Monday, May 4, 2009

The Debts of the Spenders: Trimtabs CEO Still Bearish on Equities

Trimtabs is a multi-billion dollar company that monitors and analyzes institutional money market flow as seen through the eyes of mutual fund portfolios. Charles Biderman, CEO, has reason to believe it is better to remain bearish. His analysis is based on sound reasoning of the fundamentals and astute observations of an increase in insider selling among corporations:

WATCH OUT FOR A VALUE TRAP From Charles Biderman, chief executive officer, TrimTabs Investment Research

Companies and corporate insiders have not joined the party on Wall Street. Since March 9, the float of shares in the U.S. stock market has increased $14.1 billion. In April, corporate insiders sold $2.1 billion, 14 times more than the $150 million they purchased.

Retail investors have shown some enthusiasm for U.S. stocks. U.S. equity funds posted inflows in each of the past five weeks totaling $12.4 billion. But even if retail investors pumped $12.4 billion into U.S. equities directly in the past five weeks in addition to the $12.4 billion they added to U.S. equity funds, their buying would not have been enough to drive stock prices up so much.

Since corporate America has been a net seller and retail investors have been moderate net buyers, institutional investors must have provided most of the fuel for the rally. The latest Barron’s Big Money Poll suggests institutional players have turned very upbeat. A whopping 59% of respondents describe themselves as bullish or very bullish, while only 13% of respondents describe themselves as bearish.

Institutional players apparently believe they are catching the bottom of the economy and the stock market. The problem is that consumer spendables will drop an estimated $55 billion in May 2009 relative to May 2008. The decline will be so severe due mostly to the impact of tax credits. While the “Bush” tax credit distributed $48 billion in May 2008, we estimate that the “Obama” tax credit will distribute only $7 billion in May 2009.

To add to this cheery picture, incomes of all types are plummeting. ncome tax withholdings dropped an adjusted 6.1% y-o-y in the past three weeks and four days, which is consistent with monthly job losses of at least 550,000, and non-wage income and corporate income are in a free fall. The latest data on chain-store sales, automobile sales, and savings flows all suggest that the economy’s green shoots are already dying. When portfolio managers realize that the economy is sinking, the tape will turn very ugly.


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