A client asked how we can be cautiously bullish while admitting that the stock market is a growing bubble waiting to burst. Our answer is simple. We do not envision a supply of new shares materializing anytime soon that would remove enough cash from the stock market to burst the bubble. The earliest time that sufficient new shares could be generated to burst the bubble is December. We are confident, however, that enough new shares-along with higher interest rates and probably a lower dollar-will erode the market to burst the bubble no later than April 15, 2004.
We definitely believe that a bubble exists. Thomson Financial's Insider Trading Update for October makes for grim reading. Some apologists for the market claim that insider selling figures are irrelevant because this period is the first opportunity that many insiders have had to sell options in the money. While this argument might have merit, what Thomson reported on November 5, 2003, is more important:
"During October, corporate executives purchased just $52 million worth of their companies' stock, the lowest level of monthly purchasing since July 1995. The anemic buying, combined with the $3.2 billion in sales, drove the dollar sell-buy ratio-our favorite leading indicator of insider sentiment-from $35.93 in September to $59.01 in October, which is the highest reading we've seen in at least a decade.
"October represented the fifth consecutive month in which buying failed to eclipse the $100 million mark, remaining well below the five-year monthly average of $173 million. The minimal number of executives (612) and companies (342) with insider buying confirmed the low dollar volume. Both of these indicators are approximately half their normal levels.
"Last month's sales volume represented the third highest monthly level of selling since the beginning of 2001 (behind May and August's $3.5 million volumes). October's volume was an 8% increase over September's $2.8 billion."
Following redemptions on the first trading day of November, equity fund flows resumed yesterday as an estimated $1.2 billion flowed into U.S. equity funds. Interestingly, high-yield bond funds received substantial inflows-an estimated $783 million-during the past five trading days, an annualized 25 percent rate of flow. This spike was certainly not due to hot performance. While high-yield funds' net asset values rose during each of the past five days, the total increase was just 0.54 percent.
As we write this update, we have not yet received Dealogic's report on the new offerings being priced tonight for sale tomorrow. The total amount of these offerings could be as high as $2 billion, led by Newmont Mining's massive secondary. According to yesterday's report, the new offering calendar is expected to be light during the rest of this week.
MUTUAL FUND FLOWS FOR November 04, 2003
ALL EQUITY MUTUAL FUNDS: INFLOW $853 MILLION; NAV DOWN 0.3%
US EQUITY FUNDS
FLOW: INFLOW $1204.3 MILLION BREADTH: POSITIVE 32 IN VERSUS 31 OUT NAV: DOWN 0.3%
INTERNATIONAL EQUITY FUNDS
FLOW: OUTFLOW $351.3 MILLION BREADTH: POSITIVE 14 IN VERSUS 4 OUT NAV: UP 0.4%
BONDS & HYBRID:
FLOW: INFLOW $1194 MILLION NAV: UP 0.1%
L1: NET FLOAT $178 MILLION NEW ANNOUNCED CASH TAKEOVERS: $132 MILLION COMPLETED CASH TAKEOVERS: $0 MILLION NEW STOCK BUYBACKS $491 MILLION NEW OFFERINGS: $357 MILLION INSIDER SELLING $400 MILLION
L2: US EQUITY FUND FLOW $1,204 MILLION
Regards, Charles Biderman, President TrimTabs.com Investment Research http://www.TrimTabs.com +1 (707) 525 1001
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