Foreigners Selling U.S. Stocks: A Good Sign

Last week the Treasury Department released the monthly TICC data for June 2008. The Treasury releases updated TICC data the 15th of every month for the month ended 6 weeks prior. Click here to access the data.

During the 3 months ended June 2008, foreign private investors sold a net of $13.6B of US stocks. Why is this a good sign? While I'll be the first to admit my market timing is far from perfect, the historical timing of US stock purchases and sales by foreign private investors is pretty dismal.

Foreign private investors seem especially adept at ticking market tops. Consider that until recently the record for private foreign purchases of US stocks was $27.6B in February 2000. That record was not eclipsed until April 2007, and then just barely, when purchases of US stocks by foreign private investors reached $28.1B. The current record was set a month later in May 2007 at an astounding $42.7B.

By contrast, foreign private investors sold a net of $2.2B of US stocks in the 3 months ended March 2003 just when a nice 11 month/45% uptrend began in the S&P and a very respectable 10 month/69% uptrend began in the Nasdaq Composite.

Maybe we'll see the outflows reverse or at least slow down with the recent strength of the US$. I've seen some around the blogosphere opine that a stronger US$ is bad for US stocks. As shown here that opinion has no basis in historical fact.

The moral of the story seems to be that when foreign holders of US stocks are capitulating is when you want to be a buyer.

Comments

[2houndz:]

So people are voting with their feet (dollars) and moving their money out of US equities. I really can't see how that's a positive.

2008 Aug 22 08:29 PM

[Pretzel Logic:]

Hard to say if that's a good thing. It could be, but contrarianism generally only works as a confirming indicator -- it's usually ineffective when used by itself to pick tops or bottoms.

2008 Aug 23 04:26 AM

[venividivici:]

Turning negatives into positives, something this market appears to have refined into an artform.

2008 Aug 23 08:22 AM

[viva:]

Too bad they picked off BUD before they left.

2008 Aug 23 08:39 AM

[Mr. Wynn:]

Are we reading here that foreigners are just lousy investors? That they sell just before our market goes into a nice, long ascent? Hey, I'll believe pretty much anything at this point.

2008 Aug 23 09:39 AM

[BondGuy:]

I agree with 2houndz, it's a stampede from dollar denominated assets. Given the FEDs recent policy moves, it's no wonder, as the FED has created too much currency risk for foreign equity investors. They want a pure play on US equities, but they can't get it without dollar hedging, which is expensive and reductive of yields to an unacceptable extent. So they have quit the market.

2008 Aug 23 10:04 AM

[OldLimey:]

Want a foreigner's perspective? No....well, anyway.....From the Marxist side of the pond US indices just haven't fallen far enough to reflect the utterly dire financial and economic environment in which the US finds itself. Maybe it's because US investors are just naturally more optimisitic, maybe it's because US investors feed on a daily diet of Cramer et al., or maybe it's because US markets are so heavily manipulated by Wall Street trading desks and the Fed (which on some days seem indistinguishable). In the face of the most significant housing and financial crises for three-quarters of a century and the worst economic outlook in 30 years - not to mention two wars, a fiscal blow-out, a structural trade deficit, and the start of what's shaping up to be another cold war - it's very difficult to understand why US indices are as high as they are. As for the dollar: on fundamentals it's no better than the prettiest witch at the cauldron - which is a shaky foundation on which to build a sustained uptrend.

Just a point of view, of course. It could well prove to be wrong, but that doesn't necessarily make it wrong-headed. Either way, if shy foreigners are your best reason for going long.....good luck.

2008 Aug 23 10:38 AM

[NOWHEREMAN:]

Based on your Concept, The BUD deal should never have been offered in the first place.

The War Premium which has improved the US currency is based on Fear not confidence. That same Premium can be expected to drive Oil prices higher not lower. Can the Dollar maintain its strength if oil moves up? Unlikely.

Core inflation is starting to feel the effect of the first installment of the Minimum Wage Law, there are 2 installments left to go. And if, IF, the majority of new employment has been in the Small Cap companies then Core inflation may be with us for a long time.

2008 Aug 23 10:39 AM

[notsosmart:]

goldilocks is not feeling well.

2008 Aug 23 11:07 AM

[wpdragon:]

Great post Old Limey... you surely get "it".

As to the ridiculous post about core inflation being the Minimum Wage Act's fault, if it weren't so pathetic (and idiotic), I would be laughing so hard my morning glass of milk would be coming out my nose... but what can you expect from the republicans but more of the same old same old cons?

2008 Aug 23 11:18 AM

[Alphameister:]

Foreign investors are indeed an excellent contrary indicator. Good post.

2008 Aug 23 01:35 PM

[CLH:]

Yes its time to buy US stocks.

2008 Aug 23 05:35 PM

[NOWHEREMAN:]

Foreign investors are fleeing the US market as a whole but buying individual companies. Foreign Investment has been a contrary indicator for decades. Everyone knows it. Thats the problem with well known Indicators.

Take the old "sell in May, and go away". It has been ignored for years. But all of you want to believe in One Indicator because it points upward. The Bias is Bullish and may actually be fulfilled but I'm not going to pit one indicator over another until Foreign Companies stop buying US companies.

2008 Aug 23 06:26 PM

[Ebi:]

Agree with 2houndz. US of A has to face the music. It has borrowed and spent more than it can afford.

2008 Aug 23 07:07 PM

[NOWHEREMAN:]

This weeks Barrons, Debt as held by Foreigners has increased at an annualized rate of 20% up from 17% just 3 weeks ago. Yes indeedy, they are bailing out.

2008 Aug 24 02:30 AM

[bruin532:]

Maybe they sence an intrim market top for the dollar rather than stock market weekness? With record deficits, budget, and the Fanny and Freddie mess will the dolar weaken in the second half of the year? Without Treasury intervention would he USD be where it is today vs last month?

2008 Aug 24 05:31 AM

[NOWHEREMAN:]

Global intervention, but for now, the dollar will rise as Georgia tensions rise. A US warship has docked in Georgia delivering Med. Supplies. 4 more are on their way.

2008 Aug 24 03:03 PM