A contrary view on US stocks, personal income, etc. -
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I <energyplay> am WAY net short with lots of puts - so I look all the time for CONTRARY inofrmation that might tell me when to get out or reverse my belief.
This is the strongest argument yet for not being long term bearish on the market. There are good short term arguments, like being oversold, massiv earnings jumps, etc..
But this is THE strongest long term case I have seen.
It really concerns me.
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From SmartMoney.com -
Liquidity Theory Points to a Bull Market
By Lisa Scherzer
April 28, 2005
CHARLES BIDERMAN LIKENS his job to that of a traffic tracker — the people who fly around in helicopters, watch the flow of cars, and inform commuters of the congested highways and the roads to avoid. As president of Trim Tabs, an investment-research firm based in Santa Rosa, Calif., Biderman's eye is fixed on money flowing into and out of the stock market.
The best leading indicator of the performance of the market, he says, isn't stock valuations, earnings growth or chart patterns. It is this traffic of money, the collective actions of corporate investors — both public companies and the insiders who run them — in the stock market.
In his new book, "Trim Tabs Investing," Biderman states quite plainly: "To beat the stock market casino, invest the way that public companies and corporate insiders do." In other words, buy stocks when corporate America is buying, and sell stocks when it's selling. And right now, companies are buying shares, making Biderman a through and through bull.
SmartMoney.com recently asked Biderman why he's so bullish, and how the stock market is like a Vegas casino.
SmartMoney.com: What's behind your fundamental theory of liquidity?
Charles Biderman: With liquidity, all there is in the stock market is shares of stock and money. The stock market is supposed to raise money for industry. That money comes from people. From the individual's point of view, the stock market's purpose is to raise money from individuals, which means money is going from people to the market, to companies. It's not to give money back to the people.
So the purpose of stock market is same as a Las Vegas casino — to separate players from their money, and leave them with smiles on their faces. In a casino, the house sets rules so that you can't win. In the stock market, companies give you shares, and they say "try and outsmart us." The companies are the house. They control the number of shares outstanding. Before us , no one had ever bothered to look at shares outstanding.
From the end of 1994 through 1999, companies were net buyers of their shares, meaning they reduced the number of shares in the market. Those shares would be removed from the market, and shareholders would be getting cash. If you're an institutional investor, you'd have to buy more shares to get back in.
SM: How do you determine future direction of stocks?
CB: Our definition of a bull market is when more money is chasing fewer shares. The market tripled from the end of 1994 to the end of 1999. Starting in November and December 1999, companies began selling more shares than they were buying. At the end of 1999, we estimated $800 billion worth of shares wanting to be sold by insiders from companies that had gone public in 1998 and 1999. And there's no way that could happen. Nobody has $800 billion in cash to give them. And the market had to crack. It's pure supply and demand. The market eventually broke in April 2000. If you look at the Nasdaq and the S&P, the market broke down dramatically as we approached tax time. The week ending April 15... people sold shares to pay taxes. Seven of the last seven years, the market was up after the week of April 15.
SM: What's your current outlook for the market?
CB: Since October, over the last seven months, we've seen unprecedented buying by companies. They're buying back $2 billion a day of their own shares. There's been heavy cash takeovers, adding about $500 million to $600 million a day, and selling has been quite low, averaging $700 million a day in new offerings and $600 million a day in insider selling. Companies have been shrinking the shares outstanding. The total market value of all shares in the U.S. stock market (not including ADRs and closed-end funds) is around $15 trillion... The market's purpose, normally, is to raise money. Companies think the market is so cheap now, they're buying back shares, and at the same time people are worried. Who's right?
SM: So how do you reconcile those two occurrences?
CB: The companies are saying stocks are undervalued. In Chapter 5 of my book, I say that earnings are irrelevant. The conventional wisdom says stock prices move based on estimated future earnings. But what really counts is what companies think about their future. If they think things are going well, they'll buy shares. And if they think things are not going well, they will sell shares. And they know a hell of a lot more than portfolio managers and analysts. So I totally ignore the analyst community....
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CB: ....Our liquidity model says that when L1 [net change in the trading float of shares] is a minus, the market is bullish. When it's a plus, that's the amount of shares that were added. Now companies are bullish, and so are we.
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SM: Trim tabs also tracks personal income. Why is that an important factor in your overall analysis of the market?
CB: We track income tax collections daily. Everybody who gets a salary has their taxes paid to the government. The same day people are paid, taxes are paid to the government. That's reported everyday. It's a real-time indication of income. This gauge is telling us that wages and salaries are growing every year... Wages and salaries of the 130 million-plus Americans subject to withholding have been growing at a 7.4% year-over-year rate from the Friday after Thanksgiving through Tuesday, April 26, 2005... None of this information is being picked up by Bureau of Labor Statistics or the Commerce Department. They ignore real-time data.
There are 130 million people who have their income taxes taken out of their paychecks. If you know what their tax rate is, you know their current income. And that shows the economy is doing fabulously well. So it's not shocking that companies are buying back shares hand over fist. It wouldn't make sense if companies believed we were in a soft patch, or that the economy was slowing.
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SM: What about those "conventional wisdom" reasons for fearing that not all is well and good with the economy, like the trade deficit, the budget deficit, the dollar, increased market volatility?
CB: Yeah, but it's nonsense. Even Congress is getting it. Finally, they're realizing we shouldn't be telling the Chinese to raise the yuan against the dollar. They're providing the West with low-cost goods. Since 12% of the U.S. economy is manufacturing, you could say they're hurting that 12%. But the other 88% is benefiting. The economy is benefiting from low-cost outsourcing from India and China. The U.S. economy is growing faster than the countries using the euro — and much faster than England and Japan. And it's insane that the dollar falls against those guys. The dollar will go down against the yuan.
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SM: What do daily flows of mutual and bond funds tell you about the economy now?
CB: We also track mutual fund flows and ETF flows. Flows follow performance. Recently flows have been relatively low. There's a lot of money going overseas now because people are worried about the dollar... Over $100 billion went into equity funds in the first quarter of 2000 as the market was peaking. And people borrowed money on margin. In July 2002 — the same month that Yahoo (YHOO1), eBay (EBAY2) and Amazon.com (AMZN3) made their lows — individuals sold $50 billion of their mutual funds. That's in one month. And who was the heavy buyer that month? Companies. They bought back their stocks cheap, at the same time individuals were bailing. Individuals invest with a lot of emotion, whereas companies invest based on what's really happening.
We follow fund flows primarily to get a sense of the mood of individual investors. It's a contrary indicator at extremes; when individuals are heavily going one way, that's the wrong way to go... Over the last four months, individuals were heavily avoiding the U.S. market. Whatever they're buying, it's going overseas. |
