Three week lagged Trim Tabs. Comments: Biderman felt the big GM pension contribution would help support market through YE. Individuals sole support in 2004. He expected good fund inflows through YE. In fact AMG reported very modest inflows of about $1.5 B per week.
amgdata.com
Thursday's number might be illustrative. He felt insider selling would slow through YE. In fact the last week was high at over $3B. Timing and extent of new offerings calendar now an important factor. High YE insider selling suggests this factor will pick up strong again after reporting season. Does a large correction loom about reporting time? As a side note, energy and overseas sectors now sucking up a lot of the scarce remaining cash. Another energy price spike looks on store today as a two week freeze settles in.
December 15th, 2003
NEW OFFERINGS EXPLODE TO $9.7 BILLION IN RUSH TO SELL SHARES BEFORE CHRISTMAS. BUBBLE LIKELY TO INFLATE FURTHER. MUTUAL FUND INFLOWS HEAVIEST IN SEVEN WEEKS.
Whether it was the frenzied reporting about the Dow Jones Industrial Average ending the week above 10,000 or year-end pension funding, the market rose despite $9.7 billion of new offerings. The net change in the trading float of shares (L1) remained bearish for sixth week in a row, rising by a hefty $4.7 billion during the week ended Thursday, December 11. The net float has grown an average of $4.9 billion over the past four weeks.
Given the $3.5 billion of deals already scheduled for this coming week, we would not be surprised if new offerings right up until Christmas Eve reach $10 billion. After all, the next seven trading days are the last ones before the Christmas holiday starts, and Wall Street underwriters will want to sell as many new offerings as possible before bonuses are doled out at the end of the year.
Nevertheless, we do not envision a major sell-off unless an exogenous shock—a terrorist attack, a sharply falling dollar, or sharply rising interest rates—rattles the markets. Not only is GM planning on pumping $4.1 billion into its pension plan before year-end—as are many other companies—but individuals remain wildly bullish.
STOCK BUYBACKS SPIKE TO $5.5 BILLION, BUT ONLY ELEVEN COMPANIES MADE NEW ANNOUNCEMENTS.
The dollar amount of new buybacks during this past week was impressive. A total of eleven buybacks for $5.5 billion were announced, more than double the previous week’s total and the highest dollar amount in eleven weeks. The largest of these buybacks was a $1.4 billion buyback for Masco.
Three other companies—Lowe’s, Home Depot, and Genentech—announced $1.0 billion buybacks. While the number of buybacks announced during this past week surpassed the eight announced during each of the prior two weeks, eleven buybacks is not particularly impressive or bullish.
AT $1.3 BILLION, NEW CASH TAKEOVERS CONTINUE TO REMAIN WEAK.
The dollar amount of new cash takeovers increased from the four prior weeks, but takeovers remain at relatively low levels. Only three takeovers involving $1.3 billion in cash were announced. The largest of these takeovers was SunGuard Data Systems’ purchase of Systems & Computer Technology for $584 million in cash.
From its near-term peak during the week ended Thursday, October 30, cash takeover activity bottomed during the week ended Wednesday, November 26, but it has not rebounded strongly. Over the past four weeks, cash takeovers have averaged just over $500 million weekly.
NEW OFFERINGS EXPLODE TO $9.7 BILLION AND WILL STAY STRONG THROUGH CHRISTMAS EVE.
As we expected, the new offering calendar pumped out new shares at a feverish pace. During this past week, a whopping 42 new offerings for $9.7 billion were sold. This dollar amount is the highest dollar amount since $10.6 billion was sold during the week ended Thursday, September 25. The largest of these new offerings was a $1.7 billion American Depository Receipt for China Life, which sold roughly the same amount in Hong Kong in what was the world’s largest—and certainly the most hyped—initial public offering of 2003. Over the past four weeks, the new offering calendar has averaged a healthy $5.3 billion weekly.
Dealogic reports that no less than 27 deals for $3.5 billion are already scheduled for the upcoming week. Overnight deals and the rush to offer new shares before the Christmas holiday will expand this dollar amount substantially. Remember, Dealogic listed only $5.2 billion in new offerings at the beginning of this past week. By the end of the week, the total swelled to $9.7 billion. We would not be surprised to see $10 billion in new offerings between this week and Christmas Eve.
INSIDER SELLING, REVISED TO $3.3 BILLION WEEKLY IN NOVEMBER, SHOULD SLOW AS END OF YEAR APPROACHES.
Based upon recent 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 $3.3 billion weekly during November for a total of $13.2 billion, which is revised upward from $12 billion.
As we wrote earlier, we expect insider selling to remain relatively subdued until the end of January 2004. By February 2004, however, it probably will balloon to $5 billion weekly after the bubble inflates stock prices even further at the end of this year.
BY EARLY NEXT YEAR, INDIVIDUAL INVESTORS WILL BE SOLE SUPPORT FOR GROWING BUBBLE.
If anyone doubts that the bubble is growing, one need look no further than Ctrip.com, a Shanghai-based travel web site. We wonder if investors were “tripping” when they bought this new concept. Its ADRs jumped nearly 89 percent on their first day of trading this past Tuesday. At one point, they traded for more than double its offering price.
According to Thomson Financial, it is the first initial public offering to trade at double its offering price on its first day of trading since Transmeta in November 2000. Transmeta briefly traded at over $50.00 per share in 2000. Its share price as of Friday’s close was a mere $3.55.
Ctrip.com is not the only sign of the new mania. Many Nasdaq-100 stocks trade at prices that have no regard for value. So far this year, Ebay has risen about 70%, Yahoo has surged about 160%, and Amazon.com has popped about 170%. And these gains pale in comparison to those of many bulletin-board, small and mid-capitalization stocks.
STOCKS SOAR AFTER GM ANNOUNCES $4.1 BILLION CONTRIBUTION TO PENSION PLAN FRIDAY MORN.
The bubble has received support from three main sources. The first has been hedge funds, which 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. Thus, hedge funds have all but spent their ammunition.
The second has been pension funds, which have pumped roughly $100 billion into stocks since the end of March. Healthy gains through appreciation plus this year’s cash infusion means that pension funds will be investing far less in equities next year. Last Friday, however, GM announced that it will be pumping $4.1 billion into its pension fund by the end of the year.
When GM made this announcement, the stock market popped after having been down for six of the past eight days and despite $4.4 billion in new offerings being priced Thursday night. If GM is pumping big bucks into the stock market before the end of the year, other companies will likely follow suit. This support for the market, however, will end in 2004.
The third has been individual investors, who have pumped about $130 billion into U.S. equity funds since the end of March and who knows how much more cash directly into stocks. After the beginning of the new year, individual investors will be the only support for the bubble.
BUBBLE LIKELY TO SURVIVE INTACT INTO NEW YEAR DUE TO YEAR-END PENSION FLOWS, BONUSES, AND MANIA.
Granted, the bubble probably will survive the end of 2003 intact. New offerings are surging right now, but the Christmas and New Year’s holidays will soon cool the new offering calendar until mid-January. In addition, fund inflows in December are proving to be larger than we expected, and they will only increase as investors chase performance with year-end bonus money in January.
Yet while we expect to remain cautiously bullish after Christmas, we do not expect to remain cautiously bullish for long. We believe that about $50 billion will be leaving the stock market each month beginning in February—far more than individuals generate in inflows—so it will be only a matter of time before the market collapses.
UPCOMING TAXABLE DISTRIBUTIONS DO NOT STOP INVESTORS FROM SHOVELING MONEY INTO EQUITIES.
During this past week, inflows at all U.S. equity funds surpassed $4.0 billion for the first time in eight weeks. Last week, the ICI reported that expected taxable distributions will be about $16 billion this December, the same as last year. This amount is the least since 1991 and compares with $325 billion in 2000. Thus, the main reason why December has been a slow month for inflows—avoidance of taxable distributions—is not relevant this year.
Meanwhile, the CBOE Volatility Index again closed the week below 17. As the TrimTabs Macro Economic Update reported during this past week, AAII bullish sentiment stands at an almost incredible 69.4%, and the eight-week moving average of AAII bullish sentiment has remained above 55.0 for the last twelve weeks. Bond funds saw substantial inflows for the second consecutive week.
FLOWS BECOME MORE EVENLY DISTRIBUTED BUT STILL TILT TOWARD SMALL- AND MID-CAPITALIZATION STOCKS.
The large-capitalization mutual funds that we track daily (growth, value, and blend funds combined) garnered net inflows on three of the five days of this past week after having net outflows every day during the previous two weeks. Most new cash, however, continues to flow to small- and mid-capitalization stocks, both directly and through mutual funds. The small-capitalization funds that we track daily (growth, value, and blend funds combined) had net inflows on four of the five days of this past week.
WAGES AND SALARIES UP 1.7% LAST TWO WEEKS, 3.2% 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 1.7% over the past fortnight and 3.2% over the past four 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%. Last week’s wage and salary figure of a 4.9% decline likely will be reversed this week.
BOTTOM LINE: WE TURN CAUTIOUSLY BULLISH FROM CAUTIOUSLY BEARISH. BIG YEAR-END INFLOWS LIKELY TO EXCEED THE $10 BILLION IN EXPECTED NEW OFFERINGS.
We turn cautiously bullish from cautiously bearish. Despite a new offering calendar likely to approach $10 billion over the next seven days, far more cash is being exchanged for chips in the stock market casino then is being cashed out.
We were surprised to read that GM was adding a fresh $4.1 billion into its pension fund before the end of the year. If GM is pumping in $4.1 billion, other sponsors also are likely pumping in billions.
Add individual fund flows—undeterred this year by fear of taxable distributions—and the stock market could get quite bubble-licious around New Year’s.
In our model portfolio, we will cover our shorts and go long five Russell 2000 March contracts.
BUBBLE UP INVESTORS, BUT REMEMBER THAT HANGOVER AWAITS. THE ONLY QUESTION IS WHEN IT WILL COME.
In liquidity terms, a bubble occurs when the stock market rises while the net trading float of shares (L1) expands. The only reason that the market can rise when the net float grows is that inflows exceed net float growth. This situation cannot last forever because the house in the stock market casino—public companies—can issue an infinite amount of chips—stocks—limited only by the amount of the players’ money.
A casino fixes the outcome by setting the odds against it. The stock market fixes the outcome by printing as many new shares as the cash available for investment will allow. The only way to beat a casino is to become the house. Two of the smartest stock market players ever—Larry Tisch and Warren Buffet—bought their own companies, thus becoming the house in the stock market game.
-Charles Biderman |
