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Mix-Ansicht- USA: Kleiner Eisberg (aka Liquiditätsfalle ) voraus - kingsolomon, 02.07.2003, 09:32
USA: Kleiner Eisberg (aka Liquiditätsfalle ) voraus
-->Liquidity trap
Corporate selling and individual buying signal market top
By Jonathan Burton, CBS.MarketWatch.com
Last Update: 12:01 AM ET July 1, 2003
SAN FRANCISCO (CBS.MW) -- It was nice while it lasted.
If the tools Charles Biderman uses to forecast the market's climate are precise, then investors should brace for a summer squall that could give back all of the second quarter's double-digit gains -- and then some.
Biderman runs TrimTabs.com, a Santa Rosa, Calif.-based firm that tracks the daily cash flows of 90 mutual fund families that collectively control about $1 of about every $7 invested in U.S. stock funds.
Corporate insiders have been selling huge amounts of stock into the rally that began in March, according to Biderman. When executives are heavy sellers and individuals are eager buyers, it's a recipe for a market meltdown, he says. And when that happens, it's not hard to figure out who comes out the loser.
Even more troubling, says Biderman, is that some of the nation's largest pension funds are issuing debt and investing the proceeds in stocks in the hope of covering future liabilities.
The last time buyers, sellers and borrowers had such intentions was March 2002 -- and the market tumbled shortly thereafter. A similarly ominous confluence, minus the borrowing, occurred in March 2000 and also ushered in the painful bear market.
Recently Biderman spoke with CBS MarketWatch about the significance of current funds-flow trends.
CBS.MW: What do cash flows into stock funds say about the U.S. market's condition?
"You have heavy corporate selling. New offerings and insider selling are at large numbers. At the same time, you have individuals pumping a lot of money into equity funds. The last piece of the liquidity puzzle that consistently happens at a market top is when investors borrow to buy. Recently we've had the state of Illinois borrowing $10 billion in the bond market and planning to invest that money in the equity market. And General Motors has announced it's going to do the same thing. So here you have pension funds borrowing to buy. All three are classic signs of a market top."
Why would corporate insider selling suggest a market ripe for a fall?
"When companies are heavy sellers, they know a lot more than you or me. Between the end of 1994 and the end of 1999, companies were buying back their shares on balance every month. Companies were shrinking the trading float of shares; the absolute number of shares outstanding was declining. It's no surprise, then, that the market tripled over that time frame. At the end of 1999 the balance shifted. When inflows peak and corporate selling peaks, it's always a sign of the top. We're seeing the same thing here."
How big a drop are you expecting?
"We're setting up for a 20, 25 percent decline -- probably back to where we started in March."
Individual buying is really that out of kilter?
"The demand for shares is so nuts. Yahoo (YHOO: news, chart, profile) is able to sell a zero coupon convertible (bond) at a 40 percent premium. In other words, you gave your money to Yahoo. They would give you the right to exchange your bond for shares at a price 40 percent higher than the current market, and you get no interest while you're waiting. If it doesn't go up 40 percent, you'll probably get your money back, assuming Yahoo is still viable a number of years from now."
People must be scooping up shares as fast as companies can sell them. How much money is coming into the stock funds you track?
"Rule of thumb is if a dollar is going into equity funds, another dollar is going into equities directly. So let's say $22 billion went in over the first three weeks of June."
The last time so much money cascaded in was March 2002. What happened after that?
"The market dropped 20, 25 percent through July. And we could have a similar magnitude drop here. It has nothing to do with the economy. It has nothing to do with earnings. It's just that stocks got too expensive. For various reasons people decided they wanted to put a lot of money into the market here, drove prices very high, and companies are saying, 'At these prices I'd rather have cash.'"
But isn't there still a lot of cash on the sidelines, waiting to be invested?
"Your second statement I contest. There is a lot of cash. Waiting to be invested? Why?
"People who put money into bank savings accounts, which is where most of the money has gone, are not probably going to take the money out and buy Cisco Systems (CSCO: news, chart, profile) if the market goes up for another month.
Borrowing is the third leg of this rickety stool.
"Pension plans and pension funds are one bad decision from disaster. The reason is that the people who manage them have their eye on something else other than the ultimate benefit of the pensioner. They now are borrowing because statistically it's proven that you make 8 percent a year forever [from stocks], so if you can make 8 percent and borrow at 6 percent, you make some money. You get kind of convoluted."
What should traders who agree with you do now?
"If you're a trader, my recommendation would be to go short stock index futures here."
Jonathan Burton covers the mutual fund industry for CBS MarketWatch.com
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