Three week lagged TrimTabs:
TrimTabs Liquidity News - Latest
Liquidity news is an edited version of TrimTabs Weekly Liquidity. It is published here at TrimTabs.com on a three week delay.
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March 29, 2004
“WHITE SHOE” CROWD CRANKS OUT $9.0 BILLION IN NEW OFFERINGS, MOST SINCE DECEMBER. INVESTORS PULL $3.2 BILLION FROM U.S. EQUITY FUNDS, PERHAPS A CONTRARY INDICATOR.
Stock market liquidity continued to deteriorate during this past week. The TrimTabs market capitalization shed nearly all of the previous week’s gains, declining 1.1% to $15.24 trillion. The estimated net change in the trading float of shares (L1) was heavily bearish for the fourth straight week, rising $6.7 billion. Over the past four weeks, L1 has risen an average of $6.6 billion weekly ($1.3 billion daily).
Despite the recent sell-off, the smartest money in the stock market—public companies and the insiders who run them—showed little inclination to buy other companies for cash or repurchase their own shares. In fact, the smart money hurried to sell fresh paper before the window of opportunity closes, and the new offering calendar ballooned to $9.0 billion. Individual investors joined in the selling, dumping $3.2 billion from U.S. equity funds. Once again, however, global funds managed a small inflow of $300 million.
With corporate selling overwhelming corporate buying by an average of $1.3 billion daily over the past four weeks, it has been no surprise that March has been unkind to the bulls. Several short-term liquidity factors, however, could spark a decent rally over the next three weeks. Still, we are skeptical that any market momentum will last for long.
CASH TAKEOVERS DECLINE AGAIN. APPLIED MATERIALS REPURCHASE MASKS LOW BUYBACK ACTIVITY.
The spike in new cash takeovers during the week ended Thursday, March 11 proved short-lived. During this past week, cash takeovers slowed to $1.7 billion (adding $225 million daily to current liquidity) from the previous week’s $2.6 billion weekly pace. Just four deals were announced, and Welsh Carson Anderson & Stowe’s purchase of U.S. Oncology for $1.1 billion accounted for two-thirds of the weekly dollar amount. Over the past four weeks, cash takeovers have averaged $2.0 billion weekly.
Just six stock buybacks for $3.9 billion ($775 million daily) were announced during this past week. A $3.0 billion buyback for Applied Materials masked the otherwise low level of buyback activity. Over the past four weeks, buybacks have averaged $2.4 billion weekly.
Despite the 6.0% decline in the net asset value of the average U.S. equity fund from Monday, March 8 through Wednesday, March 24, the house in the stock market casino apparently sees little reason to “buy the dips.” Could it be that the real “dips” are Wall Street strategists who blather about earnings and “geopolitical uncertainties” while hardly noticing all of the cash flooding out of the market?
NEW OFFERING CALENDAR EXPLODES TO $9.0 BILLION AS COMPANIES RUSH TO SELL NEW SHARES.
The new offering calendar was hot and heavy, reaching its highest weekly dollar amount since the week ended Thursday, December 11. No less than 37 new offerings for a whopping $9.0 billion ($1.8 billion daily) were announced during this past week, led by the $2.3 billion US portion on an IPO for Belgacom, a $1.1 billion convertible for Freeport-McMoran Copper and Gold, and a $1.0 billion secondary for Marathon Oil. Even XM Satellite Radio, that perennial day-trading favorite, got into the act by selling a $265 million secondary.
While it was the heaviest new offering calendar so far this year, this past week’s calendar was hardly a flash in the pan. Over the past four weeks, the calendar has averaged $7.4 billion weekly ($1.5 billion daily), and the calendar has exceeded $5 billion weekly ($1.0 billion daily) for eight straight weeks.
SLEW OF ENERGY OFFERINGS SUGGESTS THAT COMMODITY PRICES MAY BE TOPPING.
During this past week, Freeport-McMoran Copper and Gold replaced 24 million shares that it is buying back privately from Rio Tinto Ltd. with 19+ million new shares (assuming a 15% “green shoe”) by selling a $1.1 billion convertible preferred at a 40% premium to market. If Jim “Rob” Moffet can sell stock at a 45% premium, perhaps gold and copper are topping out. Indeed, many energy plays are selling massive amounts of stock at ridiculous prices. Back in the mid-1990s, our favorite short sale recommendation was Chesapeake Energy (CHK) at the mid-30s. CHK was touting uneconomic, short-lived wells in and around southern Louisiana. After a couple of years, the stock eventually cratered to the low single digits. Just this past Wednesday, CHK sold a $293 million convertible with the same guys still running the show!
NEW OFFERING CALENDAR SHOULD SLOW THIS WEEK. WE EXPECT AROUND $5 BILLION IN FRESH PAPER.
As of Friday, Dealogic reported seven deals for well under $1 billion on the new offering calendar for this coming week. While a few overnight secondaries could easily inflate this amount, we anticipate that the weekly total of new offerings will not approach last week’s $8 billion, but should still be around $5 billion. Sometimes, underwriters push to get a bunch of deals done and then have to take some time off to replenish the immediate pipeline. That could be what’s happening after last week’s supply binge, although a couple of jumbo overnights could certainly boost this week’s total back over $6-$7 billion.
Even if the new offering calendar slows during this coming week, however, we are skeptical that it will ease for long. More than $24 billion in supply remained in the pipeline at the beginning of March. Moreover, Wall Street underwriters earn most of their pay by selling new offerings at a 4% to 7% “commish,” so they will be under pressure to unload as many new shares as possible, particularly if the market breaks out of its recent funk.
WE ESTIMATE THAT INSIDERS SOLD $3.0 BILLION WEEKLY FIRST TEN WEEKS OF 2004.
Based upon reports by Thomson Financial, we estimate that all insiders—not just the top executives, board members, and major holders required to file Form 144 with the Securities and Exchange Commission—sold an average of $3.0 billion weekly ($600 million daily) during the first ten weeks of 2004.
Note that we revised our estimates of insider selling for the weeks ended Thursday, March 11 and Thursday, March 18 because Thomson Financial revised its Form 144 data. We double Form 144 filings to generate our weekly estimates of insider selling. These revisions lowered the estimated dollar amount of insider selling by $2.8 billion over these two weeks.
Earnings release season begins on Monday, April 5 and runs for three weeks. Over this period, insider selling is likely to drop to no more than $400 million daily.
INVESTORS HEAD FOR EXITS: U.S. EQUITY FUNDS HAVE $3.2 BILLION WEEKLY OUTFLOW.
U.S. equity funds had a third consecutive week of outflows. Based upon the 15% of U.S. equity funds that we track daily, we estimate that all U.S. equity funds had an outflow of $3.2 billion over the five days ended Thursday, March 25. Sometimes big outflows signal a short term trend reversal.
Once again, global funds managed a small inflow despite the outflows at U.S. equity funds. Nevertheless, this past week’s $300 million inflow was only half of the $600 million weekly average so far this year.
Bond and hybrid funds had a weekly outflow of $200 million. The past two weeks marked the first time in six weeks that bond funds have had two straight weekly outflows.
U.S. EQUITY FUND FLOWS LIKELY TO TURN POSITIVE, AND THREE WEEK RALLY COULD FOLLOW.
We expect flows into U.S. equity funds to increase over the next few weeks. While we are nearing the end of the month, when flows have historically been weakest, Thursday’s rally could prompt renewed inflows by individual investors. Even if it does not, April is historically the second biggest month of the year for inflows. April includes the beginning of the quarter, when pension fund inflows usually impact the equity markets. Also, April 15 is the deadline for IRAs and other tax avoidance investing. If the rally can last through Thursday, April 1, additional fresh cash could propel stock prices higher through the middle of April.
FEBRUARY EQUITY ETF INFLOW JUST $1.75 BILLION. ETFS NOT YET COMPETING WITH MUTUAL FUNDS.
On Wednesday, the Investment Company Institute reported that during February, the value of all exchange traded fund (ETF) shares issued exceeded the value of all ETF shares redeemed by $1.99 billion. Equity index ETFs experienced a positive net issuance of $1.75 billion, while bond ETFs experienced a positive net issuance of $243 million. The equity ETF inflow during February was roughly in line with the inflow during January. Equity ETFs are not really competing with equity mutual funds—at least not yet.
PENSION FUNDS WILL BE INVESTING LESS NEW CASH THIS YEAR.
According to the March 22 issue of Pensions & Investments, pension funds will be investing less new cash this year than last year. Apparently at least 40 of the first 175 S&P 500 companies reporting 2003 results have a pension surplus this year. If this rate holds true for the entire S&P 500, it would mean that about 110-115 S&P 500 firms will not need to invest new cash this year to “fund the gap” between the present value of current assets and future obligations.
SELLING PRESSURE HITS ALL CAPITALIZATION CATEGORIES. GOLD AND REAL ESTATE ATTRACT SIGNIFICANT INFLOWS.
Selling pressure intensified as this past week progressed, and no capitalization category was spared. The large-cap funds that we track daily (growth, value, and blend funds combined) had outflows on four out of five days. The small- and mid-cap funds that we track daily (growth, value, and blend funds combined) each had outflows on three out of five days.
Investors’ love affair with real estate continued. The real estate funds that we track daily managed a weekly inflow equal to 0.5% of the funds’ net assets despite a sizeable outflow on Thursday, March 25. As usual, investors are chasing performance. While the S&P 500 is flat so far this year, the Morgan Stanley REIT Index has surged over 9%.
The price of gold traded on the New York Mercantile Exchange rose $9.50 to $422.20 an ounce during this past week, and investors took notice. The gold funds that we track daily had a weekly inflow equal to 0.5% of the funds’ net assets.
High yield bond funds had a weekly outflow exceeding 0.5% of the funds’ net assets. As the stock market faltered, investors apparently grew skittish about assuming greater risks for higher yields.
WAGES & SALARIES DATA NOW REPORTED IN TRIMTABS PERSONAL INCOME.
Wages and salaries data are now reported in TrimTabs Personal Income, which is transmitted every Tuesday.
BOTTOM LINE: WE TURN NEUTRAL FROM FULLY BEARISH. PENSION FUND AND INDIVIDUAL INFLOWS SHOULD ACCELERATE AT BEGINNING OF QUARTER.
We turn neutral from fully bearish mainly because of seasonal factors and a pickup in equity fund outflows.
Our forecast for the daily cash flow into and out of the stock market in the coming week is hardly promising, but it is somewhat better than it has been over the past several weeks. New cash takeovers have averaged $525 million daily over the past three weeks. Arbitrageurs typically snap up two-thirds of the trading float of a new cash takeover within a week of a deal’s announcement, so we include two-thirds of this amount, or $350 million daily, in current liquidity. We estimate that stock buybacks have averaged $400 million daily over the past three weeks.
If these rates of cash takeovers and buybacks continue, corporate buying will total $750 million daily.
On the other side of the corporate liquidity ledger, insider selling had running about $600 to $800 million daily, but that should slow to $400 million or so daily with the start of earnings release season next week.. We expect the new offering calendar to cool to perhaps a $1 billion daily pace during this coming week, which means that corporate selling will total about $1.4 billion daily. Thus, we expect a roughly $600 to $700 million daily corporate liquidity gap.
The wild card is whether inflows will recover to fund this gap. Often after a big outflow period- such as the past two weeks – and if the new offering calendar subsides a bit -- the market has had a tendency to rally. Remember, April starts this Thursday and pension fund and retirement plan contributions will be boosting stocks. On the other hand, if inflows remain lackluster or the new offering calendar swells unexpectedly, the market could head south. If we weren’t a weekly, we would probably wait until Wednesday, March 31 before covering our short positions. Traders might want to take a two-week flyer and go long through April 15. After April 15 we expect the new offering calendar and, starting the fourth week of April, renewed insider selling to swamp all flows sending the market lower again.
Since we only change our model portfolio on weekends, we will cover our shorts and turn flat for two weeks.
-Charles Biderman |
