TRIM TABS.COM LIQUIDITY NEWS
Mon Feb 26th 2001
WE TURN CAUTIOUSLY BULLISH FROM OUTRIGHT BEARISH. LIQUIDITY IMPROVING.
CASH TAKEOVERS & NEW BUYBACKS TOP $8 BILLION. NEW OFFERING PIPELINE SLUMPING.
We see enough signs of bullish liquidity to become cautiously bullish instead of outright bearish, even though overall liquidity was negative $4.6 billion last week and has been for three out of the past four weeks. Primarily, corporate investors, always the best leading indicator of future market direction, appear to have started buying shares again at the same time as the new offering pipeline has finally started to slow.
The cash portion of newly announced takeovers came back to life last week at $4.3 billion vs. an average of $1.4 billion over the prior four weeks. Europeans were two of the bigger buyers, perhaps shorting the falling Euro. Potentially more important, Efficient Networks a tech stock -- is being bought for $1.5 billion in cash the first multi billion cash takeover in tech. What’s more, of the three $1+ billion stock buybacks announced last week, Sun Micro’s for $1.5 billion just might be another sign that tech is bottoming.
EQUITY FUNDS HAVE $12.7 BILLION ESTIMATED OUTFLOW LAST TUES. TO THURS. CAPITULATION?
After three straight weeks of stocks getting pummeled, fund investors headed for the exits, as an estimated $12.7 billion left equity funds over the three days between last Tuesday to Thursday. Global funds, on a % of assets basis, did worse than US, accounting for 32% of the redemptions.
Retail money funds did the best, receiving $8.8 billion over the week ended last Wednesday. Bond funds did have a positive flow, continuing the trend.
Historically, fund investors bailing big time has been an excellent indicator of a stock market bottom. That is another reason we have turned somewhat bullish this week.
SMALLEST NEW OFFERING SCHEDULE SINCE MID JANUARY.
New offerings all but one were secondaries or convertibles were a still hefty $3.1 billion last week. However, that was the slowest week in the last four. Going forward, the pipeline is looking a bit bare. CommScan tells us that there is less than a billion dollars scheduled for this week. While many a secondary can be done virtually overnight making new offering schedules meaningless, this will be the first week since mid January that the schedule itself is below $1 billion.
Obviously the steady downward trend of stock prices over the past three weeks appears to have finally dulled buyer’s appetites. The collapse of the wireless world is also reducing the calendar going forward. Most of the really big offerings planned for 1Q 2001 had to do with paying for 3G licenses and build out. With the value of 3G now in question, many of those offerings are currently not saleable.
DOWNTURN SOLELY IN THE NASDAQ. NYSE COMP DOING JUST FINE.
The retest of December’s low has driven the TrimTabs Market Cap index to $15.4 trillion, just over December’s low of $15.2 trillion. The index, made up of all US domiciled publicly traded stocks on the NYSE, NASDAQ and AMEX, is down 19.4% from the end of August $19.1 trillion peak. However, while the NDX (NASDAQ 100) is down a whopping 56% from its 4704 peak set last March 27, the NYSE Composite is down just 8% from its 677 peak set at the end of last August. In other words, the NYSE and NASDAQ have diverged into new economy and old economy standards. The Big Board stocks, with $11.9 billion in market cap, are hanging in just fine. An 8% down draft is nothing, considering the 250% gain since the end of 1994.
SOME TECH WRECKS ARE BECOMING CASH TAKEOVER TARGETS.
On the other hand, those former NASDAQ favorites whose soaring prices from 1997 through early 2000 created a vast investment mania have plunged so far as to where some have become attractive cash takeover targets. Yes lots of former tech favorite still has more to go on the downside, some all the way to zero. However, many of the lower tier tech stocks that actually generate hefty free cash flow are quite oversold. That’s where we would tell stock pickers to go look for rebound candidates.
FLOWS INTO M2 ACCOUNTS SOARS AT 22.3% ANNUAL PACE SO FAR THIS YEAR.
Most of the new savings generated so far this year has gone into savings as opposed to equity funds. For example, equity fund inflows dropped to $20 billion the first eight weeks of this year vs. $67 billion last year. On the other hand, $100 billion went into a combination of bank savings accounts, small denomination CDs and retail money funds over the first six weeks of this year vs. $80 billion the same six weeks of 2000 the most recent data available on all savings, according to the Fed’s H8.
WITHHOLDING SURGES MAKING UP FOR SLUMP, NOW UP 8.5% PAST FORTNIGHT VS. 7.3% PRIOR.
WE AGAIN SAY SLOWDOWN IN GROWTH RATE OF INCOMES ENDED IN JANUARY.
Income taxes withheld by employers surged 38.5% over the four-day holiday week ended Thursday, February 22 vs. the same year ago holiday week. That one week spike gain more than made up for the 17.2% year over year drop the prior week. The combined gain year over year gain over the past two weeks was 8.5%, up from a 7.3% rate of gain the fortnight between January 26 and February 8.
TAXABLE INCOME GREW 6.8% NOVEMBER - JANUARY Y/O/Y VS. 11.8% AUGUST OCTOBER.
IF WITHHOLDING IS A LEADING INDICATOR, FEBRUARY’S 7.9% PACE SAYS ECONOMY ON THE MEND.
Revised US Treasury Data from the Monthly Treasury Statement says that income taxes withheld this January were 18.2% higher than in January 2000. However, since this January had two more weekdays than did the prior year, compensating for December 2000 having two fewer weekdays than December 1999, the two months have to looked at together.
That said, the growth rate for the two months December and January 2001 vs. December and January 2000 was 6.4%. The rate of gain for the three months between November 2000 and January 2001 was just 6.2%. While 6.2% is not anything close to a recessionary pace, never the less, a 6.2% growth rate was 43% less than the 10.9% year over year pace between the prior three months, August - October 2001.
ECONOMIC DOWNTURN CREATES ITS OWN MARKET MANIA CALLED FEAR.
The growth rate in Other Income Not Withheld, which during all of 2000 included about $120-$140 billion in capital gains, slumped by 38% during the November January quarter from the August October stretch. “Withheld”, “other” and all employment taxes combined have averaged about 28% of total taxable income. Translated, that says the growth in taxable income during the November January quarter was just 6.8%, a whopping 43% decline from an 11.8% growth rate the prior three months.
A 43% decline in the growth rate in incomes certainly can feel like a recession, even though incomes are still growing. The main reasons for the slump was the Negative Wealth effect, particularly the slump in option conversions. We estimate that about $300 billion of options were converted and sold during 2000. The current annualized pace of option conversions has slumped to maybe $100 billion. After deducting the exercise price and incomes taxes that mostly are withheld by employers the day exercised, options created about $150 billion of income during 2000 vs. 1/3 that pace currently. Add to that $100 billion annual drop in current incomes, the loss of $3 trillion in market cap of NASDAQ stocks, and thousands of formerly wealthy high tech employees now feel broke, regardless of their true economic picture.
If high tech executives and employees now feel lots poorer, than one would guess that their demand for high tech products has to slump. Undoubtedly, the high tech work force both for home and office -- has to be the biggest customer of high tech products.
Other than high tech, given the rebound in the income tax collection growth over the past month, the overall economy apparently has adjusted to the prior three month slump and is slowing coming out from under. It probably will take another few weeks before the evidence of the rebound makes it to conventional wisdom.
BOTTOM LINE: WE TURN BULLISH AS CORPORATE INVESTORS & INCOME GROWTH TURN POSITIVE.
We turn bullish after having been bearish since the end of January. Last week, we said we would revisit our bearish stance if cash takeovers and stock buybacks topped $8 billion, particularly if it looked as if new offerings were slowing. Both happened this past week. Add a healthy dose of capitulation by fund buyers and a pickup in income growth we now expect a decent rebound.
One caution, our liquidity signals sometimes are early and sometimes they are not.
We will cover our shorts and go long 3 March S&P 500 futures and 3 March NDX
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