From TrimTabs.....
By Charles Biderman, TrimTabs.com
December 17, 2001
RECORD $17.6 BILLION IN NEW OFFERINGS SO FAR THIS DECEMBER. A FEW BIG NEW BUYBACKS. A JUMBO COMPLETED DEAL AND GE MAKES A BIG PART CASH BUY.
New offerings of $17.6 billion over the first two weeks of December set a record for the entire month of December, topping the $12 billion sold during all of December 1999. There will be a bunch more new offerings and even a few convertibles this week before the start of the seasonal four-five week new offerings hiatus.
Over the past fortnight, there have been less than $1 billion of newly announced cash takeovers. Corporate liquidity did improve because Nestle's $11+ billion cash purchase of Ralston Purina closed last week. In our formula, we count two-thirds of a new cash buyback when announced - due to "arbs" usually buying two-thirds of a public takeover - and one-third when the deal closes.
Over the weekend, GE did announce a takeover of Security Corp for $2.9 billion in cash, the rest stock. Is that the start of the bullish spurt in buying anticipated by those who believe the US economy is turning, or just a deal GE wanted to close before year-end?
BUYBACKS IMPROVE TO $12 BILLION BEFORE GE'S $8 BILLION ON FRIDAY. JUST YEAR END NOISE?
There was a pickup in newly announced stock buybacks to $12.2 billion that was less than meets the eye. Just two, Bank America and Sears, accounted for $9.5 billion and both are supposed to be done over the next 18 to 24 months. Another two, Bank of NY and Radio Shack, were for $1 billion. GE on Friday, besides buying Security Corp, also added $8 billion to its long term buyback program.
Our opinion is that this spike in activity is year-end related and not indicating a turn towards bullishness by corporate investors. Of course, if the burst of buyback activity broadens and there are more new cash takeovers over the next few weeks, then we will undoubtedly change our tune.
OUTFLOWS RETURN WITH NEGATIVE PERFORMANCE. WHITHER YEAR-END FLOWS THIS GO-AROUND?
US equity funds had a small $1 billion estimated outflow over the five days ended on Thursday. Global funds had much larger redemptions - as has been the case over the past few months. Given that on last Thursday, the average equity fund net asset value lost 1.7%, our guess is Friday had a hefty outflow, boosting the estimated outflow over the first half of December to around $10 billion.
Will flows improve the last half of December and in January as has been the seasonal norm? In 2001, January had a $24.6 billion equity inflow - more than the whole rest of the year. Therefore, backing out last January's inflow, the rest of this year had net outflows.
Normally, equity fund inflows slow the first few weeks of December as investors hold off until after the taxable capital gains are distributed. This year there haven't been many gains to distribute, therefore the flow pattern has probably not been affected. By the way, the ICI finally is pushing legislation to eliminate the taxation on reinvested capital gains distributions.
MOST OF NEW 2001 FLOWS WENT INTO SAVINGS, YEAR END FLOWS LIKELY TO FOLLOW & AVOID EQUITIES.
So far this year, just $20 billion or so has gone into equity funds, while over the same time frame last year equity funds got $270 billion. The remaining $250 billion this year went into buying presumably less risky assets. $87 billion went into bond funds this year vs. redemptions of $78 billion last year- although higher interest rates could rapidly increase the risk of being long a bond fund. $80 billion went into retail money funds - just over the amount that went into retail money funds last year.
The biggest gainer in 2001 has been savings accounts attracting $400 billion through the end of November vs. $115 billion last year. December is the biggest month for withheld income tax payments primarily because of year end bonuses. Will withholding slump later this month with the economy? If withholding slumps year end flows will be less. January 2001's big inflow followed a record flow year; while corporate liquidity was bullish last January.
ONLY 2 OF 4 PAST JANUARY'S UP MONTH FOR STOCK MARKET.
Up until 1998, the stock market rose each and every January since 1992. In January 1998 the TrimTabs Market Cap index was unchanged. breaking the streak. The small drop in the market during January 2000 presaged a much bigger one later that year. Despite that, Wall Street believes that the January effect is real.
Conventional wisdom says that the January effect is due to year-end tax selling of losers driving those stocks down below fair value. Then after the start of the year investors buy back those stocks.
FUNDS COULD BE SELLING GAINERS THIS YEAR-END TO LOWER BASIS AND REDUCE TAX LOSS CARRYFORWARDS.
The first part is accurate mainly after a year where investors do have profits to shelter. This year, the amount of tax selling to shield gains obviously will be less. However, mutual funds are likely to be engaged in tax selling this year for a different reason: to sell winners to reduce tax loss carry forwards.
Since mutual funds still have to distribute trading profits to shareholders - which are taxable to the shareholders - selling winners now and buying them back in January would lower the tax basis going forward. Unless of course the tax law regarding fund distributions is changed this year.
JANUARY EFFECT DUE TO SEASONAL LIQUIDITY PATTERNS.
In reality, the so-called January effect is due to two factors. First, the cessation of new offerings from Christmas through the third week of January eliminates the supply new shares. Second, December is the biggest month for income, hence the surge of cash available for investment after Christmas.
BEARISH LIQUIDITY DROVE DOWN STOCK PRICES 4.4% IN JANUARY 2000.
Except of course when liquidity is bearish in January - as it was during January 2000, or neutral, as it was during January 1998. In January 2000 there were just $2.8 billion of newly announced cash takeovers, $22 billion of new offerings and lots of insider selling of unlocked high flying IPOs. Why the market didn't crash in January 2000 was a $28 billion equity fund inflow and the addition of $15 billion of margin debt.
When liquidity is bullish in January, the reason small caps rise more than the market is due to the leveraged impact of a huge liquidity flow on those stocks with small floats. If there is lots of cash looking to buy the same number of shares, then those stocks with smaller floats are likely to experience a bigger % gain.
The bulls obviously are hoping that investors will put some of this year ends cash flow into equities. But there is no evidence that is likely, given individual behavior over the past few months. While equity funds did get a modest dose of fresh cash between November through early December, the overall equity funds inflow pace since the end of October is close to zero.
BANK BUSINESS LOANS PLUNGE $36 BILLION IN LAST 2 MONTHS - 20.4% ANNUALIZED.
Commercial and Industrial loans on the books of all US banks plunged by $36 billion from September through December 5, according to the FRB's H8. That's an annual rate of 20.4% and not conducive to an economic rebound. Have banks stopped lending, or has demand dropped? Either way, until borrowing to fund increased levels of working capital the US economy is not about to rebound.
Income and employment taxes withheld by all employers - equal to about 27% of taxable income - dropped 5.3% over the five days ended last Thursday, vs. the same five year ago days. That reverses the gain of the prior week surrounding month end. Over the past three weeks, withholding is down 0.5%.
Withholding this year is being boosted by a large number of layoffs. At large companies, layoffs are usually accompanied by several months worth of taxable severance packages. On the other hand, this year withholding rates are down all of 0.5% vs. last year due to the much ballyhooed tax cut.
Our guess is that withholding comparisons will weaken towards year end and during the beginning of January. Most employers presumably are reluctant to lay off employees around Christmas time. If that's so and this economy is declining as we expect, then weaker comparisons are likely.
BOTTOM LINE: WE REMAIN BEARISH. HOWEVER, IF CORPORATE ACTIVITY STAYS BULLISH, WE COULD ALTER COURSE.
We remain bearish and our model portfolio is starting to recoup some of the losses since the start of November. We were bearish since the start of October, missing the entire $50+ billion re-balancing into equities out of bonds pension that bulled stocks higher.
Now the markets are approaching year end when liquidity normally turns bullish. Except it wasn't so during two of the past four years.
We will stay bearish unless corporate investors turn bullish. How that would show up is:
(1) Corporate investors continue last week's spike of new buybacks.
(2) Cash takeovers come back to life.
Last week there were two new cash deals announced and two overbids. Is that the start of a trend, or just a few deals getting done before year end? In a bullish corporate scenario, cash takeovers don't stop because of year end holidays. During bearish corporate times, M&A types go on vacation. |
