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Weekly Market Commentary 5/20/2013

Weekly Market Commentary 5/20/2013

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Weekly Market Commentary 5/20/2013
Weekly Market Commentary 5/20/2013

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Published by: monarchadvisorygroup on May 21, 2013
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Member FINRA/SIPCPage 1 o 6
Jeffrey Kleintop, CFA
Chief Market StrategistLPL Financial
LPL FINANCIAL RESEARCH
Weekly Market Commentary
May 20, 2013
Buyers & Sellers
Highlights
At the heart o it, all markets come downto buyers and sellers. U.S. stocks are beingpurchased by oreigners and corporations,while pensions and insiders remain net sellers.Demand rom individuals and hedge unds hasbeen mixed.Risks to stocks would be a slowdown incorporate buybacks, and a continuation o theslowing pace o net buying by oreigners.On the other hand, uel or the stock marketcould come rom a re-allocation back towardstocks by pensions and individual investors.
We devote this commentary each week to assessing the many reasonsmarkets may rise or all. But at the heart o it, all markets come downto just one thing: buyers and sellers. Taking a look at who is buying andwho is selling can tell us something about the durability o the market’sperormance and what may lie ahead.Currently, there are six notable trends in buying and selling in the stockmarket. U.S. stocks are being purchased by corporations and oreigners.Demand rom individuals and hedge unds has been mixed. Pensions andinsiders remain net sellers.
Foreigners
Data released by the Treasury Department last week showed that the paceo net purchases o U.S. stocks by oreigners so ar in 2013 has slowedsharply rom the strong pace seen in late 2012[Figure 2], led mainly by awaning o demand rom European investors.Net purchases quadrupled in 2012 over 2011’s pace owing to two actors:
1.
The net selling that began in July 2011 and continued through year endater the debt ceiling debacle and downgrade in July and August; and
2.
The surge in buying o U.S. equities by Europeans that began inSeptember 2012, as the European market momentum stalled ater therun-up ahead o the widely anticipated announcement o its bond-buyingprogram by the European Central Bank.
Investor Buying U.S. Stocks Demand TrajectoryCompanies Yes AcceleratingForeigners Yes SlowingIndividuals Yes FlatHedge Funds No FlatInstitutions No StableInsiders No Accelerating
 
1
Buyers & Sellers
Source: LPL Financial, various sources cited individually 05/20/13
 
WEEKLY MARKET COMMENTARY
LPL Financial Member FINRA/SIPC Page 2 o 6
The weakest pace o net purchases o U.S. stocks by oreigners at the startto any year since 2004 sets 2013 on a disappointing pace. However, justas buying rebounded in 2012, we may see stronger demand rom oreignbuyers as condence improves that U.S. scal challenges will not return theUnited States to recession as it has in Europe.
Hedge Funds
The U.S. Treasury tracks net purchases o U.S. stocks rom investors inthe Caribbean, which primarily represents demand by hedge unds. Thenet buying by hedge unds is negligible in 2013, as it was in 2012, withnet buying in some months oset by net selling in others. Over the pastthree years, the monthly average has been a net sale o less than $1 billiono U.S. stocks, ranging rom a net purchase o $5.2 billion to a net sale o$10.2 billion.
Companies
Companies themselves have been the biggest buyers o stocks. Aterreducing purchases during the nancial crisis in 2008 and 2009 ascompanies were ocused on hoarding their capital, corporations havereturned to near-record levels o net share repurchases. New buybackannouncements have surged this year[Figure 3]. Corporations havebeen aggressively buying back shares, adding up to hundreds o billionsin purchases each quarter. Interestingly, the actual number o companiesrepurchasing shares has allen as stock prices hit all-time highs, but the totalamount spent continues to rise as the buying is concentrated among ewer,larger companies.
201220112010200920082013 3020100-10-20Foreign Net Purchases of U.S. Equities by Month,
$ Billions
2
Foreigners Demand or U.S. Stocks Waning in 2013
Source: U.S. Treasury 05/20/13
Just as buying rebounded in 2012,we may see stronger demand romoreign buyers as condence improvesthat U.S. scal challenges will notreturn the United States to recessionas it has in Europe.
 
WEEKLY MARKET COMMENTARY
LPL Financial Member FINRA/SIPC Page 3 o 6
201220112010200920082013 300250200150100500New U.S. Corporate Buyback Announcements by Quarter,
$ Billions
3
Corporations Are Buying Back Shares Aggressively
Source: LPL Financial, Bloomberg data 05/20/13
Corporations have become net buyers o shares as rising cash fow andwide prot margins compel them to shrink their share count to boostearnings per share as revenue growth slows.
Insiders
*
In contrast to the buying they are directing their companies to undertake,insiders, or top executives o companies, have been net sellers o shares.While the pace o insider selling oten slows during the “blackout” periodsaround the earnings season, recent data show that the number o shareso S&P 500 companies’ insiders have sold relative to those that they havebought has soared. The main reason is that while selling has averaged abelow average $2 billion per month this year, buying has been way belowaverage and close to zero.Should this net selling be seen as an important signal by those “in theknow” o impending doom or corporate America? History oers a verydierent interpretation. Corporate insiders were buying in 2007 at the peak,and they were selling in 2009 as stocks were bottoming. Back in August o2007, around the peak o the stock market, insiders at nancial companieswere doing the most buying in 12 years. At the time, this trend wasinterpreted by some as a buy signal or nancials just beore the companiesin this sector saw their stocks all more than 80%. Given this track record,we do not interpret the insider selling as a signal that they are acting on anyinside inormation that would benet an individual investor. Instead, we seeit as another indicator o relative demand or stocks.
Institutions
Pension plans, both dened benet and dened contribution, have been netsellers o stocks. The latest data rom the Federal Reserve (Fed) show that
Ater reducing purchases during thenancial crisis in 2008 and 2009 ascompanies were ocused on hoardingtheir capital, corporations havereturned to near-record levels o netshare repurchases.
*Data gathered rom Bloomberg reported SEC lings.

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