<Where do you put your money if you think deflation is in the cards and the dollar is going down the tubes -- at the same time>
I generally agree with the Puetz perspective although I don't exactly call it deflation. I think we are in an inflationary/boom blowoff phase right now, that will quickly lead to a bust. Get short all the fads of the day from China and commodities, to stocks especially those dependant on the American consumer bubble. In my mind even my favored energy stock rally may be getting long in the tooth, unless we get some wicked cold weather over the next month. The problem EVERYBODY has in this environment is that they have to be long something. That's the trap. By February we are going to see a flood of stock offerings, another massive wave of insider selling, and according to Biderman at Trim Tabs $50 billion a month will flood the market. There isn't enough money around to handle that. Mutual fund cash is only 4.6% in November (near thirty year low, see Contrary Investor's chart page 12 of 11-4 issue), and there is a huge margin debt developing.
I DO NOT think people have until "after the election". Those supply factors will not be that strong in the very short term (over the next two to three weeks), so that should give everybody some idea of the timing (late Jan- early Feb) for getting setup for this final phase IMO. Of course there could always be an outside event that could bust these markets up overnight.
For those who are interested I'd like to expand the discussion here to actual specific steps and speculations that address the boom/bust scenario, especially the timing of it. I already assume that most of the active participants here see this developing in some manner, so it's not so much as discussion of if, but when and how. If more than a few of you choose to introduce useful indicators, technical tools, charting, whatever, I'll join in?
Dec 8th Trim Tabs discusses emerging market liquidity elements.
December 8th, 2003
WE TURN CAUTIOUSLY BEARISH AS NEW OFFERING CALENDAR EXPANDS BEFORE HOLIDAYS. FUND INFLOWS DECLINE WITH APPROACH OF DECEMBER FUND DISTRIBUTIONS.
The net change in the trading float of shares (L1) remained bearish for the fifth straight week, increasing by $2.0 billion during the week ended Thursday, December 4. Net float growth was the lowest in six weeks, although we revised L1 for the week ended Wednesday, November 26, upward to $3.1 billion from $2.5 billion.
Net float growth has averaged $2.6 billion over the past fortnight and $4.6 billion over the past four weeks. Since this past week followed the Thanksgiving holiday, we were not surprised to see net float growth below these averages.
With 17 deals for $5.2 billion already on the new offering calendar for this week, before the expected billions in overnight deals, we believe that the net float should expand strongly during the next two weeks before the Christmas holiday.
We anticipate a pullback over the next couple of weeks as the new offering calendar disgorges new shares and inflows remain weaker than they were in October and November. While fund flows have been flagging lately as December mutual fund distributions approach, we do not envision a major sell-off unless an exogenous shock—a terrorist attack, a sharply falling dollar, or sharply rising interest rates—sends investors scrambling for cover.
STOCK BUYBACKS RISE TO $2.3 BILLION, BUT NEW CASH TAKEOVERS REMAIN ABYSMAL.
At $2.3 billion, stock buyback activity during this past week more than doubled from the previous week’s $1.1 billion pace. Two buybacks—a $1.0 billion buyback for ConAgra Foods and a $700 million buyback for Kraft Foods—accounted for nearly three-quarters of this past week’s buybacks. Is it any surprise to see food companies rather than technology companies repurchasing significant amounts of their shares now?
Once again, new cash takeover levels were abysmal. Only three takeovers involving $484 million in cash were announced, all of which came in the banking sector. The largest of these takeovers was Hibernia Bank’s purchase of Coastal Bancorp for $230 million in cash. Cash takeover activity has declined rapidly from its near-term peak during the week ended Thursday, October 30. Over the past four weeks, cash takeovers have averaged only $222 million weekly.
NEW OFFERINGS GROW TO $2.7 BILLION AND WILL RAMP UP BIG TIME THIS COMING WEEK.
During this past week, $2.7 billion in new offerings were sold, a nearly 60 percent increase from the previous holiday-shortened week’s pace. The largest of these new offerings was a $690 million convertible for Genzyme. Over the past four weeks, the new offering calendar has averaged $4.3 billion weekly. We expect that new offerings during the next two weeks before the Christmas holiday will be well above this pace.
Dealogic already reports that seventeen deals for $5.2 billion are scheduled for the upcoming week. The largest deal, a $2.6 billion initial public offering for China Life, will probably sell no more than half of its shares here in the United States. Overnight deals and the general rush to offer new shares before the Christmas holiday will ensure that this dollar amount swells substantially.
RESUMPTION OF INSIDER SELLING + HEAVY NEW OFFERINGS = TROUBLE IN FEBRUARY 2004
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 an average of $3.0 billion weekly during the past four weeks, including $2.0 billion during this past week.
As we wrote last week, insider selling typically slows in December and does not pick up until February. In December, insiders are reluctant incur a tax liability due the following April, so they wait until the next year to sell. In January, insiders must wait until December quarter earnings are released before they are allowed to sell. By February 2004, however, we expect insider selling to balloon to $5 billion weekly. Insider selling has already been averaging $3 billion weekly during the past four weeks, and we believe it will grow as year-end bonus money inflates the bubble even further in January. At the same time, we expect new offerings to surpass $30 billion monthly, or $7.5 billion weekly, beginning in February 2004. Remember, the fruits of this past summer’s increasing deal capacity at Wall Street underwriters will not begin to be felt until early next year. With $50 billion monthly leaving the stock market beginning in February—more than new savings in the US grow each month—the stock market will be vulnerable to any disappointment.
WHAT A DIFFERENCE NINE MONTHS MAKES! INDIVIDUAL INVESTORS ARE NOW SOLE SUPPORT FOR BUBBLE.
The net float (L1) increased an estimated $95.3 billion from the end of March through the end of November due to massive corporate selling and little corporate buying. During the same period, the market capitalization of all U.S.-based companies rose about $4 trillion, 34% from $10.7 trillion to $14.6 trillion. When the market capitalization continues to rise rapidly after the net float surges, one can be reasonably certain that a bubble is forming. So far this year, only May and June have seen higher net float growth than November.
Individual investors are eagerly chasing the stock market rally, as U.S. fund flows (L2) have remained above $12 billion monthly for the past eight months. The pace of inflows eased somewhat in November from previous months, as we estimate that U.S. equity funds received $13.3 billion in fresh cash. This estimate is probably light, given that ICI actual October inflows ran about 1/3 higher than our original estimate based upon the 15% of all US equity funds we track daily.
Margin debt (L3) rose $6.9 billion in October, the second straight month that margin debt has climbed by more than $6 billion. Margin debt has risen $28.3 billion so far this year, the first year since 1999 that it has increased. We revised the change in NYSE margin debt in September to $6.2 billion from -$880 million.
NEW CASH TAKEOVERS PLUNGE IN NOVEMBER. NEW BUYBACK ACTIVITY IN 2003 LOWEST SINCE 1998.
New cash takeovers plunged to just $667 million in November, by far the lowest level of the year. Still, the $50.3 billion year-to-date total of new cash takeovers is nearly double the $28.2 billion year-to-date total at the same time last year. Just $7.6 billion of buybacks was announced in November, well below the monthly average so far this year. New buyback levels in 2003 will likely be the lowest since 1998.
MARKET CAP UP $4 TRILLION, 36.4% SINCE MARCH 2003.
We have been astonished at the suddenness of the change in investor sentiment over the last nine months. From January to March 2003, sentiment was about as downbeat as we have ever seen it. In the buildup to the Iraq War, people were scared to invest as political and media pundits circulated all manner of nightmare scenarios. The market behaved as if Saddam Hussein and his “elite” Republican Guard could suddenly appear in Manhattan or Chicago wielding weapons of mass destruction. Roughly $11 billion flowed out of U.S. equity funds during the 1Q of 2003, even as the net float shrunk by more than $17 billion.
Today market sentiment is nothing short of ebullient. As the market capitalization has risen more than $4 trillion since the end of March, or 36.4%, both inflows and margin debt have surged as individuals chase the bubble. As the TrimTabs Macro Economic Update reported this week, the eight-week moving average of AAII bullish sentiment has remained above 55% for an astonishing eleventh consecutive week, the longest period that it has done so since December 2000. Many Nasdaq-100 stocks and other day-trading favorites once again trade at prices that have absolutely no regard for value.
Three major sources fueled the bubble. First, pension funds pumped roughly $100 billion into stocks to reduce the then massive deficits in accounts funding future obligations. Second, hedge funds shifted from being in cash or net short at the beginning of April to being at least fully invested by now, funneling about $200 billion into equities. Third, individuals pumped nearly $130 billion into U.S. equity funds since the end of March and who knows how much more cash directly into stocks.
At this point, hedge funds have spent their ammunition, and pension funds will be investing far less in equities because of this year’s gains. Going forward, individual investors will be the sole support for the bubble. Since we believe that about $50 billion will be leaving the stock market each month beginning in February—far more than individuals generate in inflows—it will only be a matter of time before the stock market cracks.
UPCOMING TAXABLE DISTRIBUTIONS ARE PROBABLY HURTING INFLOWS.
We are not surprised by the lower levels of inflows over the past two weeks. The week ended Wednesday, November 26, was a holiday-shortened week, and the week ended Thursday, December 4, included the first trading days of December, which is historically one of the lightest months for inflows. Investors are reluctant to invest fresh cash immediately before receiving a taxable distribution that depends upon the extent of a fund’s trading rather than their profit or loss in a fund. We do not see any evidence that the recent mutual fund uproar is hurting inflows. Global funds have experienced steady, if unspectacular, inflows during the past four weeks.
ESTIMATED FLOWS FOR LONG-TERM MUTUAL FUNDS ($ BILLION). NEW CASH OVERWHELMINGLY GOING INTO MID- AND SMALL-CAPITALIZATION FUNDS AND STOCKS.
Most new cash continues to flow to small- and mid-capitalization stocks, both directly and through mutual funds, as investors chase performance. While the large-capitalization mutual funds that we track daily (growth, value, and blend funds combined) had net outflows every day for the second straight week, the small-capitalization funds that we track daily (growth, value, and blend funds combined) had net inflows every day this past week.
WAGES AND SALARIES GAIN 5.3% LAST TWO WEEKS, 4.2% LAST FOUR WEEKS.
Accounting for the impact of the 4% cut in tax rates effective July 1, 2003, wages and salaries subject to withholding grew by a strong 5.3% over the past fortnight and 4.2% over the past four weeks.
The table below shows the two-week and four-week moving averages of growth in year-over-year wages and salaries for the past thirteen weeks. From February 2003 through June 2003, wages and salaries subject to withholding grew at a 2.7% rate. Since the tax cut became effective, the growth rate has hovered around 4.0%. After slumping a few weeks ago, the economy has resumed trend-line growth.
CORPORATE INCOME TAX COLLECTIONS INCREASED BY 14.0% LAST SIX MONTHS.
Wages and salaries subject to withholding comprise about two-thirds of what the Bureau of Economic Analysis (BEA) terms personal income. After adjusting for the cut in tax rates effective July 1, 2003, withholding has increased by a healthy 4.1% over the past three months.
The tax cut effective July 1, 2003, was retroactive to January 1, 2003. Thus, many workers are eligible for tax refunds on their withholding from January 1, 2003, to June 30, 2003. Some employers, however, have already reduced withholding to account for this retroactive tax reduction, so employees may already be receiving the benefits of this tax reduction. Growing after-tax incomes will provide even more tinder to fuel the bubble at the end of this year.
In April 2003, corporate income tax payments began to rise consistently year-over-year. Corporate payments have increased 14.0% during the past six months from the same period a year ago, which indicates that the economic recovery is continuing.
SAVINGS AS PERCENTAGE OF MARKET CAPITALIZATION AT 41.10%, LOWEST LEVEL SINCE JUNE 2002.
Recently we read an article in which an investment strategist claimed that massive amounts of cash are “waiting on the sidelines” to enter the stock market. To us, his comment sounds like fingernails running over a blackboard.
Cash in all savings vehicles—retail money market funds, under-$100,000 bank certificates of deposit, bank savings accounts, and all bond funds—has reached its lowest level relative to market capitalization (41.10%) since June 2002 (40.80%). By comparison, the recent peak percentage was 54.76% at the end of March 2003.Cash in all savings vehicles as a percentage of market capitalization has now declined for eight straight months.
Earlier this year, savings balances increased in part due to $8 billion to $10 billion per month of mortgage refinancings.
Now refinancings have slowed to $1 billion to $2 billion monthly. In addition, interest rates on most savings vehicles remain very low. We suspect that much of the cash leaving savings vehicles is flowing into the stock market, although we do not know for sure.
BOTTOM LINE: WE TURN CAUTIOUSLY BEARISH FROM CAUTIOUSLY BULLISH. WE EXPECT TO RETURN TO BULLISH STANCE WHEN YEAR-END INFLOWS BEGIN AFTER CHRISTMAS.
We turn cautiously bearish from cautiously bullish. Inflows have weakened over the past two weeks, as they typically do during this time of the year. At the same time, it appears that the new offering calendar will ramp up considerably in the coming two weeks. We also believe that many investors will take profits over the next two weeks to use tax loss carry forwards from prior years, which we suspect are larger than anyone realizes.
We expect to turn bullish again when year-end inflows resume after Christmas. We continue to be bearish on the stock market over the longer term.
In our model portfolio, we will sell our long position of four December S&P 500 futures and go short five March Nasdaq-100 futures. |
