Huge US Equity Fund Inflows Being Funded By Tax Front Running Income


By Charles Biderman


As we start the second half of January, this is a particularly good time to check out what real time data on flows and income has been telling us about the first half of this month. What has caught the attention of the media and markets is that a huge amount of money has gone into stocks since the beginning of the new year. TrimTabs Investment Research says that an amazing $39 billion has been invested in US and Global equity mutual as well exchange traded funds during the first ten trading days of January.


Compare that $39 billion ten day flood of cash with the entire month of January, 2012 when less than half of that amount, or $18 billion, flowed into equity funds. Let us not also forget that January 2012 was a very good month for stocks. The S&P 500 rose more than 4%.


What’s particularly amazing is that $11 billion flowed into US equity mutual funds for the first ten trading days of this month, compared with a $2 billion outflow in January 2012. Moreover, that current inflow if it lasts will be the first month inflow since February 2011.


To me the most important question right now is where is this money coming from and how much more is there to flow into stocks?


My answer is that most of the new money is probably already invested. And the bulk of that new money came from three pots. The first and smallest is usual year end inflows. A bigger pool came from sale of stocks prior to this yearend to avoid 2013′s higher taxes. An additional source of cash also resulted from front running of bonus income and other income into December, 2012 to avoid the tax hikes.


Based upon our site table of US Individual Taxable Income, which is being revised today with data as of Friday, January 12, I estimate that at least $100 billion in extra income was recognized in late 2012. And that is the source of new cash for investments so far this year. As I have previously reported in these videos, Q4 2012 income was up $60 billion as a result of the front running of bonuses and the like and about $40 billion came from sale of stock and other assets before year end.


Our real time income data is currently still being distorted by the front running of the 2013 tax hikes. Income tax payments were still up by almost double digits the first few days of this January. However, over the last four days we have begun to see a slowdown in income tax collections.


To repeat what I said at year end, the front running of what would have been 2013 income into the fourth quarter of last year will make 2012 year end look better. But that lack of income this quarter will make the economy look worse than it would have starting now. So, if we subtract about $60 billion in income that would have occurred in the first quarter of this year and about $50 billion in higher taxes, that should wipe out any gain in income this year over last year.


Moreover, lower take home pay has to translate into slower economic activity, and therefore lower sales and income for public companies. What you really need to keep in mind is that the rest of the financial world looks backward for its data and does not look at real time the way we do. Therefore most of Wall Street predicts the future based upon past trends. That unrealistic way of predicting future trends could keep stock prices up this month before they begin to fall next month if my prediction of slowing economic growth starting now is accurate.





3 Responses to Huge US Equity Fund Inflows Being Funded By Tax Front Running Income

  1. Katie on January 17, 2013 at 6:51 am

    Thank you Charles for helping to explain why equities continue to stay levitated and have in fact gone up overall so far in Jan despite a few air pockets. What goes up eventally comes back down with a thud.

  2. Chris on January 18, 2013 at 3:01 am

    There are no thuds in the QE world. The central bankers have us all driving nerf cars…..a bump or even a boulder in the rode simply causes a bounce. We bounce off market events and continue on our merry way. It will take a monsoon of debt to saturate the nerf and change the trajectory…but as Japan has shown everyone, the shell game can be played for a very long time even if it means diminishing quality of life.

  3. Ed_B on January 20, 2013 at 5:57 am

    As Everett Dirkson once famously said, “A billion here, a billion there, and pretty soon you’re talking REAL money”. I agree that the capital flow into US stocks is a little encouraging compared to all of the outflows over the last several months but am wondering just how much capital is sitting on the sidelines in money market funds compared to these capital flows. If it is some trillions of dollars, that is enough to make these capital flows look like small potatoes in spite of the 9 zeros following their numbers.

    Personally, I went to about 75% in cash (MM fund) last August and am watching the market carefully for what looks like a valid entry point. So far, I am not seeing one. Perhaps I am just waiting in vain for an adult conversation to break out in DC? Failing that, I have very little confidence in the shell game that the Fed is running or in the Obama economic policies that govern what the stock market will do next. The more gold and silver I own, however, the better I like it. At least the knuckleheads in DC can’t print, borrow, or squander any more of those.

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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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Mr. Charles Biderman is an associated person of Trim Tabs Asset Management, LLC, an SEC-registered investment adviser. All opinions expressed by Mr. Biderman on this website are solely those of Mr. Biderman and do not reflect the opinions of Trim Tabs Asset Management, LLC, Trim Tabs Investment Research, Inc., their affiliates (collectively, “Trim Tabs”), or any other associated persons of Trim Tabs. No part of Mr. Biderman’s compensation from Trim Tabs is related to opinions which he expresses on this website, elsewhere on the internet, or in any other medium.

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