Monday, May 14, 2007

ABUSE But No Neglect: The Global Liquidity Boom in Equities

In my latest Weblog entry, I noted that the U.S. is actually at the trailing end of a liquidity boom that is inflating equity prices worldwide.

Above we see EFA, the iShares ETF for the MSCI EAFE Index (Europe, Australia, Far East) and EEM, the iShares ETF for the MSCI Emerging Markets Index. Plotted with each of the ETFs is their 50-day moving average for share volume. Note the expanding participation in these markets as they have risen.

Since the start of 2006, EFA has gained 30.54%; EEM has risen 37.58%. By contrast, the S&P 500 Index (SPY) has risen a little more than 19% over that same period.

According to Charles Biderman of TrimTabs, since 2005 investors have placed $60 billion into mutual funds that focus on U.S. equities, but $300 billion into funds that primarily invest outside the U.S. The strategy has gained the acronym ABUSE: Anything But U.S. Equities.

Meanwhile, however, Biderman notes a separate dynamic to the liquidity boom: the buyout surge among private equity firms and the corporate buyback of stock. Together, these have accounted for a decrease in the total float of U.S. equities of 1.4% during the first four months of the year alone.

Rising liquidity (demand) and decreasing stock float (supply) is a potent combination for market strength, particularly if investors cease their ABUSE.


AnaTrader said...


ABUSE not Neglect....

However, the global liquidity boom in equities outside US by US corporations or individuals will also benefit them even when the USD weakens against other currencies.

A balancing trade?

cpptrader said...

Interesting post Brett, almost as if we are on the same page. Today I made a quick note about the increasing volume on my site. If you go to NYSE's webpage, you'll notice there that volume on the exchange is rapidly increasing YOY from 2005 thru 2007 (comparable periods). Also, there was an article at today that noted the explosion in volume of equity derivatives in Europe - it seems each week a volume record is being set. What crossed my mind was that this volume would intuitively be increasing efficiency, but what happens if it dries up? I would propose a strong correction. I'm not sure what would cause it to dry up, especially since there are huge amounts of funds available, but it doesn't seem likely that nominal funds growth with continue indefinitely. On an institutional level, it seems buyout multiples are rising and credit spreads are narrowing, meaning the returns won't be as great. Hurdle rates on these deals are dropping. As returns slow so will the money supplied to the managers.
Also, I would venture that the increasing volume is starting to represent euphoria rather than demand... especially since there seems to be so many new people inquiring about trading again. Short term I like riding the wave, but vix options and index puts are on my mind.

Brett Steenbarger, Ph.D. said...

Hi AnaTrader,

I agree; companies that benefit from the weak dollar are worth an extra look--


Brett Steenbarger, Ph.D. said...

Hi Matt,

There was an article in FT recently re: how trading volume in China eclipsed that of the remainder of Asia. That certainly seems like a bubble in the making. As in 2000, however, we should see plenty of evidence of distribution of stock in the money flow numbers prior to any sustained collapse. I'm not seeing that as yet. Thanks for pointing out the data on your site.