Biderman’s Daily Edge 3/20/12:Third Consecutive False Dawn for Stocks & Economy

Mar
20

 

The stock market is up over 11% so far this year benefiting from the Fed printing press, this time called Operation Twist. We at TrimTabs have been bullish for most of this year and likely will remain bullish for perhaps few weeks longer, mostly like turning bearish well before Operation Twist ends this June.

 

Meanwhile the big year to date move in stock prices apparently has almost everyone else convinced that the US economy has to be growing much faster then it really is, or else stock prices would not be up so much.

 

If only that were the truth. There is only one reason the stock market is rising and that is that the Federal Reserve has given away so much free money that the public companies are using their balance sheet cash to buy back many more shares than they and the public are selling.

 

Remember in both 2010 and 2011 the stock market was up over 10% and believe it or not the consensus among Wall Street professionals and the financial media was that the US economy was on the road to a sustainable recovery at the beginning of both 2010 and 2011. In neither case was the US economy in a sustainable recovery and that mistaken belief is what is again happening this year.

 

Last year, at the start of 2011, the stock market was boosted by the impact of QE2, and after rising just over 10% year to date by the end of April, two months before QE2 ended, the stock market started to sell off eventually dropping more than 20%. Two years ago in 2010, after a similar seemingly healthy 10%+ gain to start the year, stock market also started to sell off by the end of April, also plunging by more than 20%.

 

How quickly we forget the past. This year, the bulls are hoping that this time the US is in a real recovery. Unfortunately it is not. The job market is growing, by about 100 to 150,000 new jobs per month, but no where near the 250,000 bogus jobs reported by the Bureau of Labor Statistics. Similarly wages and salaries so far this year are growing by about 3% year over year, a rate of gain roughly equal to inflation, but no where near the 5% nonsense number estimated by the Bureau of Economic Analysis.

 

Finally the housing market is also reportedly improving numbers based upon seasonally adjusted numbers boosted by an exceptionally warm January and February. The reality, as I have previously reported on my video blog, is that the housing market is still at least a year away from a bottom, let alone a recovery.

 

To repeat, the only source of new money with which to buy stock is coming from companies buying back many more shares then they are selling. However, that could be changing.

 

While companies are continuing to buyback shares, which is why we are still bullish, there are some reasons to worry about that trend. First of all insider selling is surging. The rate of insider selling to buying went from a 5 to 1 ratio in January to a 14 to 1 ratio of insider selling to buying in February to 35 to 1 starting the second week of March.

 

Similar, there have been none, zero, new cash takeovers announced so far this month compared to monthly rate of $15 billion last year, and the pipeline of companies wanting to sell new shares is ramping up big time. To me that says that while lots of buybacks are still happening now, that trend could be ending sometime soon, particularly now that Operation Twist is approaching its end.

 

To sum all this up, yes, we remain bullish for now, but I am getting very close to the exit.

 

Charles Biderman
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)

 

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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