Hey, you don't need a 160 IQ to know that this is the wrong kind of market to mess with marginal stocks. Yet, there's been a sizable flight to the cheapies, notably those low-priced single-digit names that used to trade in the high double-digits -- the theory being a peppier economy will bail out all the losers.
Charles Biderman, one of Wall Street's leading liquidity trackers, characterizes the frenzied buying as "a mad dash for trash."
That's his assessment of the "insanity" that took place during the recent robust market rally -- a surge of 37.4% in the S&P 500 from its March 9 low -- in which investors with little or no regard for value or fundamentals recklessly bid up the stock prices of many cheap, but marginal companies to what he contends are astronomical and unsustainable levels.
In particular, he points to such recent gainers -- all of which he regards as vulnerable to stiff market declines -- as Fifth Third Bancorp (up 511%), Huntington Bancshares (up 381%), Krispy Kreme Doughnuts (up 251%), Martha Stewart Living (up 125%), and P.F. Chang's China Bistro (up 79%).
He observes that even financial firms undertaking massive capital increase and shareholder dilution have been ballooning. Here, for example, he takes pot shots at the buyers who helped fuel sizable gains last week in such names as Bank of America (62%), Simon Property Group (14%) and Wells Fargo (44%).
In some ways, says Biderman, it feels like the early 2000 dot.com bubble all over again. As a result of the buying momentum, he points out that the S&P 500 now yields less than a puny 2.4% and trades at a lofty 26.3 times earnings. Does anyone, he asks, really think a secular bull market is starting at these absurd valuations?
Biderman, a pronounced bear, is the CEO of TrimTabs Research of Santa Rosa, Ca., a 19-year old liquidity-tracking firm which monitors the flow of funds in and out of equities. The firm is partially owned by Goldman Sachs and its clients include about 25% of the country's largest hedge funds.
Biderman, a one-time Barron's reporter, credits much of the recent rally to sizable and almost desperate institutional buying, notably by many hedge funds which had a horrible 2008 and are using whatever buying power they have to try to redeem themselves. In turn, he says, this frantic buying has resulted in what he calls "the mad dash for trash" that has gunned the shares of lower quality companies.
Arguing that such ridiculous buying can't possibly last, Biderman notes that when institutions run out of dry powder, "corporate share selling is going to swamp this market and stock prices are going to drop like a stone."
What about the vigor of the recent rally? Biderman observes that some of the chief benefits that helped produce it -- the Obama tax cut, higher tax refunds this year, versus last year, mortgage refinancings and lower oil prices -- will be more than overpowered by the economic negatives, chief among them being declining personal incomes, soaring unemployment and plummeting consumer credit.
These negatives, he says, strongly suggest the economic downturn is nowhere near its bottom despite some recent glimmers of hope, such as two consecutive months of rising existing home sales and April's government-reported lower than expected jobless numbers.
Also weighing on the market, liquidity trends suck, Biderman says. Noteworthy in this respect, he points out, the smartest players in the stock market -- public companies and the insiders who run them -- have been selling hard into the rally. Since the start of April, corporate selling (new offerings and net insider sales) has totaled $33.3 billion, which is 56% higher than the announced corporate buying.
Another market depressant, according to our grizzly, is the expectation of a lot of new equity supply, with new offerings pegged this month at more than $50 billion. Yet another worry is the $37 billion decline in retail-oriented money-market funds over the past five weeks -- meaning less money available for the purchase of stocks.
As Biderman sees it, the market bottom, contrary to renewed market enthusiasm stemming from the recent rally, still remains a long way off. As such, he is advising clients to be aggressive sellers on any rally since he expects the market to drop below its March 9 low before year-end. If that were to occur, the S&P 500 would plunge roughly 30% from current levels.
In its model portfolio, TrimTabs is short (a bet on falling stock prices) such market sectors as financials, consumer discretionary, industrials and energy. Putting his money where his mouth is, Biderman recently sold short in his own account an exchange-traded fund (symbol SKF), a bet financial stocks will fall.
Taking note of the prospects of massive losses in such areas as consumer credit, mortgages and junk bonds used to finance mergers and acquisitions in 2006 and 2007, Biderman sees plenty of additional turmoil ahead for investors dumb enough to own financial shares.
It all conjures up memories of legendary trader Jess Livermore, who called the 1929 bottom and then re-entered the bear market way too soon, which led him to kill himself in 1940. "The Livermore incident showed the danger of buying false dawns," Biderman says. "and that's what the suckers are now doing again. "They're buying another false dawn."