Outperform the Markets Like the Big Guys

Charles Biderman founded TrimTabs Investment Research in 1990 in Santa Rosa, Californrnia. The company developed into the only independent research service that publishes detailed daily coverage of U.S. stock market liquidity. The premise of TrimTabs Investment Research’s approach is that current stock prices are a function of the supply and demand of shares of stock and money, having little to do with value.

He appears regularly on CNBC and Bloomberg and is quoted frequently in the social and financial media. He is the author of TrimTabs Investing: Using Liquidity Theory to Beat the Stock Market.

You can follow him on Twitter @CharlesBiderman.

For more on Charles Biderman, click here.

And finally, we dug around Charles Biderman’s brain to find out what he’s bringing to the podium in Miami this October.

As you can see from the information box above, Charles is the founder of TrimTabs Investment Research and the creator of the AdvisorShares TrimTabs Float Shrink ETF, which we recently discussed in some detail in the August issue of Boom & Bust.

Here’s what he had to say in answer to our questions…

TvdB: What is float shrink?

Charles Biderman: In real time, all there is in the stock market are transactions. Shares go from the seller to the buyer and cash goes from the buyer to the seller. It’s all just shares of stock and money. Float.

Also in real time, 80% of the shares of the 1,000 largest U.S. publicly traded companies are held by institutions — pension funds, mutual funds, hedge funds and ETFs, as well as private offices via financial planners. Importantly, almost all institutional share-holding funds hold a fixed amount of cash.

So twenty years ago, I started tracking changes in the total number of shares of stock and the money available to buy them. What I’ve discovered is that when companies reduce the number of shares trading, institutions have more cash and must replace the shares taken away. They do this by chasing a smaller supply of shares. That’s float shrink.

More money chasing fewer shares is exactly what’s been happening since 2010 and is the main — perhaps only — reason stock prices are up since then.

However, when companies start selling more shares then they buy, look out below…

TvdB: How do you use float shrink to identify potential investments?

Charles Biderman: We have determined that the stock price of companies that are shrinking the float at the same time as growing free cash flow and also not borrowing to buy, goes up more than the overall market.

Since inception, TTFS has risen by 15% more than the overall market. Most of that outperformance has been due to float shrink.

Here is an example to explain why that is: Let’s say a company is growing free cash flow — meaning cash grows even after all expenses, capital expenditures, research and development, taxes and dividends — and uses a portion of that extra cash to reduce the number of shares outstanding. Since there are less shares outstanding after the buyback, the price of the remaining shares goes up by an amount even more than the float shrink.

TvdB: What company is a current example of float shrink analysis, and why?

Charles Biderman: Some very big companies have been leading the way in terms of float shrink, including Time Warnrner, Microsoft, Lockheed Martin, Abbott Labs and Allergan.

TvdB: What is your outlook for the U.S. economy over the next two years?

Charles Biderman: The U.S. economy has grown slower than predicted by the Federal Reserve and Wall Street prognosticators since 2010. Each of the past five years, the Fed or the governrnment takes some beginning-of-the-year action that boosts wages and salaries, but then growth slows over the second half of the year. That is what’s going on now.

Unfortunately, there are too many headwinds created by governrnment mistakes that will limit future economic growth to no more than we are currently experiencing. The best way to spur economic growth is to make it easier and cheaper to start something new. Instead, it’s now much more difficult, as well as more expensive, to start something new. That’s why growth is limited to no more than 2% or so — at best.

When the benefits from zero interest rates of asset prices disappears, I fully expect a major down leg in equity and bond prices. That doesn’t mean that stock and bond prices will stop going up anytime soon. However, when stock and bond prices do crack, it will be lightning fast and very painful to those caught long.

That’s why, at the Irrational Economic Summit in October, I’ll tell all who attend whether corporate America will continue to shrink the float, further levitating stock prices, or will a surging new offering-calendar derail this aging bull market.

I hope to see you there.