Donald, Trimtabs info --
Charles Biderman, TrimTabs.com
October 8, 2001
CORPORATE LIQUIDITY WEAKENS AS STOCK MARKET RALLIES OMINOUS SIGNAL. FUND INVESTORS RETURN WITH $6.4 BILLION EQUITY FUND INFLOW.
Last week’s stock market rally looked good on the surface. The TrimTabs Market Cap index has now regained 10.7% since the low reached Friday, September 17. Equity fund investors pumped in an estimated $6.4 billion the biggest one week estimated flow since May. The president proposed a $60 billion cut in income taxes. All in all, a very good week according to most conventional stock market strategists.
However, corporate liquidity (the net change in the US trading float of shares) turned negative for the first time since the week ended September 10. Not only were there virtually no new cash takeovers announced of already public companies, but both new stock buyback announcements and actual buybacks again slowed.
The most bearish sign: the convertible bond shell game has resumed big time. Four new convertibles got sold late last week for a net of $1.4 billion the first new convertibles since September 11. What’s more there’s likely to be several billion more coming soon, on top of several billion dollars of regular secondaries and IPO’s.
Corporate liquidity turned the most positive ever in September, as the trading float of shares shrunk by an estimated $52 billion. That $52 billion shrink reversed more than half the year to date share growth.
We can only track new buyback announcements not the total shares actually bought back. While there were $53 billion in new buybacks, many already existing plans were also utilized to buyback shares the first week trading resumed. For the record, our best guess is that at least 95% of buy backs announced actually do happen over time, with about 20% to 25% occurring immediately.
We estimate that about $25 billion of actual buybacks occurred, mostly the first week trading resumed. That means that the float shrink was a good deal less than $52 billion. Going forward, over time most of the balance will be bought back. That’s why we count buybacks when they are announced.
The trading float also shrinks as a result of cash takeovers of public companies. Cash takeovers have not picked up and continue to average under $2 billion weekly less than half 2000’s weekly pace.
Insider selling in August was an estimated $12 billion, based upon doubling the $6 million in #144 sales. About half of all insider selling particularly converted stock options are done under blanket authorizations. Only selling by officers, directors and principal shareholders have to be fully disclosed. We estimate that total insider selling dropped in September to $10 billion, but will pick up in October to about $12 billion.
New offerings did stop in September. Dealogic tells us that $5.8 billion of new offerings, including two $ billion plus IPOs Principal Financial and Anthem, are currently scheduled for October. After a $3.1 billion start the first four days; and given that a new convertible can be announced, marketed and sold in about a week, we would not be surprised to see new offerings total at least $15 billion and maybe as high as $20 billion this October. That could be enough to prevent any rally from lasting more than a week. Margin debt likely shrunk big time in October, although totals won’t be released until later this month.
EQUITY FLOWS BEST IN MONTHS, BUT WELL BELOW YEAR AGO POST RALLY LEVELS.
Equity funds had an estimated $6.4 billion inflow the five days ended last Thursday, after an estimated $23.3 billion in redemptions the prior fortnight.
Most of that outflow was from US equity funds. Global funds had a smaller outflow then, and having 13% of all equity fund assets, Global got 25% of the new flow. Aggressive growth got $2.3 billion fresh no surprise given the rebound in tech stocks.
While $6.4 billion was the biggest five day inflow in several months, notice that the average weekly inflow during 2000 was $5.9 billion. The obvious conclusion, new flows available for investment are not as important in predicting future market direction as is corporate liquidity.
SEPTEMBER’S ESTIMATED OUTFLOW WOULD BE NEW RECORD, TOPPING MARCH 2000 -$20.6 BILLION.
Our preliminary estimate of September outflows, currently $32.7 billion, is based upon the 534 equity funds, with 13% of all equity fund assets, tracked daily and regressed to the ICI historic mean. If our estimate is close to accurate, that would be a new one month record topping March 2000 $20.6 billion. Our final September estimate will be available mid month after Vanguard, Fidelity, Janus and Scwhab’s fund flows are available.
DOLLAR COST AVERAGING THE GREAT DEPRESSION WOULD HAVE BEEN PROFITABLE.
Mutual fund investors usually do the reverse of what’s best for making money over the longer term. After plunging in with record inflows right at the top and even after the market started its current slide, they have stopped investing when stock prices are way down. Buy high and sell low is not a good investment philosophy.
If the US economy will rebound eventually or at least within the next five years then dollar cost averaging for long term investors makes sense starting now not after the market has jumped by 25%. We went back and assumed a $1,000 monthly purchase of the S&P 500 starting the last day of 1929, when the S&P was 21.45, and coming forward for 30 years. The amazing conclusion was that even during the 10 years ending 1939, after the S&P dropped to 12.46, the $120,000 investment would still have grown by $15,240.
After 20 years, with the S&P at 16.79 -- still below the original starting point -- the $240,000 investment would have grown by $100,340. Finally, after 30 years, with the S&P at 60, the $360,000 investment would worth $1,458,690. That’s why dollar cost averaging is the long term investor’s best friend.
Withheld income and employment taxes grew by 5.1% the four days ended Wednesday, October 3 vs. the same four year ago days. That puts the four week comparative total to a loss of just 1.1% over the time span including the terror attack. However, the reasons why might just be that many of those recently laid off received hefty severance packages which are taxed when paid out.
The final numbers for September estimated taxes shows an 8.0% year over year drop. However, that might be better than expected since many NYC related tax payers now have a January 15, 2002 due date for their 3Q 2001 estimated income tax payments.
The corporate tax picture is even cloudier given the high % of large companies of all sorts headquartered in New York and the now January 15, 2002 due date for 3Q 2001 quarterly corporate tax payments.
BOTTOM LINE: WE TURN CAUTIOUSLY BEARISH FROM NEUTRAL UNTIL CASH TAKEOVERS BOOM.
We turn cautiously bearish from neutral. Last weeks rally appears to us to have been generated by Wall Street “professionals” realizing that the world was not coming to an end after the September 11 events and re-invested the money pulled out the first week trading resumed as well as by covering shorts.
After a magnificent one-week blossoming, actual stock buybacks according to trading desk sources have slowed dramatically. Further, we can't find nary a cash takeover of an already public company.
A major LBO fund principal says while his fund has 10 transactions in the works, all are for the purchase of a division of a public company, and none are for an entire publicly traded entity. Why, we asked? The top guys at beaten down tech stocks are unwilling to sell at anything near today’s price at least for now, our source says. Further, he adds, cash flow is rapidly disappearing at those companies that would be interested in selling out.
Until cash takeovers do pick up, which will only happen when corporate investors feel confident about their future, we will expect to stay cautiously bearish. We sell two Dec. S&P 500 futures in our model portfolio |
