MarketVVizard's Market Thoughts

Top 910. Feb 11, 2004 6:42 AM

» Austrian - Interesting Commentary

With the US Dollar as the reserve currency of choice, the impact of the Fed and US gov't is or can be global.

Regards,

-- Austrian

Is Alan Greenspan Behind China's Bubble Too?: William Pesek Jr.
Feb. 11 (Bloomberg) -- Globalization is globalizing the Federal Reserve.

It has 12 districts and acts based on U.S. events, but its influence has never been greater. It isn't far-fetched to think of Latin America as the 13th district, Southeast Asia the 14th, Russia the 15th, China the 16th, and so on.

Perhaps it's not surprising, then, that some observers are blaming the Fed for problems in one of its de facto, satellite districts. China, Asia's second-largest economy, is experiencing a dangerous asset bubble, one that's making investors antsy.

It seems a reach to blame Fed Chairman Alan Greenspan and his colleagues here in Washington. After all, Asia isn't a huge blip on the Fed's radar screen these days. The Fed also has taken its share of flack for the U.S. bubble of the late 1990s. But the U.S. central bank's global reach is being felt in Asia.

``The Fed commitment to keeping interest rates low for a considerable period of time fueled speculation in high-risk assets,'' says Andy Xie, Hong Kong-based chief economist at Morgan Stanley Asia Ltd.

``The byproducts of this speculation,'' Xie explains, ``are the wealth effect on consumption in the U.S. and the cheap capital-fueled investment boom in China -- the twin engines or bubbles, depending on your perspective, for the global economy today.''

The cycle, Xie says, will end with either the Fed reversing its policy or with a financial accident caused by the leverage building up in high-risk assets around the world. ``History would not be kind to the Fed,'' Xie says. ``Its accommodation and even encouragement of speculative excesses would be viewed as the primary cause of the massive bubble in the global economy today, the consequences of which are yet to show.''

The Fed's culpability is debatable. What's not is that speculative capital flows into Asia reached a record high last year, surpassing the previous peak in 1996.

The big recipients of capital in 1996 were Hong Kong, South Korea and Southeast Asia. This time, it's China. Just like the capital flow destinations of the 1990s, China is experiencing an investment bubble.

In 2003, East Asia's foreign-exchange reserves rose $234 billion more than the region's trade surpluses. That compares with an average of $26 billion in the 1990s and $8.3 billion in the 1980s. China and Japan were the main capital recipients in Asia last year.

The increase began in 2001, when the Fed cut interest rates aggressively to boost U.S. growth. Like clockwork, China's foreign-exchange reserves rose by more than its trade surplus for the first time since 1996. The inflows picked up speed and reached record levels last year.

What can be done about all this? China needs to tighten capital controls to slow the inflow, Xie argues.

Such a step would be anathema to free-market aficionados and to the Group of Seven nations, which last weekend renewed its call for flexible exchange rates. But the longer Beijing allows such rapid inflows of speculative capital, the more difficult it will be to avoid a financial crisis.

Xie's views are contrarian, indeed, but it's hard to dismiss them. The vast majority of world leaders, economists and investors think China's currency is undervalued and that Beijing should let it rise. That was certainly the thrust of the G-7's latest communique.

But ``the appreciation of China's currency, which many advocate as the main means to cool the bubble, would only encourage more speculation, as we saw in Southeast Asia,'' Xie says. ``The resulting bigger bubble would make a hard landing inevitable.''

China may be presenting economists with a rare throw-away- the-textbooks situation. Established macroeconomic models hold that more exchange-rate flexibility will squeeze some air out of China's bubble and keep the economy from overheating. Freeing the yuan may do exactly the opposite.

Beijing has taken steps to cool its economy. The central bank, for example, increased reserve requirements on commercial banks to curb money-supply growth. Higher interest rates in the U.S. could help temper China's boom. Global investors are looking for hints on the subject when Greenspan testifies in Congress this week.

``The massive swings in capital flows into Asia could only be explained by the speculative drives that rise or ebb with some stimulus,'' Xie says. ``The stimulus is usually Fed policy changes.''

It's doubtful Greenspan is preoccupied with all this. But those speculating on China's rise should keep two things in mind. One, the Fed's policy decisions here in Washington may have considerable influence on China's outlook. Two, what markets think they know about China's currency policy could be 100 percent wrong.

-- posted by Austrian

Top 911. Feb 11, 2004 7:11 AM

» Austrian - Re: Europe G7 and Secular Shifts

In response to message posted by Austrian:

And so reality hits the EU, at amazing speed, even reported in the domestic press. Stuck between the proverbial rock and hard place, they hint at currency intervention. Read printing Euros, read we are telling you what we are going to do. You currency traders have been warned. We won't reform toward freer markets, we will pollute our currency.

Can you say just one more step in the secular bear market? Can you say Secular Shift? Got Gold?

So begins the transitionary phase where the Euro corrects, gold drops, leading to the real bull market in commodities.

On a personal note, I think precious metals is the best idea I've ever seen. I am investing heavily, betting my future on the gold bull market. I believe there will be Cisco size gains in several PM equities, and 10 baggers galore from here.

Regards,

-- Austrian
EUROPEAN BUSINESS NEWS

EU Top Aides
Hint at Actions
To Rein In Euro

By JOHN MILLER and WILLIAM ECHIKSON
DOW JONES NEWSWIRES

BRUSSELS -- Continuing a month-long campaign of verbal warnings to stem the strengthening of the euro, European Union finance ministers hinted that some action -- such as intervention -- could be in the cards if the currency were to rise too much, too fast.

The ministers, concluding the second day of a monthly meeting, expressed satisfaction with the euro's present level but cautioned that they would be watching the currency closely. "It's not the level, it's the shock and rapid swings that are worrisome," Belgian Finance Minister Didier Reynders said Tuesday, after commenting late Monday that intervention to stem to the euro's rise was "possible." He insisted that no decisions on the matter would be made right away. The euro has risen more than 50% against the dollar since its record low of 2000.

Despite the comments from euro-zone officials, the euro has continued its strengthening since the weekend Group of Seven meeting in Florida. Late Tuesday in Europe, the euro was at $1.2727, up from $1.2694 late Monday in New York, and less than two cents below its record of nearly $1.29 reached last month.

Analysts say part of the euro's strengthening stems from mixed signals on the currency being sent by European officials that suggest disagreement and a lack of resolve. Indeed, adding to the mixed messages, a key official of the European Central Bank Tuesday played down the need for a cut in interest rates -- at least for the time being. In recent weeks, speculation has grown that the ECB might consider cutting its key rate of 2% to compensate for the damping effect of a strong euro on growth and inflation.

"A rate cut is not a topic at the moment," said ECB executive board member Gertrude Tumpel-Gugerell. "A rate change is not a topic." She said the bank would closely keep its eye on the path of the currency. She declined to comment on intervention to stem the euro's rise.

It is up to the European Central Bank to act on the euro. ECB officials have said privately that they prefer to intervene in coordination with other central banks, and the U.S. has shown little concern about the weakening dollar. Also, the ECB would prefer to intervene once the mood against the euro has shifted, to reinforce a trend rather than work against it. The ECB did intervene on several occasions in 2000, when the euro was at its weakest against the dollar.

The U.S. is unlikely to go along with any European proposal for joint action. Treasury Secretary John Snow only reluctantly signed onto the G-7 statement, as a concession to his European counterparts, and Bush administration officials hope the G-7 will stick to its rhetoric -- and inaction. While the administration wouldn't like to see a steep decline in the dollar, officials see the falling dollar to date as a boon for beleaguered U.S. manufacturers. A weaker dollar helps American companies compete against foreign firms.

In Japan, which has moved aggressively to stem the yen's strengthening against the dollar, officials said Tokyo's stance on intervention hasn't changed despite the G-7 statement's call for more flexibility in major economic areas that have inflexible currency regimes.

-- posted by Austrian

Top 912. Feb 11, 2004 7:24 AM

» MarketVVizard - Short SIRI 3.08

Company will go bankrupt, not sure when, but it will. Leave plenty of wiggle room for upside in the meantime.

Traders seem very confused last couple days. Some seem to think Greenspan will hint at inflation today and market will sell off. Others think he will explain that "patient" means no rate hikes and market takes off. All I know is we powered out of the oversold condition and are now close to overbought. Even though there might be a day or two left for upside, I think the downside risk is greator. I probably won't be going long at all this year, just like last year (off to a much better start this year).

-- posted by MarketVVizard

http://www.morganstanley.com/GEFdata/dig...

Top 913. Feb 11, 2004 7:40 AM

» Austrian - Re: Re: Europe G7 and Secular Shifts

In response to message posted by Normxxx:

Normxxx,
When I first saw your chart above, I thought the dynamics this time may be different, I am reconsidering my position. The impacts of globalization are economic certainly, but also social and political. With the net export of American jobs there will probably be a social led political reaction. The Dems are campaigning on this very issue. As Winston Churchill once said, "The further I look back, the farther forward I can see."

Thank you for your post

Regards,

-- Austrian

Global: Coping with the Global Labor Arbitrage

Stephen Roach (New York)

Month in and month out, the basic story really hasn’t changed. The United States remains in the midst of the most jobless recovery in modern-day, post-World War II history. It’s not the lags — especially after a 6% annualized growth spurt in the second half of 2003 and indications of more vigor to come in early 2004. Nor is it a measurement problem — with a small sample of households conveying a truth that a much larger sample of businesses is missing. Let’s face it: The Great American Job Machine has finally met its match.

To be sure, jobs are finally increasing. But the current hiring upturn pales in comparison with historical norms. Gains in private nonfarm payrolls have averaged only 84,000 over the past five months (September 2003 to January 2004) — less than half the 183,000 norm that was recorded, on average, over the comparable five-month interval of the previous six recoveries. Scaled for the expanded size of the US economy, this shortfall is even more serious. When compared with the 6.5% increase in private sector hiring that has occurred, on average, in the first 26 months of the past six cyclical upturns, the current decline of a little less than 1% translates into a shortfall of 8 million Americans who would have been at work had the US economy been on the hiring trajectory of the typical recovery.

The income implications of this hiring shortfall are equally profound. Private sector wage and salary disbursements — by far the largest component of personal income — are still down about 1% in real terms relative to levels prevailing at the trough of the last recession in November 2001; that compares with gains that averaged about 9% over the 25 months of the previous six upturns. That’s the functional equivalent of a $400 billion shortfall in real consumer purchasing power. Lacking in the fundamentals of income support, the current rebound is being fueled by more “toxic” sources of growth — budget deficits, reduced private saving, debt, and the extraction of purchasing power from over-valued assets such as property. Until that changes, the sustainability of this recovery remains an open question, in my view.

Nor do I buy the commonly expressed view that the data are simply wrong — that the payrolls-based survey of business establishments simply misses the inherent dynamism of risk-taking entrepreneurs whose enthusiasm for hiring can only be captured in the so-called household survey. Yes, the household-based job count is up 1.4 million workers in the 12 months ending January 2004 — well in excess of the paltry gain of 6,000 as measured by the establishment survey. According to the US Bureau of Labor Statistics, a little more than 25% of that discrepancy can be traced to definitional differences between the two surveys — namely a household survey that includes the self-employed, unpaid family workers, and private household staff. But the remainder of the difference could well be a perceptual one — disaffected workers sampled in the household survey who have downgraded their aspirations and simply won’t admit to the tougher reality depicted by businesses in the establishment survey. Yet there is really no comparison in the sampling accuracy of these two surveys. According to the US Bureau of Labor Statistics, the “active sample” of some 400,000 establishments in the payroll data covers about one-third of the total universe of such workers; by contrast, the monthly sample of only 60,000 households covers only 0.06% of the universe of over 106 million households in the United States. There is no doubt in my mind as to which of these two surveys should be trusted.

In these days of froth, the broad consensus of investors has continually ignored the hiring shortfall — choosing instead to draw comfort from the spin that vigorous job creation is just around the proverbial corner. I have stressed the “global labor arbitrage” as an alternative explanation as to why those hopes may not be realized in any short order (see my October 6, 2003 essay in Investment Perspectives, “The Global Labor Arbitrage”). In coming up with this hypothesis, I made an effort to step back and identify new characteristics of the macro environment that are coming into play, which might alter the traditional relationship between employment and aggregate demand. Three such forces quickly went to the top of my list — the maturation of offshore outsourcing platforms in places such as China and India, the Internet, and the cost-cutting imperatives of a no-pricing-leverage world. It is the confluence of these forces that strikes me as so unique in the current climate — an unprecedented interplay that has the potential to have a lasting impact on the hiring dynamic in high-wage economies such as the United States.

I have been criticized for exaggerating the potential impact of this cross-border arbitrage on current US hiring trends. Right now, the metrics are fuzzy, at best. The benchmark estimate of white collar offshoring comes from the IT research firm, Forrester, who calculates that “only” 3.3 million US business processing jobs will shift offshore by 2015. Like all estimates of IT-enabled transformations in the real economy, this one could also be well short of the mark. The details of the just-released January payroll employment survey hint at just such a possibility: Job losses were evident in a host of service sector categories that are prime candidates for offshoring — namely, accounting and bookkeeping (-18,000), business support services (-8,000), architects and engineers (-2,500), legal services (-800), and computer systems design (-600). For these areas, combined, US headcount is essentially unchanged over the past 12 months. At the same time, our calculations suggest that payrolls in America’s IT and information services segment are currently running about 350,000 below the profile of the recovery of the early 1990s — not exactly what would normally be expected of an increasingly IT-intensive US economy. Halfway around the world, anecdotal reports abound of surging employment in India’s IT-enabled export sector. In my view, these two seemingly disparate trends in America and India are not a coincidence — they are part and parcel of the same global labor arbitrage.

Painfully for disenfranchised workers, this is the way globalization is supposed to work. The theory, of course, is that surging incomes in the developing-world that arise from such offshoring spawn new markets and a new class of consumers. As supply begets these new sources of global demand, goes the argument, displaced workers in the developed world are presumed to be well positioned to uncover new sources of job creation. It’s a great theory, and, over the long run, inarguable, in my view. But the long run may be a good deal further in the future than most are willing to admit. First of all, consumers in low-wage developing nations such as China and India do not have job security or the benefit of institutionalized safety nets. China, for example, continues to eliminate 7–9 million positions a year under the guise of state-owned enterprise reforms and is lacking a national social security and pension system; little wonder its consumers remain predisposed toward saving. That underscores one of the inherent asymmetries of globalization: The shifting mix of global job growth may initially be driven more by the supply side of the equation in the low-wage developing world; conversely, demand-side impacts, which might spur hiring in the high-wage developed world, could lag for a considerable period.

But there’s another serious problem as well — a narrowing of the educational attainment gap between the developed and developing worlds. That could well inhibit the knowledge-based job creation that high-wage western economies are counting on to fill the void of the cross-border labor arbitrage. That possibility should not be taken lightly. US National Science Foundation data show that the United States is currently awarding only about 200,000 bachelor’s degrees in engineering and science, little changed from trends in the mid-1980s. By contrast, Asia’s annual graduates of science and engineering students (for China, India, Japan, South Korea, and Taiwan, combined) has now hit approximately 650,000 per year; that’s up over 50% from the graduation rate in the mid-1980s and fully three times the comparable degree production rate in the US. The US has long drawn comfort from the quality differential of its educational system; however, in the Internet Age with its ubiquitous diffusion of knowledge, innovation, and technological change, that may turn out to be an increasingly false sense of security. Needless to say, convergence on the human capital front raises serious questions about America’s future competitive prowess, as well as its ability to uncover new sources of job creation.

In the end, the global labor arbitrage may well meet its biggest challenge in the political arena. A record hiring shortfall in an election year certainly raises this issue to the top of America’s political agenda; that’s especially the case if job-related angst continues to move up the white-collar occupational hierarchy to segments of the US workforce that have never before felt the pain of economic hardship and distress. But harsh verdicts are also likely to be rendered by other politicians and policy makers around the world. The G-7’s Boca Raton communiqué is but the latest example. In my view, Europe and Japan are now united in pointing the finger at China as the scapegoat of global rebalancing; consequently, they seem to believe that China must now bear a greater share of the impacts of a weaker dollar — a point of view that doesn’t exactly sit well in Beijing these days.

The IT-enabled global labor arbitrage is emblematic of the inherent contradictions of globalization: It is the means by which jobs are created in poor countries while it is also the breeding ground of a political backlash in rich countries. Ultimately, these tensions will have to be vented — either through economics, or politics, or both. The steady drumbeat of America’s jobless recovery tips the scales more toward the political resolution. So does the recent verdict of the G-7. For that reason alone, I continue to fear a backlash against globalization that that takes the form of heightened trade frictions and mounting protectionist risks.

-- posted by Austrian

Top 914. Feb 11, 2004 8:31 AM

» Kirk - Re: Re: Re: Europe G7 and Secular Shifts

In response to message posted by Austrian:

Why don't we just look at Treasury Tax reciepts and plot those?

There should also be data on the tax forms that show total net income from wages and tips. The data might be a year late, but a good percentage of working folks have payments made by their employeers on a regular basis. We could add in quarterly tax estimates...

Of course, both surveys miss the underground economy... the workers who are hired to help mow lawns, take care of kids, etc.....

I think much of the lackluster recovery in jobs is due to the high level of employment the recession ended at. Normal recessions see the unemployment rate much higher... It might reflect some of the "jobless recovery" we are now seeing.

On the flip side, in the Bay Area, the unemployment and under employment rate is much worse than recorded. MANY have left the area and state to work. Some have left behind families but most just packed up and left to cheaper places to live where they could get a job. Funny thing is housing is still going up.... as there are still plenty who want to live here, many who are retired or comming from Asia with wealth earned there.

-- posted by Kirk

http://www.channelnewsasia.com/stories/a...

Top 915. Feb 11, 2004 10:18 AM

» Austrian - Re: Re: Europe G7 and Secular Shifts

In response to message posted by Austrian:

More on the Stability and Growth Pact falling apart, and disharmony in Europe.

STRASBOURG : The European Commission set the stage for a bruising battle with EU member states by calling for a huge increase in the bloc's long-term spending, partly to finance its biggest expansion yet.

The European Union's executive branch agreed to propose taking the EU budget to 150.2 billion euros (191 billion dollars) at the end of the 2007-2013 spending round, an EU source said Tuesday.

That would be a big rise from the level of nearly 116 billion euros that the EU budget is expected to reach in 2006, and be equivalent to 1.22 percent of the bloc's combined gross national income (GNI).

The EU's six biggest financial contributors -- including Britain, France and Germany -- have demanded a cap at 1.0 percent of GNI.

The Commission argues that the big increase is needed to fund an expensive wish-list of projects sought by the member states, not least the "big bang" enlargement from 15 to 25 nations this May.

Nearly all of the incomers are relatively poor former members of the Soviet bloc and will need large amounts of structural aid.

However, the richer member states counter that at a time when they are being sued by Brussels for failing to abide by EU budget rules, the Commission can hardly justify such a steep rise.

The Commission has taken EU finance ministers to the Union's top court for refusing to bring France and Germany to heel despite their repeated violations of the eurozone's Stability and Growth Pact.

Germany, the EU's paymaster, has slammed the Commission proposals as unrealistic.

"You can't say on one hand, you in Germany you have to save money and cut down expenditures, and demand at the same time: you have to pay more money to Brussels," Finance Minister Hans Eichel said late Monday.

"It doesn't work that way," added Eichel, who was commenting at a two-day meeting in Brussels of EU finance ministers which was expected to give short shrift to the Commission plans.

British Chancellor of the Exchequer Gordon Brown unveiled a strategy paper at the Brussels meeting demanding that "EU budget expenditure is limited and refocused to support the Union's priorities, including economic reform".

European Parliament chief Pat Cox retorted by calling on the member states to put their money where their mouth is.

"We cannot run an ambitious Europe of tomorrow on an empty fuel tank," he said, ahead of an appearance at the Strasbourg assembly by Commission chief Romano Prodi to formally present the proposals at 1530 GMT.

As the Commission has repeatedly pointed out, EU leaders have a long and costly list of long-term goals, including making the EU the world's most dynamic economy by 2010.

http://www.businessworld.ie/livenews.htm...

Infrastructure to get spending boost
Wednesday, February 11 11:34:17

(BizWorld)

The EU has moved to exclude private funding for public works from Stability and Growth Pact rules, leaving the way open for the Irish government to substantially boost its investment in infrastructure.

Eurostat, the EU's statistics office, said the assets involved in public-private partnerships should be classified as non-government assets and therefore recorded off balance sheet for governments, subject to certain conditions.
The private partner must bear the construction risk and at least one risk, Eurostat said. "This has important consequences for government finances, both for the deficit and the debt," it said.

With a very low level of national debt, the Government should be able to borrow more than it does for investment in essential infrastructure projects.

But under the existing rules, the full cost of projects is charged in total to Government accounts, which could push Government borrowing over the current maximum level of 3pc allowed by the Growth and Stability Pact.

But today's more flexible interpretation of the rules means that governments should be able borrow more as the cost of private investment is not included in borrowing calculation.

-- posted by Austrian

Top 916. Feb 11, 2004 10:39 AM

» azxcvbnm - Re: Re: Re: Europe G7 and Secular Shifts

In response to message posted by Austrian:

I knew it! Liberals just can't help themselves from spending every last Euro and then some! Looks like the EU will be just another massive layer of beauocracy, so all the gains from the adoption of a single currency will be wasted and more. Unlike Europe, we have at least some desire for fiscal responsibility. So although the dollar is falling against the Euro right now, the longer term prospects indicate a higher dollar as our deficits are eventually cut back.

-- posted by azxcvbnm

Top 917. Feb 11, 2004 10:45 AM

» MarketVVizard - Greenspan's testimony

I've been listening to Greenspan's testimony. These are always entertaining!

Well we pretty much got the reaction I expected as you can see by the plunging treasury rates and spike in the market. I still do not expect any rate hikes this year (apparently the market doesn't either). Whether this reaction holds is an entirely different question. NASDAQ has that "ill" feel to it.

Greenie being grilled on "considerable period" language (and why market dropped when he dropped those two words)...

Congressman: "Doesn't it occur to you that maybe there's too much power in the hands of those that control monetary policy? You speak and the markets move ... that to me is an OMINOUS power for those that control money"

Greenie: "Because we are unelected officials it is mandatory that we be as transparent as we can... The power we have is all granted by you... One reason I am here is to endeavor to convey why we are doing what we are doing"

He has also been REPEATEDLY attacked on the jobs issue (i.e. How can all these economic indicators look so good when the jobs picture is so dismal?). It seems congress is NOT buying the recovery story. One of the more hysterical portions were when Greenspan was grilled about budget deficits and he essentially punted: "all those issues are addressed in Mr. Bush's latest budget proposal".

-- posted by MarketVVizard

Top 918. Feb 12, 2004 7:55 AM

» MarketVVizard - Trimtabs

As most of you know, I read a lot. But I have only a few sources of commentary that I actually closely follow and highly regard. One of these is Charles Bidderman from Trimtabs. You can only get his weekly commentary for free on a 3-week delayed basis, but he often does interviews or writes for other publications which reveal more timely thoughts. The reason I like his approach is because like Hussman, it is purely quantitative, making these two guys more objective than most. But even though their trading is based on mechanical models, they both offer very colorful commentary.
_________________________________________
Stock market bubble waiting to burst
Commentary: Players beware: The house isn't buying
By Charles Biderman
Last Update: 12:01 AM ET Feb. 2, 2004

SANTA ROSA, Calif. (CBS.MW) -- The current stock market is a bubble waiting to burst.

At TrimTabs, we view the stock market essentially as a casino. Public companies are the house, while investors are the players. The basic premise of our approach is that stock prices in the casino are determined mainly by liquidity -- the supply of shares and the money available to buy them -- rather than fundamental value.

There are two major reasons why we think that the current stock market is a bubble. First, the house has not been buying much lately, either through stock buybacks or purchases of public companies for cash. Second, the players have been buying heavily, which usually occurs at or near market tops.

When the players are buying and the house is not, the market will begin to decline once the house begins printing more shares than the players' cash can absorb.

On the surface, corporate buying looks active enough. In the four weeks since Christmas, the weekly dollar amount of newly announced cash takeovers has averaged $450 million, and the weekly dollar amount of newly announced stock buybacks has averaged $3.9 billion.

Yet corporate buying has been highly concentrated in a few large-capitalization names, which makes it appear stronger than it actually has been. Since Christmas, a mere seven cash takeovers and 18 buybacks have been announced.

Recent buyback figures would be far more bullish if buyback activity were more broadly based. For example, in December 2003, the dollar amount of buybacks totaled an impressive $26 billion, but only 43 buybacks were announced. By contrast, in October 2002 -- the recent bottom in the stock market -- the dollar amount of buybacks was $15.4 billion, but the number of buybacks reached 130.

Given current stock valuations, the lack of broad-based corporate buying is not surprising, and we doubt that it will strengthen any time soon.

Instead of buying, both public companies and the insiders who run them have been selling new shares to eager investors. During the first three weeks of January, new offerings have averaged a healthy $4.1 billion weekly -- and January historically has been a slow month for new offerings. At the same time, corporate insiders have been selling heavily. While insider selling generally slows during the holidays, insider selling reached a $3.4 billion average weekly pace in November and a $2.4 weekly pace in December.

In January, insider selling declined to $2 billion weekly, which is not surprising because January is an earnings reporting month, and blackout periods prohibit many insiders from selling. Insider selling should surge in the weeks ahead if it follows its historical pattern.

Flooding the market with fresh cash

There is a second major reason why we believe that a bubble exists: the players have been clamoring to buy stock, which they usually do at or near market tops. Over the past few weeks, inflows of cash into the stock market have been extremely heavy.

Online brokers are reporting strong inflows directly into equities, and we estimate that $13.6 billion poured into all U.S. equity funds during the first 13 days of January. This inflow is the largest inflow during the first 13 days of the month since this bull market began in April 2003. It is entirely possible that inflows into U.S. equity funds in January could top the all-time record January inflow of $28 billion in January 2000. We all know what happened shortly after that.

What are the sources for all of this cash?

First, individuals are eagerly chasing the stock market gains of the past nine months with year-end bonus money and retirement plan contributions.

Second, many companies have been pouring money into their pension funds over the past two months to close massive gaps between plan assets and future liabilities. Much of this new money is finding its way into the stock market.

Investor optimism about equities has reached extraordinary levels, which is another contrary indicator. On Jan. 23, the CBOE Volatility Index (VIX: news, chart, profile) closed at 14.74, its lowest close since November 1996. In its most recent survey, the American Association of Individual Investors (AAII) reports that a record high 69.5 percent of investors are bullish, 17.1 percent are neutral, and a mere 13.4 percent are bearish. The eight-week moving average of bullish AAII investor sentiment has climbed to 64 percent, which is higher than at any time during the 1999-2000 bubble.

Bubble will burst when corporate selling overwhelms inflows

If the stock market is a bubble, why have we been mostly fully bullish since the end of October 2003? The answer is simple. Massive inflows from individuals and pension funds, combined with limited corporate buying, have far outweighed corporate selling.

The stock market will face headwinds as it enters a less seasonally strong period. The new offering calendar has been growing recently, and the pace of insider selling is likely to accelerate in February because blackout periods that have prevented insiders from selling have been lifted.

In sum, the new offering calendar and insider selling could easily drain $50 billion from the checking accounts of stock market intermediaries in February -- but that $50 billion is only a guess. In addition, inflows should weaken somewhat in the coming weeks. Many individuals have spent their year-end bonus and retirement fund ammunition, and pension fund inflows should slow by the end of February.

We are awaiting confirmation that the supply of new shares via offerings and insider selling reaches at least $10 billion weekly before we turn bearish. Right now, the stock market casino is doing an outstanding job of separating the players from their money. At some point soon, the house will flood the market with a torrent of new shares that will soak up all of this cash. Then it will be time to sell. Of course, exactly when the top will occur will only be known in hindsight. It could be as soon as February, but it could also be several months from now. It all depends upon how maniacal individual investors want to be in throwing good money after bad.

-- posted by MarketVVizard