It's All About Liquidity

First, profound apologies for a mistake in my article last week. Distribution of capital gains and income for our mutual fund shareholders will happen next week instead of last week as I said in the article. (The board of directors will tell us the exact date shortly.) This is later than we distributed last year -- but it's interesting to me that some of my confrere funds are distributing later, too.

You see, last week at our shop, we were trying to figure out how much of the market's action was due to cash in mutual funds staying on the sidelines in anticipation of distribution day. Soooo ... nearly a week has passed, and we still can't tell.

First, fund managers needed to keep cash around to distribute. But since many shareholders automatically elect to reinvest their dividends (the bulk of ours do, for example), it also meant the managers were probably going to retain most of that cash. Second, some investors are acutely desirous of buying a mutual fund after the distribution is made. So it's fair to assume a slug of cash flowed in to many funds because anyone who was waiting for distributions to pass is now safe to invest.

On the Margin

In this context, we looked at Charles Biderman's Liquidity Trim Tabs this week with great interest, because he tracks fund flows pretty closely. On two days last week, equity funds had record inflows for a total of $16.3 billion. Plus, Nabisco was purchased for $26 billion in cash. And the new offering market only sucked down $1.5 billion last week, ending 2000 "with a whimper, not a bang," as Charles put it. Corporate investors, who were bearish this time last year, are now extremely bullish -- more than 90 companies have announced $18 billion worth of buybacks. (Yeah, so a lot of companies never actually buy back all that stock. But it still tells you which way the wind is blowing.)

Most fascinating to me is Charles' guess that margin debt has probably dropped by $100 billion since March. (The New York Stock Exchange is late this month reporting November margin debt at member firms, so it appears there are year-end logjams happening at a lot of firms.) Anyway, that drop suggests the entire $100 billion margin debt surge which snowballed between October 1999 and March 2000 has been erased.

Fascinating. Simply, totally fascinating.

You see, Alan Greenspan led the Fed to inject more than $80 billion last autumn as insurance against cash hoarding because of Y2K ... and ... nothing awful happened. So the first week of January, the Fed started draining. And they didn't quit draining until April.

Ring any bells? Some really unpleasant bells?

Given these margin numbers, it's scarcely surprising the Nasdaq 100 is back where it was in October 1999 and the Nasdaq Composite Index is near its August 1999 lows. As always, the Fed giveth and the Fed taketh away.

So. I've been talking for weeks about how biotech is doing vs. the rest of the market. I'll go into more detail later this week on my expectations for the sector, but here's a quick recap since the highs of late October and early November:

Comparison Shopping Biotech suffers less than the tech-heavy Nasdaq
Index, or security/ticker	Percentage drop from Oct.-Nov. highs
Amex Biotech Index (BTK)	-17%
Nasdaq Biotech Index (IXBT)	-17%
Merrill Biotech HOLDRs (BBH)	-12%
Nasdaq Composite (COMP)	-28%
Nasdaq 100 (NDX)	-31%
Nasdaq Telecom Index (IXTC)	-30%
Nasdaq Computer Index (IXCO)	-35%
Source: Nasdaq

Hmmm. Don't know whether I'll be proved right in my theory that biotech will lead the Nasdaq out of this bear market. But so far, it's looking good. Now, if they just hadn't added several biotech stocks to the Nasdaq 100 this week. (But that's another rant ...)