Charles Biderman: Liquidity Bullish as Fund Flows Increase

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Stock market liquidity rebounded big time last week, an $11.3 billion swing from minus $5.3 billion to plus $6 billion. The main reason: When the Japanese market soared early last week, taking the U.S. market with it, all equity fund inflows, both domestic and global, spiked. This was another instance where flow followed performance.


Trim Tabs Market Cap Index

surged 2.9% for the week -- although most of the gain was made last Monday -- and was the first decent-sized gain since early October. If the market stays up through this week, this will be the first time that the market has stayed up the month after a $5 billion new offerings week.

The new-offering calendar did not reach a record last week, although a whopping 53 new offerings were sold -- with an amazing 24 deals priced Thursday night for Friday. Fortunately for the bulls, the outflow this week will stop Wednesday due to the Thanksgiving holiday. That also means that next week's calendar will be slower than the recent torrent because of the necessity of restocking the pipeline after a holiday.

The Asian meltdown continues to be a trump on the U.S. stock market. Notice that foreign central bank holdings of U.S. Treasuries dropped before late October, but have bounced slightly since. It seems that foreigners are not bailing from U.S. Treasuries.

Last week saw several newly announced cash takeovers, as well as some completed stock buybacks. As long as banks are flush and rates are cheap -- even with today's relatively high stock prices -- cash takeovers and stock buybacks will keep happening. That gives this stock market an insurance policy that should prevent any kind of major collapse. These days, more than half of executive compensation comes from stock market appreciation.

When the U.S. market swooned at the end of October, many stock buybacks happened. It seems as if insiders are willing to spend a great deal of their companies' cash flow to ensure the value of their stock options.

While companies are continuing to redeem shares, insiders -- acting for themselves -- continue to sell.


Bob Gabele reports that insider activity during the end of October wasn't anywhere near as bullish as during the October 1987 and 1989 market drops. This time, Bob reports he is not seeing nearly as much buying and continues to be surprised by the amount of selling going on even at companies whose stock prices are trading well below previous peaks.

We were also amazed to see that margin debt at NYSE member firms rose by more than $2 billion in October. Historically, whenever there has been a major market break, margin selling reduces margin debt. This go around, there appears to have been no margin selling, rather margin buying. Perhaps a higher percentage of margin debt these days results from relatively less volatile mutual funds buying on credit, rather than buying the




. The ratio of margin debt to the Trim Tabs Market Cap rose to 1.16% -- just a touch below the 1.17% peak reached early in 1994 -- just before a lousy spring for stock prices.

So far, we have not yet seen the slowdown in inflows that we expect prior to capital gains distributions. The


family's funds go ex-distribution early in December, as does most of the fund world. Logic says inflows should slow this week. Will they?

The last three weeks have not been good for our model portfolio, as the market did not follow liquidity. For right now, liquidity ended last week modestly bullish. The inflows were slower at the end of the week, but the new calendar was also slower and several large new cash takeovers were announced. We don't know what the impact of the worsening Japanese financial mess will have on U.S. stocks this week. However, we will start off by going long 10

S&P 500

futures, and keeping our fingers crossed.

Charles Biderman writes Liquidity Trim Tabs, an independent research service used by portfolio managers and market strategists. For more details on Liquidity Trim Tabs, email Michael Alexander at