Every Major Asset Class In The World Is Overpriced
By: Minyi Chen, CFA, Portfolio Manager of AdvisorShares TrimTabs Float Shrink ETF (TTFS) TrimTabs Asset Management, 40 Wall Street, 28th Floor, New York, NY 10005, www.trimtabs.com
We wanted to share a part of a report that TrimTabs sent out over last weekend that received some attention on CNBC on June 10, 2013. Please let us know if you would like to receive a full copy of the report. TrimTabs research focuses on fund flows and float shrink. As you know, they believe the market is heavily influenced by what people and institutions are doing with their dollars. You can read more about the research behind float shrink at AdvisorShares.com.
– Demand Indicators Somewhat Bearish for Short Term and More Encouraging for Longer Term. Market Volatility Puts Modest Damper on New Stock Offerings.
– Bond Fund Flows Decline for Five Consecutive Months, and Bond Funds Lose $7.3 Billion since Start of May 2013 as Yields Rise Sharply.
– No Sign of Pickup in Lackluster U.S. Economic Growth, and Manufacturing Sector Particularly Weak.
We think investors with a longer-term outlook should tread carefully in financial markets. The Federal Reserve and its fellow central banks have succeeded in making almost every major asset class in the world overpriced. And it is amazing how quickly bubble behaviors from the last decade have come back. To name just a few examples, global junk bond issuance is running at a record pace, house flipping in California is running at the fastest pace since 2005, and Wall Street firms are creating synthetic collateralized debt obligations in size for the first time since 2009. Confidence that central bank intervention can solve economic and financial problems has never been higher than it is today.
We first advised traders to consider trimming long positions in TrimTabs Overnight Liquidity Update on Tuesday, May 21, the same day the S&P 500 Index hit a record closing high. But we are not convinced that the high that day was the ultimate top of this central bank liquidity-fueled rally. Our intermediate-term demand indicators turned more favorable in the past week. The TrimTabs Demand Index closed at 82.0 on June 6 comfortably above the interim low of 70.4 on May 21 (readings above 50 are bullish). Since the index exceeds 75, the TrimTabs Demand Index is leveraged bullish (200% long) on U.S. equities.
While the longer-term outlook is favorable, we believe a contrarian analysis of ETF flows suggests stock prices are unlikely to bounce much more over the short term. Investors in leveraged ETFs have turned upbeat, which is negative from a contrarian perspective. In the past week, leveraged long ETFs issued 13.5% of assets, the biggest inflow all year. Another negative contrarian signal is that inflows into U.S. equity ETFs have been elevated. These ETFs issued $12.4 billion (1.6% of assets) in the past month.
Corporate liquidity flows in the past week were pretty inconsequential. On the sell side, new stock offerings totaled $6.7 billion amid the stock market pullback, led by another government sale of General Motors shares. On the buy side, companies announced a modest $7.8 billion in float shrink. We believe the float is unlikely to shrink much later this year if corporate actions do not turn more bullish than they have been in May and June. Since the start of May, announced corporate buying (new cash takeovers + new stock buybacks) of $77.5 billion has been $33.1 billion higher than new offerings of $44.4 billion.
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