Three week old TrimTabs:
TrimTabs Liquidity News - Latest
Liquidity news is an edited version of TrimTabs Weekly Liquidity. It is published here at TrimTabs.com on a three week delay.
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February 9th, 2004
NEW OFFERINGS REACH $8.8 BILLION, BUT COULD DROP TO $5 BILLION BEFORE REBOUNDING. U.S. EQUITY FUND INFLOWS SLUMP TO $2.2 BILLION, LOWEST LEVEL IN FOUR WEEKS.
Liquidity deteriorated during this past week as stocks ended up having basically treaded water. The TrimTabs market capitalization fell below the $15.5 trillion mark, dropping 0.6% to $15.46 trillion. The estimated net change in the trading float of shares (L1) turned heavily bearish, surging $6.6 billion. This gain in L1 was the largest increase in nearly three months and well above the $2.2 billion average weekly increase over the past four weeks.
For the first time this year the new offering calendar, at $8.8 billion, was big enough to impact stock prices. However, as the calendar subsided at week’s end, the market rebounded. The calendar might be slow this week. The near term future of this market depends upon how big the new offering calendar can get. More fruits of the new corporate finance hires’ labor should find their way into the stock market over the coming weeks, boosting new offerings to more than $1.75 billion daily. When that outflow is sustained, the bubble will surely burst.
Inflows into U.S. equity funds decreased substantially to an estimated $2.2 billion, slumping below $4 billion weekly for the first time in four weeks.
THE HOUSE CONTINUES TO BE TIGHTFISTED WITH ITS CASH.
Corporate buying was practically non-existent during this past week. While the dollar amount of cash takeovers was $4.3 billion, Oracle’s sweetening of its offer to buy Peoplesoft accounted for over 90% of this amount. Similarly, while the dollar amount of newly-announced stock buybacks was $3.3 billion, a $1.0 billion replenishment by First Data and a $1.2 billion replenishment by Aflac accounted for two-thirds of this amount. The house in the stock market casino—public companies and the insiders who run them—clearly prefers cash to shares right now.
Over the past four weeks, new cash takeovers have averaged $1.7 billion weekly, and newly-announced stock buybacks have averaged $4.9 billion weekly. These dollar amounts may appear impressive, but they mask a relatively limited number of transactions. The number of buybacks has been particularly low. In January 2004, 11 cash takeovers and 36 buybacks were announced. In January 2003, 14 cash takeovers and 73 buybacks were announced. Comparisons with recent market bottoms are even more revealing. In March 2003—when the Iraq War broke out and investor pessimism was rampant—18 cash takeovers and 82 buybacks were announced. In October 2003—the bottom of the recent bear market—17 cash takeovers and 130 buybacks were announced.
We are considering adjusting our liquidity methodology to account for the numbers as well as the dollar amounts of cash takeovers and buybacks.
NEW OFFERING CALENDAR EXPLODES TO $8.8 BILLION, HIGHEST $ AMOUNT SINCE WEEK ENDED DECEMBER 11.
As expected, the new offering calendar ramped up considerably during this past week – although not quite to our $10 billion headline estimate. A whopping 41 new offerings for $8.8 billion debuted, the highest dollar amount of new offerings since the week ended Thursday, December 11. The largest of these new offerings was a $2.0 billion IPO for Assurant, the U.S. insurance arm of the Dutch financial services firm Fortis.
Prior to last week’s $1.8 billion daily, the new offering calendar had been averaging $800 million daily the four weeks of January. Until this past week, however, inflows at U.S. equity funds—not to mention inflows at U.S. equity ETFs and direct investments into U.S. equities—were hefty enough to offset it. Yet with new offerings increasing and inflows declining during this past week, the bullish liquidity environment is beginning to crumble.
ABSENT LARGE OVERNIGHTS, THIS COMING WEEK’S NEW OFFERING CALENDAR SHOULD COOL DOWN.
Dealogic reports that only 12 deals for $2.2 billion are currently scheduled for this week, about half scheduled for last week. Since 48% of the activity in recent weeks has been on the calendar at the beginning of the week, next week’s dollar amount should be no more than $5 billion, unless overnight deals are particularly large.
Sometimes, after the first big week of new offerings, the pipeline slows as it refills. We would expect by next week it will resume at $1.7+ billion daily for several weeks. Our guess is it will take more than a single week of heavy new offerings to suck enough cash out of the stock market to burst the bubble and for us to turn bearish.
DOLLAR SELL-BUY INDICATOR REACHES AN EXTREMELY BEARISH $42.
In January, corporate insiders were selling far more of their own companies’ shares than they were buying. On Wednesday, Thomson Financial reported that the dollar sell-buy indicator—its favorite leading indicator of insider sentiment—fell to an extremely bearish $42. This indicator has remained below the very bearish mark ($20) for the ninth straight month. Corporate executives purchased just $71 million worth of their own companies’ stock during this past January, the lowest level of insider buying in January since 1995, when insiders bought $54 million. At the same time, they sold $3 billion of their own companies’ stock, the highest level of insider selling in January since 2001, when they sold $3.2 billion.
NASDAQ BULLETIN BOARD TRADING VOLUME SPIKES TO RECORD 57.4 BILLION SHARES IN JANUARY.
If anyone doubts that this is a bubble look no further than the NASDAQ bulletin board. During this past January, share volume spiked to 57.4 billion from 31.8 billion in December and the highest monthly total ever recorded. By comparison, total volume was 81.4 billion shares during all of calendar 1999 and 117.2 billion shares during all of 2000.
SUPPORTIVE YEAR-END LIQUIDITY ENVIRONMENT IS BEGINNING TO DETERIORATE.
Liquidity is not easy to assess during bubbles. While we do not yet know when this bubble will burst, we do know that the supportive liquidity environment that the stock market has enjoyed over the past several months, when limited corporate buying and heavy inflows far outweighed the new offering calendar, is beginning to deteriorate. First, corporate buying is not accelerating. Second, inflows into U.S. equity funds weakened considerably during this past week from their January pace Finally, and perhaps most importantly, both the new offering calendar and insider selling have been surging recently. Combined, they could easily suck $50 billion out of the stock market in February.
INVESTORS ARE FLOCKING ONCE AGAIN TO SMALL- AND MID-CAPITALIZATION STOCKS.
The rotation to large-capitalization stocks during the previous week proved short-lived. The large-cap funds that we track daily (growth, value, and blend funds combined) had outflows every day during this past week. By contrast, the mid-cap funds that we track daily (growth, value, and blend funds combined) had inflows every day during the past five days, and the small-cap funds that we track daily (growth, value, and blend funds combined) had inflows on three of the past five days.
Investors’ appetite for real estate has been nothing short of astonishing. During this past week alone, the real estate funds that we track daily received inflows approaching 2% of their net assets, and they have had inflows on all but two days during the past five weeks. As usual, investors are chasing performance. The Morgan Stanley REIT index has enjoyed double-digit returns in three of the past four calendar years, and it has not declined since 1999. So far this year, it has gained 6%, outperforming the S&P 500 index by 3%.
WE CHANGE OUR MONTHLY FUND FLOW MODEL.
We are changing our monthly fund flow model to reflect more accurately the month in which flows actually occur. We will begin each month with flows from the second day of the month and end each month with flows from the first day of the following month. Most fund families include new flow in the next day’s total net assets. Only the Rydex family and several other smaller families that encourage rapid-fire trading include a day’s flow in that same day’s total net assets.
If we had followed this new model in December, our December U.S. equity fund flow estimate would have been $10.4 billion instead of $13.6 billion. The final ICI figure for December’s U.S. equity fund flow was $9.8 billion.
WAGES & SALARIES DATA NOW REPORTED IN TRIMTABS PERSONAL INCOME.
Wages and salaries data are now reported in TrimTabs Personal Income. This new publication, transmitted every Tuesday, focuses on personal income and money flows. You will receive TrimTabs Personal Income with your subscription to TrimTabs Liquidity Research until your subscription expires. Thereafter, you may subscribe to TrimTabs Personal Income separately.
TrimTabs Personal Income reported last week that US wages and salaries grew at just over 6% in January and through early February. That is an increase from the 4% rate in December. Remember, bubble stocks have nothing to do with economic reality. When the supply of new shares is greater than the inflow of new cash for long enough, the bubble bursts.
BOTTOM LINE: WE REMAIN NEUTRAL. IF OVERNIGHTS INFLATE NEW OFFERING CALENDAR THIS COMING WEEK, WE WILL TURN BEARISH.
We remain neutral. The key for the stock market over the short term is the size of the new offering calendar. While new offerings surged to $8.8 billion during this past week, the new offering calendar for this coming week is only 12 deals deep for $2.2 billion.
It will take two or three consecutive weeks of new offerings approaching $10 billion to burst the bubble. A single week will not be enough. In February 2000, we jumped the gun and turned bearish too early. This time we plan on waiting until the market churns through the huge amount of cash dumped into the market over the prior few months.
This coming week could see a big pick-up in overnight deals. We also expect the new offering calendar for the following week will be much heavier than it is this weekend. If either happens, we will go short the following week. If not, we will remain neutral.
Given the strong economic growth TrimTabs Personal Income is reporting, we believe that large-caps will continue to outperform bubbled-up small-caps. Therefore, we will go long ten March DJIA futures and go short three Russell 2000 futures. That was the trade we had recommended last week to aggressive traders.
-Charles Biderman |
