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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
Weekly Market Commentary
May 20, 2013
Buyers & Sellers
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.
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:
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
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
Buyers & Sellers
Source: LPL Financial, various sources cited individually 05/20/13
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 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
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.
LPL Financial Member FINRA/SIPC Page 3 o 6
201220112010200920082013 300250200150100500New U.S. Corporate Buyback Announcements by Quarter,
$ Billions
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.
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.
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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