Stock Market Rally Mystery Solved!
|
Posted by Kirk Lindstrom Nov 22, 2006 |
In " A bizarre explanation for the stock market rally" Daniel Gross writes:
- "The continuing stock rally in the face of a slowing economy and a cratering housing sector is something of a mystery, baffling economists and investors alike. But there could be a simple explanation: supply and demand..Simply put, the supply of U.S. stocks available for individual investors, mutual funds, and index funds. Call it de-equitization. In the last few days, deals have been announced or concluded to take large publicly held companies private. HCA, the giant hospital chain, last Thursday announced the completion of its $21.2 billion leveraged buyout. The same day, Reader's Digest said it would be acquired by private equity firm Ripplewood Holdings for $2.4 billion. This morning, Equity Office Properties, the huge real estate company, struck a deal to be acquired by the Blackstone Group for $19 billion. (Throw in the value of Equity Office's debt, and it may be the biggest LBO ever.) At the same time, publicly held firms are buying back big chunks of their shares. Last Friday, Wendy's said it would spend $800 million buying 19 percent of its outstanding shares.
I don't think it is bizarre at all.
Remember at the top in 2000 companies were issuing more shares to buy other companies. In 1999 and 2000, their share price was so high relative to earnings that they were not buying shares back. Rather, they used the inflated shares as currency to diversify and even buy real assets such as AOL using its internet bubble pricing to buy a "real company" Time Warner.
We see the opposite today by most real companies. Companies with low PEs and loads of cash are using their CASH to repurchase their own shares and those of other companies.
The "deal makers" who brought companies public "before their time" in 1999 and 2000 are now buying up companies to take private to sell at a later date with IPOs when stocks are in greater demand.
"Follow the money" has never made more sense than today.
Read more articles like this in Kirk's Market Thoughts
= > > for 2006, my Newsletter Explore Portfolio" is up 14.9 YTD.
Click To Get On My FREE STUFF Mailing List and get a free sample issue of my newsletter.
DISCLAIMER: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.