EXPERT IS HEARING SELL BELL

Sept 27, 2004
By DANIELLE DiMARTINO / The Dallas Morning News

Charles Biderman is no economist, but he's got the notion of supply and demand licked.

Monday morning, the president of TrimTabs Investment Research came out and said his sell alarm was ringing. He amply demonstrated that supply will dwarf demand in the traditionally treacherous month of October, for several reasons.

First, the offering calendar has exploded. The amount to be raised recently doubled from $500 million daily to $1 billion daily. Last week, it hit $1.2 billion. "There's an enormous amount of new shares Wall Street underwriters want to sell so they can get the year-end bonuses they so richly deserve," Mr. Biderman quipped.

All kidding aside, it's typical for Wall Street to flood the market with as many new offerings as the market can digest in the weeks leading up to Christmas. This year will be no exception.

The second reason is that after a bang-up August, corporate buyback activity has come to a standstill. (Funny thing, that 10 percent rally took the shine off shares' price tags.) Corporations buying back their own shares in the open market acts as a natural support to the market and, more important, as an offset to any new supply.

Third, the fiscal year ends in October for mutual funds. They will have to liquidate a sufficient amount of holdings in order to distribute gains. Rather than sell the profitable nuggets in a portfolio, many managers opt to jettison the dogs.

"What area has done the worst this year?" Mr. Biderman asked. "Tech." Enough said there.

A fourth reason for his bearish call is so near and dear to my heart that I can't bear not to share - insider selling. Corporate fat cats are vesting options that were granted four or five years ago. (Of course, the markets were much higher then, so the profits on these option holdings are thin, to say the least. All at once now - "Awwwww.")

Finally, hedge funds - you know, the quiet, unregulated elephant in the market - are sitting on huge cash stores. Because they live and die on momentum, as long as the market's headed south, they'll remain sideline dwellers.

Mr. Biderman stressed that although he's not surprised the Dow broke through 10,000 (again) on Monday, he's no perma-bear.

And as we can all appreciate, the supply/demand dynamic is a fluid one. That's why he says a real "barn-burner rally" could be in store for November investors.

As soon as corporations deem their shares to be "attractive" once again, the buyback binge will resume. And the momentum-driven hedge funds will smell any rally miles away and be quick to jump in with their collective cash cache.