Liquidity Update – December 2, 2002
L1 TURNING BEARISH. INSIDER SELLING DOUBLED IN NOVEMBER FROM OCTOBER. EVEN THOUGH INCOMES RISING, UNLESS CORPORATE BUYING PICKS UP MARKET SELL-OFF LIKELY.
L1, the net change in the trading float of shares, grew by $1.2 billion over the holiday shortened four-day week ended Wednesday, November 27. That was virtually unchanged from a revised $1 billion increase in the trading float the prior week. Corporate selling has been picking up while buying has slowed. Over the recent past, that is a fairly typical pattern after a hefty market rally.
We have revised upwards insider selling for the first three weeks of November to $7.2 billion, due to the most recent data from Lon Gerber at Thomson Financial. If insiders sold $2.4 billion last week, then November’s will have doubled our estimate of $4.8 billion of insider selling for all of October. That would be the most insider sales since $11.2 billion last May – which was the last time the S&P 500 was over 1000.For the record, we double insider intentions to sell (form #144) since in reality only major office and share holders are required to file #144s.
HOW FAST WILL THE NEW OFFERING CALENDAR BOUNCE BACK? COULD BE HUGE STARTING LATER THIS WEEK.
There were $1.3 billion of new offerings sold last week, the least amount since the first week of October. That was not unexpected given the Thanksgiving holiday. Dealogic tells us that there are only two small deals currently on the calendar for this week. However, since it takes less than 48 hours to bring to market a whopping secondary, we have no idea how big the new offering calendar will actually be this week.
Our guess is that it could be huge for two reasons. First, there are only two more weeks before Christmas after this. Starting Xmas eve, the new offering calendar takes a three to four week holiday. Therefore, there is considerable pressure both on companies who need fresh cash to fix their balance sheets as well as on Wall Street underwriters to bring in fees to ensure a decent year- end bonus. Second, given that insider selling has blossomed at the same time as corporate buying has slowed, we would not be surprised to see a boost in the sales of new shares simply because many stocks have soared over 50% in the just the past two months.
CORPORATE BUYING HAS SLOWED DRAMATICALLY THE PAST FORTNIGHT.
Corporate buying slowed last week, but that could be mainly due to the Thanksgiving holiday. However, unless corporate buying picks up, and quickly, there won’t be enough cash available to absorb the expected new offerings onslaught. Last week, there was just one new cash takeover and eleven small buyback announcements.
We do know that there is a relationship between corporate buying and selling. When selling is heavy buying is light, and vice versa. A pickup in insider selling usually happens at the same time as a pick up in new offerings.
Unless there are some big new cash takeovers and/or stock buybacks announced Monday morning our best guess is that buying will remain light, and therefore selling this rally is the way to go.
US EQUITY FUNDS LIKELY HAD NOVEMBER INFLOW, ENDING $90 BILLION OUTFLOW STREAK.
L2, flows in an out of US equity funds, were -$5.7 billion over the four days ended last Wednesday. Global funds also had hefty redemptions of $2.9 billion. For all of November, except for the 29th, US equity funds had a small outflow. However, given that on last Wednesday the net asset value of the average US equity fund rose 2.6%, the biggest one-day gain in over a month, we would expect a very large Friday inflow.
Therefore, we estimate that November saw the first US equity fund inflow since May. Between June and October US equity funds had $90 billion in outflows. Remember, L2 is a contrary indicator at extremes. Thus, we expect to see decent inflows to start December.
CASH LEVELS AT US EQUITY FUNDS ROSE $4 BILLION IN OCTOBER DESPITE $7.5 BILLION OUTFLOW.
Apparently US equity fund managers did not believe the 6% rise in the average US equity fund in October was real, because they sold more shares than was necessary to meet the $7.5 billion in net redemptions. Cash levels rose to $110 billion from $106 billion at the end of September. Cash as a % of assets dropped to 4.77% at the end of October from a revised 4.89% (from 4.81%) at the end of September.
We had been worried that US equity fund managers had bought the October rally and therefore were extremely short of cash going forward. Obviously we were wrong. The recent rally was most visible in depressed tech stocks –the ownership of which was the main reason many US equity funds have performed so horribly over the past three years. Apparently fund managers took the opportunity to get out of their losers. Want to bet that many of these same PM’s end up buying back those same stocks at much higher prices in January?
ACTUAL BUYBACKS AT TOP 100 MARKET CAP ROSE DURING 2Q & 3Q.
Actual stock buybacks at the top 100 market cap stocks rose to almost $31 billion during the 2Q and 3Q of 2002 from a low of $23.8 billion during the 1Q of 2002. We don’t know which month the buying started during the 2Q, but would guess June since that’s when buyback announcements picked up.
The market cap of the top 100 stocks at the end of Sept. was $5.3 trillion, just under half the $10.9 trillion market cap of all listed US stocks. In order to estimate actual buybacks in a quarter, simply doubling the top 100 would be too high, given that the best performing companies are in the top 100. Therefore, we multiply actual buybacks by 1.8 to estimate total buybacks. Notice that total announced buybacks over the past eight quarters are roughly equal to the estimated amount of all buybacks.
That proves, at least to us, that most buybacks get done and that while new buyback announcements are not directly correlate to actual buybacks, the trends are similar.
US PRE-TAX WAGES & SALARIES GREW 2.1% LAST FIVE WEEKS. FASTEST SINCE AUG. 2001.
Withheld income and employment taxes were down 0.9% over the past five weeks, when compared with the year ago five weeks. We are using a five week comparison this week to balance out all the various calendar quirks that prohibit reasonable weekly comparisons for the past four. Thanksgiving this year and last were in different weeks. Also, the four week ago period had the first day of November this year, but in the year ago fifth week.
Since withholding tax rates are down about 3% year over year due to last year’s tax cut bill, a 0.9% decline in withholding translates into a 2.1% gain in US pre-tax wages and salaries. The last time that pre-tax incomes rose by more than 2.1% was a 3.3% gain in August 2001 – the month before 9/11.
PACE OF US INCOME GROWTH LIKELY TO KEEP INCREASING THROUGH MIDDLE OF NEXT YEAR.
Obviously a good reason for the gain is that the year ago period was depressed. However, the stretch of year over year increases started this July and that was versus fairly healthy growth rates last summer. What’s more, not only are the year over year rate of gain in US wages and salaries rising, but new weekly unemployment claims are dropping to levels not seen since before 9/11.
BOTH NON-FINANCIAL COMMERCIAL PAPER & C&I LOANS UP LATEST WEEK, SAYS FED.
Corporate borrowing seems to be improving, although perhaps not declining would be a better way to look at it. Recently there’s been a spate of ink talking about the rise in commercial paper over the past three months.However, all that gain was due to financial commercial paper – not industrial. Non-financial commercial paper as of November 27was at $160.7 billion, up all of $2.8 billion from month end October. Given that commercial paper seems to shrink at month end, then bounce back the next day, this coming week’s total should be significant.
Also, in the most recent Federal Reserve H8 report on bank lending, Commercial and Industrial loans grew a modest $2.7 billion in the week ending November 20 – the first weekly gain in over a month. While it is too soon to say that corporate borrowing is growing, that corporate borrowing has stopped declining is indeed important.
BOTTOM LINE: WE TURN CAUTIOUSLY BEARISH FROM CAUTIOUSLY BULLISH. THE PROBABLE SPIKE IN CORPORATE SELLING OUTWEIGHS IMPROVING ECONOMY FOR NOW.
We turn cautiously bearish from cautiously bullish. The reasons are quite simple. Corporate selling has been ramping up and corporate buying has slowed with the recent rally in stock prices.
What’s more there’s a three week window starting now for companies to sell as many new shares as they can until the new offering window shuts for about three to four weeks starting the day before Christmas and running through at least the second week of 2003.
A healthy correction over the next few weeks would set up a likely strong year-end rally when new offerings cease the day before Christmas. Remember, starting in December and running through early next year, tons of dollars are showered on the equity markets. At least that has been the case in the past.
Given that the US economy is improving, we would expect corporate buying to pick up if indeed there is a healthy downside correction over the next few weeks.
Even though the stock market has been up all but one of the past 15 December’s (the S&P 500 was down 2.2% in December 1996), a decline the first three weeks of the month followed by a year end rally is not unusual.
In our model portfolio we will sell our three S&P 500 futures and short three of the same.
MUTUAL FUNDS FLOW FOR NOVEMBER 29, 2002
ALL EQUITY MUTUAL FUNDS: INFLOW $6.3 BLN; NAV DOWN 0.1%
US
FLOW: INFLOW $5.0 Bln
BREADTH: POSITIVE 35 IN VERSUS 21 OUT
NAV: DOWN 0.2%
INT'L
FLOW: INFLOW $1.3 Bln
BREADTH: POSITIVE 29 IN VERSUS 2 OUT
NAV: UP 0.8%
#VALUE!
L1: NET FLOAT ON NOVEMBER 29 $300 MLN
NEW ANNOUNCED CASH TAKEOVERS: $0 MLN
COMPLETED CASH TAKEOVERS: $0 MLN
NEW STOCK BUYBACKS $0 MLN
NEW OFFERINGS: $0 MLN
INSIDER SELLING $300 MLN
L2: US EQUITY FUND FLOW $5038 MLN |
