Underwriters Lose No Time Pumping Out New Shares after Labor Day
Minyi Chen, CFA, Chief Operating Officer of TrimTabs Investment Research and Co-Portfolio Manager of AdvisorShares TrimTabs Float Shrink ETF (NYSE Arca: TTFS) shares his insight on recent fund flow trends.
The U.S. stock market historically performs more poorly in September than in any other month, but this month may buck the historical trend. Our demand indicators continued to turn more favorable for both the short term and the intermediate term in the past week. As for the short term, investors are still unloading U.S. equity ETFs, which is bullish from a contrarian perspective. These ETFs redeemed $27.2 billion (3.3% of assets) in the past month, the biggest trailing one-month outflow since February 2008. Another positive contrary indicator is that leveraged ETF investors have turned pessimistic. Leveraged long ETFs redeemed 15.3% of assets in the past week, the biggest outflow this year, while leveraged short ETFs issued 0.8% of assets.
Turning to supply, we are concerned about how quickly underwriters started dumping new shares into the market after Labor Day. New offerings reached $5.2 billion in the past week, led by large overnight deals for LinkedIn ($1.4 billion), LyondellBasell Industries ($1.2 billion), and Jarden ($800 million). Assuming stock prices hold up, we would not be surprised if new offerings accelerated to $8.0 billion ($1.6 billion daily) this week. If and when new offerings start topping $10 billion weekly, it could make it tough for stock prices to move higher. The U.S. stock market has historically performed poorly when new offerings exceed $10 billion per week.
Given the weakness of wage and salary growth and employment growth as well as massive redemptions from bond funds—bond mutual funds and exchange-traded funds have lost $44.3 billion (1.2% of assets) since the start of August—we expect the Federal Reserve to reduce its money printing later this year by no more than $15 billion to $20 billion per month.
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