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Commentary Features: Charles Biderman: Liquidity Problems Lurk in the Background
By Charles Biderman
Special to TheStreet.com
11/4/97 3:01 PM ET
Stock market liquidity last week was negative for the third week in a row. Equity fund inflows were a surprisingly light $1.3 billion for the week. We were first surprised that the two-day -- Friday to Monday -- outflow from domestic equity funds was only $700 million. We are even more surprised that the three-day inflow -- Tuesday to Thursday -- was only $2 billion. If the huge turnaround on Tuesday could only generate a net flow of $1.3 billion for the week, then this market is in big trouble.
The cause of the "big trouble" globally is negative liquidity. As we have been saying, the worldwide new offering calendar since Labor Day has sucked an amazing $60 billion in cash out of the world's equity markets -- $30 billion in the U.S. and $30 billion elsewhere. Most of the global deals were privatizations -- Germany, France, Italy, Spain, Russia and China all sold off billions in new paper this fall. Indeed, Oct. 15, the day the $5 billion China Telecom deal was priced, was the day the Hong Kong market started the global decline.
What's most amazing is that the huge market drop last Monday only stopped the new offering calendar for one day. Over the next two days -- deals priced Tuesday and Wednesday eve -- took away $2.3 billion from U.S. investors. For the week as a whole, over $3.5 billion in new offerings were sold. (Before, our new offering data has been provided by Securities Data. We will be adding other sources to get a more complete list of deals.)
The last time that the market had three weeks of negative liquidity was from the end of November through early December 1994 -- when the S&P 500 was at 450 and the Trim Tabs Market Cap of all U.S.-traded stocks was just over $5 trillion. Those three bad weeks for liquidity actually made that market bottom.
The main difference between then and now was that corporate investors in the fall of 1994 had just turned wildly bullish. In the fall of 1994, corporate investors started buying back their own shares and started announcing many huge cash takeovers of public companies. Last but not least, the new offering calendar in December 1994 was all of $4 billion for the month -- an amount equaled just this past week.
This time around we don't think that three negative weeks of liquidity will be the bottom for this correction.
The reason: Corporations and countries privatizing are selling record amounts of new offerings; insiders are also selling record levels of shares and converted options; and perhaps most importantly, the pace of newly announced cash takeovers has slowed in favor of stock takeovers.
Other investor indications of extreme bullishness include that the number of small-cap Nasdaq issues sold short compared to average daily trading dropped to 0.78% in mid-October from 1% in mid-September. The last time that the Nasdaq bulletin board stock short interest ratio was this low was at last June's small-cap bust.
Also bearish -- cash levels at domestic equity funds, at 5.16%, hit another 20-year low at the end of September, down a tad from 5.18% at the end of August. Absolute cash levels did rise by $4 billion in September. We wonder if most portfolio managers added or spent cash last week.
Bottom Line: Investors did not add liquidity to this market last week -- despite all the anecdotal evidence to the contrary. Our guess is that foreigners and insiders were the big sellers last week and portfolio managers and the little guys were buyers. If that's so, then the next downturn in the U.S. stock market could be quite deep.
Cash flowed into U.S. equity funds at a slow $5.8 billion monthly rate last week. While that's low, it's still lots better than the huge outflows continuing from global and bond funds. |
