET CAPITALIZATION AT 42.0%, LOWEST LEVEL SINCE JUNE 2002.
Earlier this year, savings balances increased in due to $8 billion to $10 billion per month of mortgage refinancings, hefty flows into bond funds and no new money into stocks Since that time, savings balances have declined steadily for a variety of reasons. First, interest rates on savings balances remain extremely low. Second, rising mortgage rates have choked off refinancings. Third, the stock market has rebounded.
Cash in all savings vehicles—retail money market funds, under-$100,000 bank certificates of deposit, bank savings accounts, and all bond funds—has reached its lowest level relative to market capitalization (42.00%) since June 2002 (40.80%). By comparison, the recent peak percentage was 54.76% at the end of March 2003. Much of the cash leaving savings vehicles is finding its way into the stock market.
BOTTOM LINE: WE REMAIN CAUTIOUSLY BULLISH. WE WILL TURN BEARISH WHEN NEW OFFERINGS RAMP UP FURTHER.
We remain cautiously bullish, but we are prepared to shift our stance if new offerings accelerate from current levels.
This week saw strong growth in the net float, low levels of new stock buybacks, and an active new offering calendar. None of these developments bodes well for the stock market. Yet barring a steady drain of cash through new offerings, the lemmings apparently will continue running toward the edge of the cliff.
This bubble will burst when new offerings increase sufficiently to suck all of the cash from the checking accounts of portfolio managers. When new offerings build to roughly $7 billion weekly and the upcoming new offering calendar looks crowded, we will turn bearish.
-Charles Biderman |
