It's during times such as these, than during other times, that great risks are more likely to turn into fortunes. trimtabs.com: Overnight Liquidity Update - January 26th, 2004 EQUITY INFLOWS ACROSS THE BOARD CONTINUE TO OUTWEIGH CORPORATE SELLING. $13.2 BILLION POURS INTO JUST U.S. EQUITY FUNDS DURING FIRST THIRTEEN DAYS OF JANUARY. The stock market continued its upward course during the holiday-shortened week ended Thursday, January 22, with the TrimTabs market capitalization rising 1.4% to $15.82 trillion. The estimated net change in the trading float of shares (L1) was slightly bearish, rising $618 million, roughly in line with the $417 million average weekly gain in L1 over the past four weeks. L1 growth has been restrained in recent weeks by a small number of large stock buybacks. Once again, a single large-capitalization transaction-a $3.0 billion buyback for Verizon-accounted for nearly all of the dollar amount of corporate buying during this past week. We obviously need to revisit our L1 model and adjust size of new buybacks with number. Meanwhile, new offerings surprisingly declined from the previous week. The most significant liquidity news of this past week, however, was the continued strength of inflows. Investors dumped $4.8 billion into U.S. equity funds during this past week and $13.2 billion during the first thirteen days of January. As the online brokers reported last week, individuals are heavily buying directly as well. ONE LARGE-CAPITALIZATION BUYBACK ACCOUNTS FOR MOST OF CORPORATE BUYING DOLLAR AMOUNT. Corporate buying remains limited. Just two new cash takeovers for a mere $291 million were announced during this past week. Southwest Airlines also repurchased shares during this past week. Over the past four weeks new cash takeovers have averaged $450 million weekly, and only seven takeovers involving cash have been announced. Clearly the "house" in the stock market casino-public companies and the insiders who run them-sees more value in cash than in the shares of public companies. Only eight new stock buybacks for $3.9 billion were announced during this past week. A single $3.0 buyback for Verizon accounted for over three-quarters of the weekly dollar amount. At current valuations, however, the lack of broad-based corporate buying is not surprising, and we doubt that corporate buying will strengthen any time soon. APPARENT PURPOSE OF MICROSOFT BUYBACKS: PROP UP STOCK PRICE SO INSIDERS CAN BAIL OUT. One of the finest examples of a public company acting as the "house" in the stock market casino is Microsoft (MSFT). With a market capitalization of $300 billion, MSFT insiders hold enormous paper profits in their shares. For example, Bill Gates is reportedly worth over $50 billion. Of course, this statement is true only as long as Bill Gates does not sell his MSFT stock. Yet he cannot sell his MSFT stock for cash today. He cannot even sell it over the course of a year or more. Why? No one, other than Microsoft itself, has $50 billion to pay him for his stock. MSFT insiders face a dilemma: how can they sell their shares without destroying their underlying market value? MSFT's solution appears to be using corporate cash flow to support its stock so that insiders can bail out over time. MSFT has repurchased $19.3 billion of its shares since the beginning of calendar year 2000 (MSFT officially uses a June fiscal year, but we are using calendar year data for simplicity). Probably not coincidentally, the dollar amount of insider selling at MSFT has been nearly identical to the dollar amount of buybacks. According to Thomson Financial, all MSFT insiders required to file with the Securities and Exchange Commission (SEC)-which do not include line types and ordinary millionaire engineers-have sold $18.3 billion in MSFT shares since the beginning of 2000. We guess that employees not required to file with the SEC have sold at least $4 billion. Thus, all MSFT insiders have probably sold over $22 billion in MSFT shares over the past four years. While what MSFT appears to be doing is not exactly "pump and dump," it is in the same arena. MARGIN DEBT AT ON-LINE BROKERS GROWING FASTER THAN MARKET. At Ameritrade-the largest pure on-line broker-margin debt rose 24.5% during the fourth quarter to $2.74 billion from $2.20 billion. At E-trade, margin debt rose 21.3% to $1.76 billion from $1.45 billion. Schwab, which is only partly an on-line broker, saw margin debt rise 13.3% to $8.5 billion from $7.5 billion. Since overall margin debt rose 11.1% during the fourth quarter, a rise twice as fast at the online brokers was not as excessive as we had thought. We expect that borrowing to buy at on-line brokers will grow even faster during the first quarter of 2004, just as it did during the first quarter of 2000. $13.6 BILLION FLOWS INTO U.S. EQUITY FUNDS DURING FIRST THIRTEEN DAYS OF JANUARY. Based upon the 15% of U.S. equity funds that we track daily, we estimate that all U.S. equity funds had an inflow of $4.8 billion over the five days ended Thursday, January 22. This inflow was nearly as heavy as the inflow during the previous week. Over the past four weeks, inflows have averaged $3.2 billion weekly. Global funds had an estimated $700 million inflow during this past week. So far this year, inflows at global funds have been slightly higher than the $400 million weekly average in 2003. Bond funds had an estimated $900 million inflow during this past week, roughly the same as the $700 million inflow during the previous week. INFLOWS IN JANUARY SHOW NO SIGN OF SLOWING FROM THEIR TORRID PACE. The continued strength of inflows was the major liquidity news during this past week. Placing the January 2 outflow from all U.S. equity funds in December, an estimated $13.6 billion has been shoveled into all U.S. equity funds during the first thirteen days of January. Fueled by year-end bonus money and retirement plan contributions, this inflow is the largest inflow during the first thirteen days of the month of this entire bull market. BUBBLE REDUX: INFLOWS DURING JANUARY 2004 NEARLY AS STRONG AS INFLOWS DURING JANUARY 2000. The first part of the table below shows inflows into all equity funds, U.S. equity funds, and international equity funds during the first thirteen days of the past five months. What's most significant is that inflows have remained heavy over the first part of the past five months, regardless of whether the market has been up or flat. Note that the numbers in this table differ from what appears in the four-week fund flow table because the January 2 inflow that we report was actually from December 31. The second part of the table shows inflows during the first thirteen days of January 2000 through March 2000. Note that inflows during the first thirteen days of January 2004 were nearly as strong as those during the same period in January 2000, although the increase in net asset value has been much stronger this January. It is possible that this January's inflow could surpass the all-time record January inflow of $28.0 billion January 2000. Last week, we thought that inflows might start to ease, since year-end bonus money and retirement plan contributions often boost inflows during the first part of January. So far, though, inflows into all U.S. equity funds have shown few signs of slowing. Investors are far more concerned about missing the next leg up than they are concerned about any downside-exactly the mentality of the herd at market tops.