For Charles Biderman, the bull run that the stock market is currently experiencing all boils down to supply and demand.
A former commercial and residential property investor in the 1970s who lost millions when the real estate market tanked, Biderman applied the lessons he learned to the stock market.
"I discovered that price is a function of liquidity, having nothing to do with value,” the Harvard Business School graduate said in an interview with Forbes.
Biderman believes that when stocks are in short supply — from buybacks or private-equity buyouts or whatever — their relative scarcity will push prices up.
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On the flip side, then the market has an oversupply of new stocks either from initial public offerings or exercised stock options, then the abundance forces a decrease in prices.
How valid is Biderman’s premise? According to Forbes, he decided to build his own measure of the total supply of stocks by combing through company filings and surveying mutual funds on inflows and outflows.
The result: Biderman’s equity retirement numbers are close to those published by the Federal Reserve. What’s more, they’re available sooner.
Now, 12 years after formulating his theory, Biderman says he can show a rough inverse relationship between market performance and changes in the quantity of equity available.
He’s founded a company — Trimtabs — that sells its liquidity data to mutual funds and hedge funds for between $15,000-$150,000 a year. More recently, it’s opened up its own fund for private clients.
One expert, after analyzing the effects of supply and demand on bond prices, said she found a "broadly similar” effect to Biderman’s and that Biderman’s logic makes sense as applied to stocks.
So what are Biderman’s supply signals saying to him about today’s market?
There has never been a better time to be a bull, said Biderman.
"So the housing market is soft, so the legacy automakers are tanking. Who cares,” said Biderman.
Even so, said Forbes, there are two weaknesses to Biderman’s theory: First, it doesn’t include dividends which are interchangeable with share buybacks. While buybacks creates a shrinking in the supply of equity — a bullish sign — dividends don’t.
Second, Biderman’s theory, argues Forbes, overlooks where the buyout capital is coming from. When Blackstone Partners acquired Equity Office Properties, it got its capital from pension funds. That put an upward pressure on stock prices. But those same dollars, states Forbes, were taken out of the pocket that otherwise would have paid for publicly traded shares. Why would moving the investment dollars from one pocket to another boost share prices?
Biderman’s answer is it’s wrong to assume all private equity investments replace public stock holdings and, more important, that private equity funds use leverage to magnify the impact of every dollar of equity they receive.
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