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.