Trim Tabs: Corporate Investors Stay Bearish
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individualinvestor.com
(10/19/01)
Charles Biderman, TrimTabs.com
Corporate liquidity weakened considerably last week as new offerings rose to $3.9 billion and both new cash takeovers and stock buybacks were less than $1 billion combined. Despite that gloomy picture, the overall market cap rose 2.1% to $13.8 trillion. The three-week gain of $1.4 trillion just about equals the market-cap loss suffered the week ending September 20, which was the first week trading resumed.
Liquidity determines whether the market rises or falls over the longer term. Short term, market psychology is more important. The week after trading resumed Wall Street professionals -- many of whom either saw the devastation first hand or personally lost friends and associates -- panicked. By last week that panic attack seemed to be over. Now that Wall Street is pretty much back to where it was before September 11, until corporate investors turn bullish, there is no new money to take prices higher.
FUND INVESTORS STARTING TO COME BACK IN SIZE
U.S. equity funds received an estimated $2.4 billion over the week ended last Thursday and $7.2 billion over the past fortnight. That sounds like a decent inflow. However, U.S. funds got an estimated $5.3 billion on just one day, Thursday, October 11, while global funds got an estimated $2.1 billion that day.
Thursday's flow followed a 2.3% Net Asset Value gain on Wednesday. What's interesting is that on Oct. 1, following a 2.2% NAV gain, U.S. equity funds received only an estimated $1 billion of fresh cash.
Bond funds had small outflows last Wednesday and Thursday as bond prices dropped the prior two days. High-yield funds continue to have redemptions, $132 million last week and $700 million the past fortnight.
Answer: There's A Huge Pile of Sideline Cash Waiting To Buy Stocks. Question: What Do The Bulls Say When They Are Fully Invested?
Last week was the first time in quite a while that we heard Wall Street talking heads say, "There's a huge pile of sideline cash waiting to buy stocks." These delusionals think that the $1 trillion in retail money funds, $1 trillion in institutional money market funds and $1.2 trillion in bond funds are just sitting there waiting to go into the stock market. Not that any of that money ever was in the stock market before.
The last time we heard that refrain was in late spring -- just before the market plunged. In other words, the only reason Wall Street traders are looking for someone with additional buying power has to be because those self-same traders are already fully invested.
The truth is retail money funds this year have had inflows no bigger than the year-to-date inflows of a year ago. Yes, institutional money funds did have big inflows this year. That is corporate money looking for a higher yield than offered by commercial paper. That inflow has nothing, repeat nothing, to do with potential flows of new cash for the stock market.
Flow follows performance, except when fear is paramount. So far this year, $318 billion has poured into savings accounts, up from $110 billion over the same year-ago stretch. Much of that flow is after tax savings flows looking for safety rather than money market yields.
The best example of buying high and selling low occurred right after the October 1987 market crash. Between October 1987 and December 1988, fund investors redeemed $21.2 billion from equity funds, a whopping 10.9% of total assets. That would be the equivalent of a $400 billion outflow today.
Yet, the S&P 500 (AMEX: $SPX - Quotes, News, Boards) rose 19.5% between November 1987 and December 1988. Why? Over that same 14-month time frame, there were $102 billion in cash takeovers, $60 billion in stock buybacks and just $16 billion in new offerings. In other words, corporate investors were wildly bullish.
WITHHOLDING SLUMPS AFTER FORTNIGHT GAIN DUE TO SEVERANCE; INCOMES IN TROUBLE
Income and employment taxes withheld by employers slumped by 0.9% over the six days ended October 11 this year, versus the six-day period a year ago. That slump comes after two weeks of hefty gains following the terrorist attack. Our take on what that means is that the prior two-week gain was mostly due to hefty severance packages given to laid-off workers. Now that post attack lay-offs are mostly done, incomes are down.
Our guess is that the year-over-year decline in incomes will accelerate before bottoming out, hopefully by the end of the year. Income growth had been slowing even before September 11. The slump in economic activity has to hurt overall incomes, turning comparisons downward.
Another reason incomes are down this year is due to the plunge in option conversions versus an estimated $200 billion sold between January and October 2000. Since option conversions slowed dramatically starting in November 2000, that will help comparisons this winter.
BOTTOM LINE: WE TURN BEARISH FROM CAUTIOUSLY BEARISH
We turn fully bearish from cautiously bearish. Corporate investors are not buying shares, at the same time as the new offering calendar is surging. That says that corporate investors do not yet see a bottom to the current economic decline and are unwilling to use up cash to buy stock at this time. They would rather be selling shares now to raise cash. So would we.
The "crowd" of Wall Street traders can be herded by emotion. The fear following the terrorist attack created a one week 12% plunge in stock prices. Now that Wall Street no longer believes the world is coming to an end, they bought back the shares they sold.
That puts everything back to where it was in early September, except that there are now fewer people working and less business activity. In early September, corporate investors were bearish and after a brief spike in buybacks to support the overall market, corporate investors have returned to a bearish stance.
Not only have Wall Street traders apparently reinvested the cash raised during the post terror week, but fund investors have finally gotten bullish again, pumping in a hefty $7.4 billion in one day -- the biggest one day flow in months. Inflow spikes usually happen at a market top.
Charles Biderman, a former Associate Editor at Barron's, founded TrimTabs Investment Research in 1990. It is the only independent research service that publishes daily in-depth coverage of stock market liquidity and mutual funds flow. TrimTabs products are used principally by money managers, mutual funds, hedge funds and Wall Street market strategists. |
