May 20th, 2002
FLOAT SHRINK ACTIVITY IMPROVES A BIT - BUT NOT ENOUGH TO MATTER. NEW OFFERINGS SOAR TO $5.4 BILLION - BEFORE OVERALLOTMENTS. HUGE OFFERINGS WEEK AHEAD.
Corporate liquidity, L1 - the net change in the trading float of shares - continued on its bearish path last week, at -$3.3 billion, which was roughly equal to the prior week. Last week's market pop had more to do with the extremely bearish sentiment that had built up during the stock market drop from a market cap of just over $15 trillion at the end of March to just under $14 trillion at the end of last week, than with liquidity.
There were some positives on the float shrink side of the equation. Sears announced the $1.9 billion cash purchase of Lands End, the largest new cash takeover since Shell's purchase of Quaker State back in March. However, so far this May new cash takeovers are $2.7 billion, just under $1 billion weekly and down from already low March-April totals. Completed cash takeovers popped to $3.2 billion, the biggest GE's purchase of Security Capital for $2.9 billion. That was the most completed cash takeovers since the week ending Feb. 21.
There were 16 new stock buyback announcements last week for $1.5 billion. That compares with a similar 16 announcements the prior week for $1.7 billion. Indeed, going back over the past five weeks and including IBM's $3.5 billion, new buyback announcements have picked up to just under $2 billion weekly. That's a significant improvement from the less than $1 billion weekly pace of March through mid April, but still less than half the $4.8 billion weekly average of 2001.
CASH TAKEOVERS & BUYBACKS HAVE TO CONSISTENTLY TOP $8 BILLION WEEKLY TO END BEAR MARKET.
Combined, new stock buybacks of close to $2 billion per week over the past five weeks, plus new cash takeovers of around $1 billion totals just $3 billion of weekly float shrink activity. Compare that $3 billion with a just under $8 billion average for float shrink activities during 1999, the last year L1 was bullish. During 1999, our estimate of insider selling and new offerings was just over $6 billion weekly, The difference was about $1.5 billion weekly for all of 1999. No surprise then that the stock market rose sharply across the board that year.
INSIDER SELLING AT SAME PACE NOW AS IN 1999. NEW OFFERINGS MUCH HIGHER.
Insider selling back in 1999 - before spiking upwards during 2000 and 2001 -- was roughly at the same $10 billion monthly pace as it is today. New offerings currently are averaging around $5 billion per week, significantly more than the $3.5 billion of 1999. Therefore, in order for L1 to turn bullish, unless new offerings slow dramatically, float shrink activity would have to again average $8 billion weekly.
WHENEVER MARKET RISES, NEW OFFERINGS SURGE - COMPANIES STILL NEED CASH.
Earlier last week, L1 turned bullish for two consecutive days - the first time that had happened in several weeks. Then an avalanche of new offerings buried that bullish trend. Last Friday, May 10, Dealogic had estimated that about $2 billion or so of new offerings were scheduled for the week ended May 16. Since there were many offerings sitting of the shelf, or even some new ones that could go immediately since many companies had fresh March quarter financials, the total amount popped to well over $5.4 billion.
The biggest was a $1.9 billion secondary for Accenture. Other large deals included $1 billion as the US tranche of the British Sky Broadcasting offering, a $545 million secondary for something called Willis Group and around $300 million each for iStar Financial and AMN Healthcare Services.
This week, Dealogic says that there are a huge 26 deals for over $3 billion already scheduled. The largest are a $150 million EON Labs IPO and a $350 million convertible for Toys R Us. Given the likelihood of more offerings not currently on the calendar, the potential new offering calendar is again likely to top $1 billion daily.
WE HAVE BEEN UNDERSTATING NEW OFFERINGS DUE TO NOT COUNTING GREEN SHOE 15%.
We have inadvertently been undercounting new offerings this year by about 15%. The reason, most deals come with an underwriters 15% over allotment - called the "green shoe". Since most get filled, we have been undercounting actual cash leaving the stock market. What's more we have noticed that our historic data on new offerings for 2001, at $235 billion, is about 25% less than what Dealogic currently says were sold in 2001. Since our historic data came from Dealogic, we are checking the discrepancy.
SPIKE IN NEW OFFERINGS SAYS CURRENT RALLY JUST TEMPORARY.
The stock market always fluctuates. One reason is psychological. Over the recent past, whenever investors have gotten very bearish - regardless of the underlying liquidity -- the market has usually rallied. Similarly, whenever investors became aggressively bullish - again despite the underlying liquidity -- the market slumped. The length and duration of the bounces and dips are determined by liquidity. In other words, liquidity will determine if the market ends up higher or lower after a series of ups and downs.
Currently the market is rallying after individual investors, as evidenced by the AAII weekly survey, became very bearish two weeks ago. While individuals are slightly less bearish, our guess is that just for sentiment reasons this rally could last a while longer.
However, given that corporate investors are using any opportunity to dump huge amount of shares, at the same as corporate buying remains well under the necessary rate of buying to shrink the float, this rally has to end badly for the bulls.
STRONG SMALL CAP & VALUE FUND INFLOWS BOOSTING OVERALL TOTALS. GROWTH HAS OUTFLOWS.
Equity funds had small estimated outflows of $2.7 billion over the week ended last Thursday. US equity funds had less than half the overall outflow.
Since bond prices have been falling lately, our estimate is that $3.6 billion has been redeemed out of bond funds over the past fortnight. Even retail money funds had a hefty outflow last week, reversing the prior week's inflow. During April, our current guess is that equity funds had an inflow of about $10 billion, all into US funds. Small cap and value funds had inflows, while growth and just about everything else had outflows.
Of the four largest fund families only one, Vanguard -- the second largest with $293 billion in assets, had April inflows of $1.8 billion. The other three, Fidelity with $423 billion in assets had $723 million of outflows. Janus, with just $90.5 billion left, had $1.1 billion of redemptions and MFS, with $47 billion, had $459 million in outflows.
During April Schwab customers bought $734 million of US equity funds, down from $1.9 billion during March. Remember, April was a lousy month for the market. All the new money went into small cap and value.
WITHHOLDING DROPS 5.1% LATEST WEEK. YEAR/OVER/YEAR INCOME DROP NOT APPRECIATED.
Withheld income and employment taxes collected during the week ended Thursday, May 16 were 5.1% lower than the amount collected the same five year ago days covering the mid-May pay period. Indeed, adding in the beginning of May pay period and withholding over the past few weeks is down 4% year over year.
Since payroll tax rates are down by 4%, that means wages and salaries are flat year over year. If wages and salaries aren't growing, and incomes subject to other income taxes has been plunging lately, then what about the supposedly strong consumer? The myth of the consumer in our opinion is just that, a myth.
WALL STREET'S MAGUFFIN: GOVERNMENT MONTHLY NUMBERS. WALL STREET BULLS BELIEVE THAT BEA, BLS & CENSUS REPORTS REAL, NOT FICTIONAL DEVICE.
Every Alfred Hitchcock movie has a "maguffin" that has to be believed in order for the movie to make sense. Maguffins aren't supposed to be looked at too closely, or else the viewer will scoff. Similarly, every report coming out of Washington these days is a "maguffin", a fictional device meant to make the economy look better - at least to the bulls.
Don't look too closely, or else the magic will disappear.
BOTTOM LINE: WE STAY BEARISH. NEW OFFERINGS SOAR WITH ANY RALLY.
We remain bearish and will sit on our hands, even though we expect the stock market to rally over the short term. The reason, when the rally ends - assuming L1 remains bearish - the downside will be sharp and swift. Therefore, we are not inclined to trade rallies when corporate liquidity is as bearish as it is.
The bulls like what the BEA, the BLS and the Census Dept has been telling them lately. As long as they keep listening, and don't bother to look behind the surface numbers, then they are likely to keep on getting run over by the stock market.
_____________________________________________________________
If someone asks me for the link, "Go find it yourself"...
Chispas |
