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TrimTabs Mutual Funds Flow News - Latest
July 9th, 2001
Equities Lose $3.6 Billion; More Outflows On the Way. Turnaround In Junk Bond Flows.
U.S. equity funds had redemptions estimated at $2.9 billion in the two business days ending Thursday, July 5, for a monthly rate of -$30.2 billion. With Int'l funds losing $770 million, outflow from all equities was $3.6 billion, even before fund holders had time to react to Thursday's plunge.
Domestic breadth was negative as 41 managements lost cash, while 11 were flat and 25 had inflows. Aggressive Growth lost $1.4 billion, while Growth & Income outflows were $255 million. All sectors except Energy saw declining NAVs. Tracked Technology funds lost $139 million, or 0.2% of assets, their second triple-digit loses in the past eight periods. Emerging Growth funds had a small inflow.
Int'l NAVs fell by 2.5% vs. a domestic decline of 1.4%. Breadth was negative as 22 managements had outflows, while 11 were flat and 8 got new cash. Worldwide lost $21 million. Europe funds lost a modest $4 million, or 0.4% of assets, as NAVs dropped by 4.4%.
Bond and hybrid funds took in $461 million; Hybrid lost $31 million. The Gov't/GNMA sector took in $98 million.
High Yield got $100 million, for a full-week inflow of $292 million. The reason such an abrupt turn in sentiment towards junk is not clear. NAVs rose by 0.2% in the five days ending Thursday, while the peak rate of decline was during the five days ending June 20, when NAVs dropped 3.5%.
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TrimTabs Liquidity News - Latest
July 9, 2001
LIQUIDITY REMAINS IN BEARISH TERRITORY, EVEN WITH NEW OFFERING HIATUS. BULLISH MYTHS OF "SIDELINE CASH" & "HISTORIC SUMMER RALLY" BEING EXPOSED.
Liquidity stayed negative last week primarily due to the cancellation of UAL’s $4.2 billion cash purchase of US Air. Without the cancellation, liquidity would have been modestly positive but certainly not enough to stop the end of week sell-off. There was one decent size cash purchase - Earthgrains for $1.6 billion.
US equity funds had modest estimated outflows over the four business days ended Thursday. The new offering calendar slowed as just $44 million were sold during Monday to Friday of last week. Stock buybacks slumped, but should pick up as the earnings season is almost here. Insiders continue to sell many more shares than they are buying. While the overall sales pace appears down, the ratio of sells/buys is still at record highs.
Bullish stock market strategists first erroneously were pointing to the huge pile of sideline cash as a reason to expect a strong rally. We debunked that over the past few weeks. More recently they predicted a summer rally based upon how strong a month July is historically. Yes, in the past, but not since 1996 when the last bull run began. The S&P 500 has been down four of the past five July¹s and three of the past five August¹s.
EQUITY FUNDS DROP 75%. CASH T/O’S DOWN 59% IH 2001. JUNE NEW OFFERS UP 67&
Stock market liquidity was quite bearish in June, which continued the negative trend of the first half of this year. Academics have proven that equity fund flows both follow and predict performance at the same time. A falling stock market hindered inflows, down 75% between January and June this year vs. the same year ago six months. At the same time, less inflows meant less cash with which to pay for all the convertibles and other offerings sold over the first half.
We had thought earlier in the year, before corporate income tax collections plunged, that new cash takeovers would surge, particularly with the rule change eliminating amortization of good will. Never happened. New cash takeovers during the first half were down a whopping 59%.
Also bearish, new stock buy back announcements dropped by 25%. Considering that stock prices are lots lower now than last year, bulls had been hoping for a pickup, not a drop, in buy backs.
Sellers, both insiders and companies themselves, are still there. Dealogic (CommScann¹s new name) tells us that while new offerings sold during the 1H were down 15%, in June, new offerings sold rose 67%. This week, the current calendar is under $500 million and about $3 billion for all of July.
5.1% US EQUITY FUND CASH LOWEST SINCE SEPT. 2000. OUCH!
Cash as a % of US equity assets stayed at 5.1% in both April and May. How can anyone point to 5.1% as a harbinger of potential sideline buying power? That¹s the lowest ratio since September of last year, and we all know what has happened to the stock market since. While actual cash at US equity funds rose in May by $2 billion, the cash hoard has dropped $56 billion, or 22%, since the peak at the end of October,
We’re amazed that fools continue to believe that the huge flood of cash into institutional equity funds this year, as short rates plunged, meant anything other than rates drop slower at money funds. However, now that money fund rates, at 3.5%, are less than the 3.75% on new commercial paper, the flows are reversing. The big flows this time, are to savings accounts offering higher yields than money funds-- $150 billion year-to-date.
FLOW PACE DROPPING AS FUND INVESTORS APPEAR TO BE LOSING INTEREST.
Flows were neutral over the past week or so. There was a pickup a week ago Wednesday, following the post rate cut rally. However, inflows quickly turned to redemptions when the rally fizzled.
We could still be underestimating inflows as there does appear to be surge of interest in small caps and small cap funds. However, the money flowing into small caps will not impact the major averages, since all the indices are market cap driven. In other words, breadth could improve but the indices drop.
The Federal Reserve¹s H6 showed that while retail money funds lost $8 billion around June 15 tax payment time, savings accounts lost $50 billion. Savings are up $150 billion ytd and funds $37 billion.
WEEKLY WITHHOLDING KEEPS GROWING AT 4%+ PACE. CORPORATE STILL PLUNGING
Liquidity theory starts with the thesis that understanding the economy leads to understanding the equity markets. However, the pitfall for many is using government agency statistics, such as the BLS monthly employment report and BEA national income accounts. Why?
BLS & BEA DATA BASED UPON PRE-INTERNET METHODS OF ANALYSIS.
Those data series were initiated before the onset on the internet world. Daily data on income, both corporate and individual is now available via daily individual and corporate income tax collections. Obviously withheld income and employment taxes now due immediately after each pay period are a real time correlate for individual income. Indeed, the BEA uses income tax collections as a basis for their national income accounts. However, they use two and three year old "final" data to make current estimates, rather than today¹s data. Why not use current data?
What they have told us is the current data is unreliable, in that it gets revised and the components of income are not certain until after all the related income tax returns are analyzed. Our response is the trend in collections is much more important in the real world, than whether the actual rate of gain was 4.3% or 4.6%.
PERSONAL INCOME, NOT INCLUDING OPTION SALES, GROWING 6+% Y/O/Y.
All that said, US personal income subject to taxation is still growing nicely. The 4% to 4.5% rate of growth since February, has understated the true gain by about 2%. Why? Last year¹s income through August included about $10 to $20 billion monthly more from option conversions than this year.
However, while personal income is growing nicely, corporate income is plunging. The period surrounding the June quarterly tax payment says that corporate income taxes paid fell 27% -- a much bigger rate of decline than the 7% drop over the first five months of this year. That income plunge might not be due to less actual recurring income, rather to charges and writeoffs related to excess capacity.
WHAT % OF THE $1+ TRILLION RAISED BY CORPORATE AMERICA SINCE 1997 WILL BE WRITTEN OFF?
Over $800 billion was raised in the US equity markets since 1997 by corporate America, and that does not include many hundreds of billions of debt. How many of those billions went to fund unneeded internet related businesses and beaucoup broadband capacity?
That extra capacity is right now being cut. The real cutting appears to have just started as the V shaped economic turnaround prayed for by those overextended is obviously not occurring particularly in the tech sector. Indeed, lenders and equity holders will not permit the rest of the cash on hand at many a losing venture to be burnt off, and instead will move to foreclose and effort to get back as much as possible.
Therefore, our guess is that over the next few months, there will be several huge corporate busts, casting lots of fear into the financial markets. At that time, we would expect to see bargains of the decade available for purchase at your local stock market.
What’s equally amazing is that this bust will occur while the non-corporate economy continues to steam ahead, growing quite nicely. Where¹s the new money being generated going if not into the stock market? It appears to be going into homes, cars and good living.
ACTUAL PRIVATE PAYROLLS GREW 2.2 MILLION SINCE MARCH & 801,000 IN JUNE. SEASONALLY ADJUSTED PRIVATE PAYROLLS DROPPED 350,000 SINCE MARCH & 138,000 IN JUNE.
Only on Wall Street is a seasonally adjusted bogeyman more feared than reality. We have read lots of reports about Friday¹s BLS labor report. Not one mentioned the huge difference between seasonal and not seasonal. They all had lots of gloomy, hand wringing stuff to say about all the poor souls who¹ve lost their jobs.
Except that in reality, over 800,000 more people worked at non-government jobs in June than May. Based upon some sort of seasonal data from the past, 939,000 jobs would¹ve had to have been added for job growth to be 0. Last July 2000, during vacation time, not seasonally adjusted private jobs dropped all of 30,000 while seasonally adjusted rose 151,000. It will be interesting to see what the drop off in not seasonally adjusted is this July whether it is less than the seasonal expectation and therefore creates a big boom in phony job growth. If so, we can predict the analysts all saying basically the same thing: the Fed¹s rate cuts are now working.
Seasonal adjustments are necessary. However, how do we know if the BLS seasonal adjustment is valid and based upon the current internet economy and not the vestiges of a manufacturing based business model? The BLS can¹t have included in their model the millions of self-employed, "1099" workers, many of whom are thriving currently. Given the slump in seasonally adjusted payrolls combined with the steady growth of personal income, our guess is that the BLS model is so unreliable as to be a detriment rather than a help.
MANUFACTURING JOBS DOWN 4.1% SINCE JUNE 2000 PEAK.
There is no question that corporate America is slumping. Not only are corporate tax collections plunging, but even "not seasonally adjusted" manufacturing jobs are down 755,000, or 4.1%, since peaking in June a year ago. However, manufacturing jobs in the US, at 17.9 million, are just 15.9% of all non-government workers. Add to those manufacturing workers, 2.2 million computer related service type employees, and all manufacturing plus high tech jobs equals just 17.8% of the US non-government workforce, or 20.1 million. For whatever it is worth, the total number of government jobs at the end of June was 20.8 million.
For various reasons we back out government workers from our analysis. Actual government jobs fell by 2.13 million between May 2000 and August 2000; and rose 1.79 million between August 2000 and May 2001. The seasonal adjustments for government workers are probably quite accurate. Which is to be expected. To repeat, we also believe that the BLS seasonal adjustment for non-government is flawed beyond use.
BOTTOM LINE: WE REMAIN SHORT TERM CAUTIOUS AND LONGER TERM BEARISH.
We remain short term cautious and longer term bearish, unchanged over the past week. The big sell off on Thursday and Friday was the result of all the negative liquidity generated over the prior two months.
However, it is unlikely that there will be much of a new offering calendar this week given the recent plunge combined with many PMs and underwriters taking last week off. Therefore, we would not be surprised to see a decent rally by mid-week.
Unless there is a change in corporate investors, we would recommend using any rally to sell equities. We fully expect a retest of this April’s lows this summer.
TrimTabs Liquidity News Weekly Update: Every Wednesday after the close.
Archive of TrimTabs Liquidity Reports (Monday Edition) written by Charles Biderman. |
