Three week lagged Trim Tabs:
November 17th, 2003
WE TURN NEUTRAL AS NEW OFFERING CALENDAR & INSIDER SELLING REMAIN STRONG. CASH TAKEOVERS DECLINE TO $254 MILLION. MONEY POURS INTO U.S. EQUITY MUTUAL FUNDS.
The outlook for the stock market continued to deteriorate during this past week. The net change in the trading float of shares (L1) remained bearish, rising by at least $3.0 billion during the week ended Thursday, November 13. We say at least $3 billion because we expect that our preliminary $2 billion estimate for insider selling during the week ended November 13 will be revised upward at the end of this week. Indeed, the slump in stock market performance during this past week was probably due to the huge amounts of cash leaving from corporate selling.
While the net float has increased significantly during the past fortnight, it still may not be enough to burst the stock market bubble any time soon because individual and pension fund investments into equities remain so heavy. Yet if growth in the net float accelerates over the next few weeks due to further increases in the size of the new offering calendar or if something deemed “bad news” by the stock market hammers stock prices for a few days and thus reduces inflows, this situation could change.
Given the uncertainties and growing risk, we will turn neutral for now.
CASH TAKEOVERS DECLINE FURTHER TO JUST $254 MILLION, DOWN FROM $2.0 BILLION PRIOR WEEK.
Only three new cash takeovers for just $254 million were announced during the past week, the largest of which was the purchase of Cotton States Life Insurance by Country Life Insurance & Financial Services for $134 million. The largest takeover of this past week, RR Donnelley & Sons’ purchase of Moore Wallace for $2.8 billion, was an all-stock transaction, and we continue to expect far more stock deals than cash deals in the near term. Cash takeover activity confirms our earlier view that no new boomlet of cash takeovers had begun. In fact, the exact opposite is occurring, as cash takeovers have declined sharply over the past two weeks.
BUYBACKS SPIKE TO $4.1 BILLION, LED BY BUYBACKS FOR 3M AND MEDTRONIC.
Stock buyback activity was far more positive than cash takeover activity. During this past week, fourteen new buybacks for $4.1 billion were reported. Two of these buybacks—a $1.5 billion buyback for 3M and a $1.4 billion buyback for Medtronic—were substantial. This level of activity is a dramatic improvement from the prior week’s $722 million. We will be interested to see if it persists.
NEW OFFERINGS POUR FORTH AS INSIDERS BAIL OUT OF STOCKS.
On the other side of the liquidity ledger, new offerings continued to surge, much as we had expected. During this past week, no less than 31 deals for $5.5 billion were announced, led by a $705 million semi-private placement for Fieldstone Investment Corporation. Over the past three weeks, new offerings have averaged over $5 billion weekly, and it looks as if the new offering calendar could build even further. The consistently large size of the new offering calendar as well as the substantial increase in the number of offerings getting done each week are the major reasons that we are turning neutral this week.
Based upon reports by Thomson Financial, we estimate that all insiders—not just the top executives, board members, and major holders required to file Form 144 with the Securities and Exchange Commission—have sold more than $2 billion weekly during each of the past four weeks. We could, however, be underestimating insider selling because most of the past week’s largest non-convertible new offerings consisted of insiders bailing, and we do not believe that these sales show up in Form 144 filings. For example, all of the $600 million of Ameritrade shares sold last week were for insiders. Thus, insiders are not only selling individually, they are selling en masse through new offerings and paying a 3% commission to do so.
Dealogic reports that 24 deals for nearly $3 billion are scheduled for this coming week. The largest of these offerings is a $310 million initial public offering for Pinnacle Airlines. Obviously overnight deals will significantly boost the already active new offering calendar.
WE REVISE OUR LIQUIDITY METHODOLOGY FOR “BUBBLES AND BOTTOMS.”
As we explained in this past Wednesday’s Overnight Update, we are currently revising our liquidity methodology. Instead of always holding that L1 leads the market and L2 lags the market, we will divide the markets into “normal markets” and “bubbles and bottoms.”
During normal markets, L1 is the leading indicator, while L2 follows and indicates turning points at extremes.
During bubbles—which occurs when L1 remains consistently bearish even as the stock market continues to rise—we will compare L2 to L1 to determine if enough new cash is entering the market not only to “fade” corporate selling but also to boost overall stock prices further. For example, from November 1999 through April 2000, L1 was heavily and consistently bearish, yet the market continued to rise.Obviously heavy inflows from individual investors, as well as margin buying, more than compensated for corporate selling. Yet when as much as $100 billion in stock had to be sold in early April 2000 to pay various kinds of income taxes, the bubble popped, and prices began tumbling. We previously explained this situation by arguing that while L1 is a leading indicator, it could lead the market by as much as six months at extremes.
At market bottoms, L1 shrinks, but the market continues to drop or stays relatively flat because the amount of cash leaving the stock market exceeds the amount of corporate buying. This situation occurred from July 2002 through March 2003. Beginning at the end of June 2002, L1 began to shrink. Yet the stock market stayed relatively flat, despite significant volatility, through March 2003.
EQUITY FLOWS REMAIN STRONG SO FAR DESPITE LACKLUSTER STOCK MARKET.
Despite the lackluster performance of the stock market over the past few weeks, equity flows have remained strong. Most of the new cash is flowing into small- and mid-cap stocks, either through mutual funds or directly, which may outperform big-caps going forward because small- and mid-capitalization mutual funds and individual buyers of such stocks do not participate in the new offering calendar.
Investors remain extraordinarily complacent. The CBOE Volatility Index stands below 17. As the TrimTabs Macro Economic Update reported this week, the AAII eight-week moving average of bullish sentiment is holding steady at 57%. It has remained above 55% for the eighth week in a row, the longest period that it has done so since December 2000. A major down day or two could send stock prices sharply lower over the near term and end the recent inflow boomlet. Moreover, with the end of the year approaching, some investors could begin to lock in this year’s hefty gains as well as sell losers.
STALE PRICE TRADING ALLEGATIONS APPEAR TO HAVE RELATIVELY LITTLE IMPACT ON FUND FLOWS.
The mutual fund uproar appears to be having relatively little effect on investors. During this past week, all U.S. equity funds had inflows of $3.7 billion, a level more than double the 2003 weekly average. Even global funds, which are most amenable to market timing, had an inflow of $700 million during this past week.Yet with new claims involving companies like Charles Schwab and American Express emerging nearly every day, it is becoming apparent that most fund families with “stale pricing” issues had hedge funds and others taking advantage. We will continue to monitor global fund flows carefully, but it does not appear that the large outflow at global funds during the week ended November 6 is the beginning of a trend.
WAGES AND SALARIES GREW 6.8% LAST TWO WEEKS AND 3.7% LAST FOUR WEEKS.
Wages and salaries continue to grow at a healthy pace. Accounting for the impact of the 4% cut in tax rates effective July 1, 2003, wages and salaries subject to withholding grew by 6.8% over the past fortnight and 3.7% over the past four weeks. A month-end October calendar quirk probably distorted the growth rate over the past fortnight, but the four-week year-over-year growth rate is consistent with the roughly 4% growth rate of the recent past.
BOTTOM LINE: WE TURN NEUTRAL AS NEW OFFERING CALENDAR GROWS. IF NEW OFFERINGS RISE EVEN FURTHER, WE WILL TURN BEARISH.
We turn neutral from cautiously bullish.
While new buybacks reached $4.1 billion during this past week, new buybacks are not as real time as other indicators that we track, which were less positive. New cash takeovers were almost nonexistent, insider selling via both direct sales and new offerings remained strong, and the new offering calendar has averaged more than $5 billion weekly during the past three weeks. While the new offering calendar may slow somewhat during Thanksgiving week, we are concerned that the number of new offerings has increased so much so quickly.
We would be far less positive about the prospects for the stock market if so much fresh cash were not flooding into it. At $7 to $8 billion weekly, U.S. equity fund inflows are equal to the new offering calendar and insider selling, not to mention heavy direct investment into stocks and who knows how much entering the stock market through pension fund sponsors funding the “gap”,
Most hedge funds, however, appear to be “all-in,” and hedge funds and large-capitalization funds are the main buyers of new offerings. Since most of the new money appears to be flowing into either junk stocks or small- and mid-capitalization stocks, this money is not directly absorbing the supply of new offerings.
With the risk to the stock market climbing, we will wait safely on the sidelines to see whether new offerings continue to rise. If new offerings top $8 billion weekly, we will turn bearish. Yet since there are only four more weeks for new offerings this year—this week and the three weeks between Thanksgiving and Christmas— the bubble could enter the year-end intact if new offerings simply remain at the $5 to $6 billion weekly level. If that happens, we will likely turn bullish through at least the middle of January.
For now, we will sell four December S&P 500 futures in our model portfolio to go flat.
Given the conflicting liquidity signals as well as our change in methodology, we welcome comments and questions from clients.
In Memoriam: Laurence Tisch: “The Secret To Getting Rich Is To Be Long-Term Greedy.”
I first interviewed Larry Tisch, who died this past weekend, in 1970 as a cub reporter for Barron’s. What Mr. Tisch said as an aside during that first interview became a personal mantra. He told me that the secret to getting rich was to be “long-term greedy.”
People who are short-term greedy, Mr. Tisch said, usually cut corners, break rules, and eventually get caught. People who are long-term greedy, by which I understood to mean doing the right thing for no reason (such as keeping your word in a deal, a stock trade, or a relationship), usually win out in the end.
I learned from that conversation that if you are long-term greedy, not just in the stock market but more importantly in life itself, you will end up winning big time over the long term.
Thank you, Mr. Tisch. I will always remember you.
-Charles Biderman |
