If you feel that the real estate bust is a possibility, you are unsure about commodities, there are some bullish commentators for equities;
Brian Reynolds, the chief market strategist at the boutique brokerage M.S. Howells in New York, sees the disconnect between corporations and average investors as the difference between believers and nonbelievers. Federal Reserve flow-of-funds data, he says, show that individuals have been selling equities the past three years as heavily as they did during the bear market while buyers on the other side of those transactions have mostly been the companies themselves who are repurchasing stock and going private.
Essentially, Reynolds noted, corporate bond investors are valuing companies' earnings as if they are going to grow for years to come, while individuals seem to think there's a depression coming. That Freescale deal is again a great example. At the time the buyout was announced, the stock was one of the most heavily shorted on the New York Stock Exchange, and bears decried the price offered as insane. Yet the bonds issued to pay for the transaction were oversubscribed by a factor of three.
"It's the exact opposite of 2000 and 2001, when it was corporate bond investors that were pessimistic and the public was optimistic," Reynolds said.
The veteran strategist says the last time he can remember this wide a gulf between smart money and the public was in late 1994 and early 1995 at the start of a five-year ascent for stocks. It's a matter of mistaken perceptions in some cases. For instance, many investors are leery of stocks due to a concern that a real-estate crash may crush stocks. But it doesn't work that way. Reynolds pointed out that in the last real-estate crash, from 1988 to 1993, 750 thrifts went bankrupt and the government created the Resolution Trust Corp. to sell real estate at pennies on the dollar. Yet the Standard & Poor's 500 Index ($INX) doubled in that period, as investors paradoxically came to consider the stock market a haven.
Phil Erlanger, an expert on investor sentiment and the publisher of the Erlanger Research Web site, said he thinks the current rally is sustainable because it has been a low-volatility advance -- not a screaming, one-sided race. "I haven't seen any kind of froth at all," he told me from his office in Boston. "We've seen nice, tight uptrend with no superstrong one-day moves. You can tell that there are lot of people still waiting to get in; they're paralyzed."
Charles Biderman, another veteran observer who publishes institutional research on market liquidity called TrimTabs, said the most bullish effect at work today is companies' efforts to reduce the number of outstanding shares for sale in the market at an annualized rate of 3%. A "float shrink" of this size is unprecedented, he said. The only faintly similar episode came in late 1994 through 1995, with share shrinkage of a bit more than 1%. Stocks went on to advance 33% in 1995 and 25% in 1996. He advises clients to align themselves with the corporate "smart money" and get fully invested now in exchange-traded funds tracking small-cap and large-cap indexes.
Bert Dohmen, a seasoned investor and research publisher in Los Angeles, noted that the big buyouts have done two things that benefit all investors: They take supply off the market and release more money back into the target's sector. Once this week's Equity Office Properties (EOP, news, msgs) deal is completed, for instance, most of its former shareholders will redeploy their money into other real-estate investment trusts, buoying their prices.
The bottom line, said Dohmen, is that there's a lot of money sloshing around the world economy, from tripled oil prices in the Middle East to windfall manufacturing profits in Asia. All that money needs to find a good home, and right now, billions of it is pouring into stocks. So no matter how much you may fear the economy is bound to slow or that the consumer is tapped out, or that Congress will overspend, or that North Korea will blow up the world, you need to realize that liquidity -- the fancy word for rivers of cash -- conquers all. "Sometimes you just need to pretend you're dumb and not look too closely at all the details," Dohmen said. "Just admit you don't know everything and go with the flow."
jog on
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