Buy Float Shrink & Tech Stocks Whether Market Cracks or Not

Dec
20

 

By Charles Biderman

Over the past year since I started doing these videos, I have said many times that I expect the stock market to crash at some point in time, the only question is when. That does not mean I do not own and buy stocks. Yes, while my holdings include gold, inflation protected Treasuries and short positions, I am also long stocks and have been regularly buying.

 

To summarize why I have been saying stocks have to crash is that the $10 trillion gain in the market value of all US stocks since March 2009 is solely due to US Government and Federal Reserve being able to both print huge amounts of money to pay bills while reducing interest rates to zero at the same time. Now if all the money printing was resulting is US economic growth accelerating if not today maybe tomorrow, one could excuse today’s high stock prices. But not only is US economic growth not accelerating, the growth rate will decline next year due to around $150 billion in higher taxes at a time when total after tax take income has been growing by $400 billion a year.

 

Some of you might think that is a contradiction, saying I will buy stocks while expecting both a market crash and slowing economic growth. It is not a contradiction to me. And here are two reasons why.

 

One, there is still a rapidly growing worldwide broad band economy that even our dumb ass governments have not yet been able to screw up. That is why I own now and have owned for a long time Apple (AAPL), Salesforce.com (CRM) and Amazon.com (AMZN). Believe it or not, if Facebook has another good quarter monetizing its friends, and now that all the insider shares are unlocked, I probably will start buying FB. For the record, I owned Google for a long time before selling a year or so ago. My concern is not that I think Google is a bad company, but I do have a concern that while GOOG does own search, search is in danger of becoming commoditized by value added vendors.

 

Two, in all conversations I have with investors, I recommend dollar cost average buying of companies using free cash flow growth to shrink the trading float of shares. Some companies grow cash whether the economy is good bad or indifferent.

 

Remember, there are two ways companies can give money back to shareholders. The first and most obvious is via dividends. Less obvious, but historically better for shareholders in terms of higher stock prices, companies can reward existing shareholders by using free cash flow to reduce the total number of shares outstanding. Think about it, if the company reduces its share count by 5%, that means shareholders now owns a 5% bigger stake. And that is even before considering the possibility of higher dividend tax rates.

 

Over the past year or so, portfolios of companies that are using free cash flow to shrink the float have not only significantly outperformed all dividend ETFs, but also the overall market. And going forward into a world of little economic growth, where money printing and debasing the currency is the standard, I only want to own companies that consistently grow free cash and use that cash to shrink the float. Or I want to own technology market leaders while they grow market share.

 

To summarize, in an elevated stock market and facing an economy where economic growth is anemic at best, yes I remain short Europe, the big banks and emerging markets. But I am long tech and float shrink, and will add to both positions over time if the market remains at or around current levels or plunges.

 

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2 Responses to Buy Float Shrink & Tech Stocks Whether Market Cracks or Not

  1. Ed_B on December 21, 2012 at 6:20 am

    Charles… your opening statement reminded me of a quote that I read many years ago. I believe that this was said by a French philosopher who was challenged by someone else for inconsistency. His reply was, “I contradict myself? Very well. I am complex!”. ;-)

    As a successful amateur investor for the past 3 and a half decades, I can honestly say that the stock market of today does not look much like that of the 1980s or 1990s, when it was not only possible but reasonably easy to make a lot of money in the then booming economy. Today, we have: 1) near zero interest rates that punish savers and reward the extravagant; 2) high frequency trading that allows those who can do it an advantage over all the rest of us who cannot; 3) a Fed that consistently either raises interest rates too high or pushes them too low and then holds them in those inappropriate positions for far too long; 4) a crony system wherein who you know matters MUCH more than what you know; 5) large but poorly run companies that are not allowed to fail, no matter how desperate their need is for exactly that; 6) banks and other financial institutions that are WAY too big and that therefore cannot be allowed to fail at any cost; 7) multiple distortions of the supposedly free market that makes predicting future market moves virtually impossible because they depend on Fed and Gov market manipulation policies rather than on stock fundamentals and national and/or world events; 8) more than a quadrillion dollars worth of the financial sludge known as derivatives that will collapse the entire world financial system should even 0.5% of these highly leveraged bets implode, which they will at some point; 9) fiat currencies that are rapidly being printed to extinction ala Weimar Germany and Zimbabwe; and 10) regulator agencies that are primarily staffed by those who will return to their former careers at the same businesses that they now supposedly regulate. Hmmm… did I miss anything that belongs on this list?

    From my point of view, it is clear that I cannot use most of my previous market experience to make money in what has morphed from a relatively free market into a rigged casino; virtually all of which can be traced directly to incompetent Fed and Gov policy. I do not believe that I am alone in these assertions and that this is likely the reason behind the flight of capital from many of the stock mutual funds.

    While the stock market has any number of problems, I also believe that the biggest bubble outside the derivatives market is the sovereign bond market. As with most anything else that is available in virtually unlimited quantity, these bonds are being seen by more and more investors as a bubble asset and this is why the Fed now has to routinely purchase more than 70% of them at every US Treasury auction. If these were viewed as desired assets, investors would be flocking to buy them and the Fed would not have to be the purchaser of last resort. If this continues much longer, the Fed could well become the purchaser of only resort. This is the result of producing a product that pays a lower rate of return than the Fed / Gov stated rate of inflation, which is about 2/3 too low IMO, and then investors get taxed on their minuscule interest “gains”. Such a deal!

    • Ed on December 21, 2012 at 2:03 pm

      On your list you missed the fact that most of the economic data reported by the various govt agencies is contorted to look “better than expected” or “at positive levels not seen since before the economic crisis”.

      It’s all about trying to give consumers a false sense of confidence to spend more…even though they may get laid off the following day/week/month.

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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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