Inflow into Equity Funds in September Fourth-Highest Ever

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New Offerings Top $7 Billion for Two Consecutive Weeks, and 18 Deals Expected to Raise Total of $2.4 Billion Already on Deck for This Week.

Although the S&P 500 sits just below a record closing high, we think the path of least resistance for stock prices is higher. The Federal Reserve seems as determined as ever to inflate asset bubbles by funneling $85 billion per month in newly printed money to the primary dealers, and our demand indicators continue to turn more favorable for the intermediate term.

The outlook for the short term is less positive. Investors are pumping enormous sums of money into equities. All equity mutual funds and exchange-traded funds have issued $48.9 billion so far in September, which approaches the record $66.3 billion in January. This month's inflow is already the fourth-highest ever. U.S. equity ETFs alone issued a stunning $31.4 billion on the past eight trading days. Such massive inflows in such a short period are worrisome from a contrarian perspective. More encouraging is that leveraged ETF investors are still adding to short positions amid the rally. Leveraged short ETFs issued 3.6% of assets in the past week, the biggest inflow in nine weeks.

We are also concerned that the new offering calendar is picking up steam. Underwriters cranked out 44 deals that raised a total of $7.2 billion in the past week, and the pace is likely to pick up further this week. Dealogicreports that 18 deals expected to raise a total of $2.4 billion are already scheduled, including 14 IPOs. If all 14 of these IPOs make it to market, the number of IPOs this week would be the highest since November 2007. Overnight deals could easily lift this week's volume of new offerings to $10 billion, which is a level that tends to give the U.S. stock market indigestion.

We have written for months that the U.S. economy is weaker than the conventional wisdom believes. The Fed appears to agree, passing on an opportunity to scale back its money printing and reducing its forecasts for economic growth. Real-time tax data indicates overall wage and salary growth remains modest. Adjusting for tax changes, income tax withholdings rose 1.6% y-o-y in real terms in the past four weeks, not much higher than the 1.2% y-o-y in August and in line with the growth rates that prevailed for most of this year. We continue to believe that any "tapering" later this year will amount to no more than $15 billion to $20 billion per month.

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