Global Equity Shortage I: US market
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First heard this “equity shortage” term from Jim Cramer, the host of CNBC “Mad Money”. I watched his show mostly for entertainment purpose, but I think this term desribes the “supply and demand” of global stock market well. Yesterday the S&P index in the US hit a new high at 1530. Last record was set in dot com era on March 24, 2000. To put it in perspective, on March 20 same year, I got my job offer from my current employer.
There are many changes in the stock market during the past seven years. We have been through a recession, housing boom and bust, China boom, outsourcing boom, etc. For me personally, I became an investor in US stocks and mutual fund (401K); I also bought my first house. The business has done better fundamentally, many lowering cost by outsourcing and expanding in global market. Most the Internet concept-only companies have gone, the companies cleaned up their books after the Enron and WorldCom scandle, and we got Sabane-Oxly (which means more opportunites for my accounting friends).
But I think the “reducing stocks supply” also helped driving up stock prices. We all know the “supply and demand” determine the prices of goods and services in market economy. Similar things can be said for stock markets. We have declining stock supplies; and we got more money (although we consistenely complain we don’t have enough). Let me elaborate more on the supply side: IPOs, buy backs, private equity, M&A.
1) IPOs: we did not have much IPOs from 2001 to 2003. We got more IPOs recently, but not many real good quality large-size IPOs. Google (2004) is a good one. Master Card (2006) is also good. Two large Chinese banks, ICBC and BOC went public last year, but I don’t think they are in the Google/Master Card league. Note the Chinese companies listed in NASDAQ are fairly small companies.
2) Buy backs: a company can reward its investors in two ways: issue dividend; buy back outstanding stocks. The latter usually works better because dividend is taxed twice. Oil companies did a lot buy backs lately because they have lots of cash, and their need for capital expenditure is not too much. Some tech companies such as Microsoft and Cisco are doing the same.
3) Private equity: the latest is Cerberus took Chrysler private. This is not the largest deal in recent years. Blackstone’s $20 b buy out of Equity Office is much bigger. In tech arena Sungard Data Systems $11.3 b buy out is quite big.
4) M&A: this does not necessrily reduce the stocks. If company A bought company B using cash, that will reduce stocks (e.g., eBay $620 m buy out of shopping.com). Oracle did lots of acquisition in recent years: Siebel, Peoplesoft, Agile, etc. Sometimes it uses its own stocks (it won’t reduce the outstanding shares if it issues new stocks), sometimes it uses cash (that will do the trick).
So what’s the big picture here? Not many good IPOs; reducing the stock supply by private equity and buy back; and increasing M&A activies (some overlap with private equity). No wonder there are fewer stocks for average Joe and Jane.