The Stock Drought

Some people think the movement of stocks, either up or down, is random.  Most think, correctly, that a stocks path is determined by profitability, or the lack thereof.  Or interest rates.

The one fact that is often overlooked is supply.  The more stocks out there, the bigger the supply and vice versa.  A prime example of stock oversupply was the dot.com bust.  Actually just prior to the bust when everybody and everything was going public.  Eventually the greater the supply the less demand and the market went  in the dumpster.  The lack of earnings didn't help.

So what is going on now?  The reverse actually.  Thanks to our friends at Forbes we have some interesting statistics. 

Fact 1--In 2000 there were $41 billion worth of leveraged buyouts. 

Fact 2--In 2001 there was $20 billion in leveraged buyouts.

Fact 3-2002, $23 billion.

Fact 4--2003, $47 billion.

Fact 5--2004, $94 billion.

Fact 6--2005, $130 billion, and,

Fact 6--In 2006, so far, there has been $171 billion.

That means  a total of $525 billion of stock disappeared, taken off the market.  I don't know how that compares with the total market but $525 billion is not chump change.  So  supply fell and demand increased and the stock market took off.  Aided, of course, by tax cuts and a low base to take off from.   

Yeah, so what?  What do I do NOW, you say?  Little late, isn't it?  My, we are testy this morning.

The thing to do is watch out.  For what?  EUPHORIA.  Because when we get EUPHORIA these stocks are going to reappear.

Huh?  Ok, why do Wall Streeter's do leveraged buyouts?  Find a company on the rocks, badly managed, fat, flabby, and coasting.  Think Burger King.  Go in and slash costs, jobs, close stores and goose cash flow.  It was easy when there were a lot of fat companies around.  Harder now but still doable.  But the payout is not so much in the cash flow now.  It is in eventually going PUBLIC.

Yep.  Clean 'em up, thin 'em out, rawhide. 

So if and when you see a bunch of companies coming back into the market place you may want to head for the exits.  If you don't you probably will be buying at the high. 

Comments

[Ralph Morgan]

In a supply & demand analysis you'd have to also consider IPOs adding to supply, and total funds available (and wanting) to invest in this asset class eg. rate of accumulation of money into retirement accounts earmarked for investment in stocks.

Regards
http://enoughwealth.blogspot.com

[Alex]

Really good macro insight. On a short-term basis we're overbought and I think more than due for some consilidation. I've been sitting about 38% in cash as of late, waiting for a pullback.