It’s too early to turn bearish on stock market

Jan
29

By Charles Biderman

 

I love Rick Santelli and the opportunity I had to be with him on CNBC Monday. However, during the four-minute segment, I didn’t have the opportunity to say that it probably is too early to turn bearish on the stock market.

 

TrimTabs tracks in real time new inflows into US equity mutual funds and ETFs. Historically January and April are the two biggest months for equity fund inflows. January is important because many people make once a year investment decisions. April sees big inflows because of tax avoidance investing.

 

This January was a real whopper in terms of inflows. In addition to the usual start of the year new money, there have been two other sources of cash. And by the way, money is not leaving bonds for stocks. Bonds funds are still attracting lots of new cash.

 

I believe the major source of new funds this January came from stocks sold before year end 2012 avoid higher capital gains taxes that was then reinvested. There is no way of knowing how many billions dollars in stocks were sold before year end to avoid higher capital gains, but I think it was a lot.

 

The other new cash that went into the equity markets was part of the $60 billion of this year’s income taken in December 2012 to avoid higher tax rates. Since those who recognized this year’s income tax last year were obviously wealthy, a good portion of that income probably went into risk assets. Hence we had a record flow.

 

I firmly believe that this inflow will subside as we move into February. However, I will not increase my short positions until the inflows end. Once the inflows end, the key metric to watch is whether the trading float of shares grows or shrinks. As I said on CNBC, January was the first month since last September that new share sales by public companies were greater than buybacks. But the total dollar amount of selling was not huge. So while corporate selling should be picking up starting this week, it will take a sustained bout of new share sales to turn this market south.

 

What I did mention on the air is that higher 10-year interest rates are already creating a slump in mortgage activity. Remember that last year as mortgage rates dropped, real estate activity picked. That enhanced both income and GDP. This year, as interest rates on the 10-year notes approach 2% — the level from which it dropped last year — real estate activity is likely to contract, making for a big year over year negative comparison.

 

On the other hand, one thing that I did not take into consideration enough in the past is that the Federal Reserve each day now creates $4 billion of new money and uses that new money to buy mortgage bonds and longer term treasuries. Those who sold their bonds to the government got newly created money with which to buy other risk assets. Which means that some of that new money has probably gone into equities as the new money moves down the chain of risk assets. In other words, the Fed is investing in US stocks and in essence is rigging the equity markets.

 

Therefore until inflows into US equity funds stop and corporate America overwhelms the market with new shares I will not increase my short position.

 

Rigged markets never end well, but staying solvent until the market does crack is essential to financial survival.

 

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6 Responses to It’s too early to turn bearish on stock market

  1. Mark Dent on January 29, 2013 at 2:16 pm

    Charles have you lost your mind? Too early to turn bearish on the stock market? I can’t count he number of times that you have proclaimed your bearish view on the stock market in recent months. THE FACT IS YOU HAVE BEEN BEARISH ON THE STOCK MARKET. You have been bearish and wrong.

    • Gordon on January 29, 2013 at 10:17 pm

      Yes Biderman has lost his mind, but more importantly he has proved by going BEARISH last July and going on talk show after talk show for the last six months and proclaiming such is on the record as bearish and has proved to all of his blog followers that he is not a Market Timer as he claims to be. Well maybe he is a market timer but being wrong for six months is the sign of a very poor market timer.

  2. Krish on January 29, 2013 at 4:53 pm

    I agree with Mark, Since you are bearish from long and may be loosing money advising everyone to be bearish from long.
    Check your last few videos what you are advising.

    Now you are changing to April.

    Market anyway will come to halt some day than you will say I said thats no brainer

  3. Quinn Ronin on January 29, 2013 at 5:28 pm

    @Mark & Krish

    An ancient Zen annecdote: Young monk to old monk listening to one of the master’s sermons: “The master seems to be contradicting himself.”
    Old monk: “Well, his Zen is not very good….”
    The master finds out what the old monk said.
    The next day the master delivers a completely different kind of sermon.
    Young monk: “The master is again contradicting himself!”
    Old monk: “Yes, his Zen is very good!”

  4. Katie on January 30, 2013 at 7:00 am

    without the extraordinary inflows from 2013 Q1 earned income and from stock sales in 4Q 2012 to avoid capital gains taxes, the stock markets would be sinking lower.

    I agree with Biderman that the equity markets are overinflated and rigged,it’s just a matter of time before they finally collapse.

    The can keeps being kicked down the road, but this the time the road leads to a very steep fiscal cliff!

    • Ed_B on January 30, 2013 at 8:07 pm

      I agree, Katie. Many successful small investors grew up in a stock market that was governed by fundamentals and news about the economy, companies, and the nation. Much of that has been swept aside by the current market rigging policies of the Fed and the Gov. So… what is left for a small investor to observe to know which way to go to make a few dollars? I agree with Biderman that it is good to watch the share float, personal earnings, and herd money movements.

      Like others, my wife and I both pulled income from our IRAs into 2012, rather than 2013. The widespread nature of such a move is a substantial contribution to the economy of 2012 vs. that of 2013.

      Of course, Fed and Gov policies will continue to trump fundamentals until they do not. The breaking point where they do not will be reached but no one knows when that will occur and the market takes a BIG hit. Schizophrenic markets can stay crazy far longer than most of us can stay solvent, so invest carefully and keep your stops close.

      As to bonds… it would be difficult to come up with a worse investment at the time. The BLS claimed annual inflation rate of 2.5% is absolutely bogus and completely divorced from the reality that everyone who shops for their daily needs understands. REAL inflation is a lot closer to 9-10% than it is to 2-3%. With a 10 year bond paying just under 2% and even the admitted, let alone the real, rate of inflation being higher than that, bonds are guaranteed money losers. As if that was not bad enough, bond holders will then be taxed on their “gains”, making a bad investment even worse. For the past few years, I have been using big cap dividend stocks and REITs to provide income for my portfolio. This has worked well and has delivered real income that exceeds the rate of inflation. While this has worked well, it could also come to a screeching halt at any time, so all small investors should remember to be and stay nimble in this market.

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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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