Monday, May 11, 2009

Wall Street Logjam Breached

Today Ford announced that they were going to offer about $1B of new common equity. The Ford news comes on the heals of bank announcements of successful equity offerings. On the debt side of capital raising, MicroSoft said it will sell debt, totalling $8, for the first time in its history. This offering follows Whirlpool and several industrial companies to the debt markets. After months of paralysis capital markets appear on the mend.

Bullish market forecasters have consistently touted the huge cash horde of institutional investors and opined that it was key to a mighty rally when finally deployed. It appears that the current market rally has been prying loose some of that idle cash. Additionally, there is an appetite for new stock and bond offerings. While it is good for the economy that capital is starting to flow again, it will lessen the strength of the stock market's rebound. Money that is invested in new issues of debt and equity, versus being deployed into already issued purchases, will reduce the pace of the market's rise. The new issues add to supply, thereby reducing demand. Since almost all new equity issues have been sold below the current market price, they inhibit the market's price recovery. 

All of the equity raising has been done by the marginally credit worthy, banks and auto makers, as they have needed to rebuild their balance sheets now that institutional investors have opened the door a crack. Credit worthy companies will follow the debt route as equity prices are too low to entice them to offer new shares. But now that water is getting through the logjam, they will come to market, at low interest rates, and sop up lots of institutional cash.

I've maintained that the economy isn't improving as fast as the market thinks and the current rally is overdone. Plus, Obama's antics are sure to bring higher interest rates and inflation. The willingness of professional investors to re-enter debt and equity markets spells competition for "risk free" assets [treasuries/agencies] and a continuation of the rate creep we are seeing. Smart companies are seeing the same thing or they wouldn't be issuing long term debt. 

Higher interest rates will present competition for stocks. That, plus the eventual recognition that the economy won't show a meaningful recovery for many quarters will cause stock prices to move downward over the next 6 months. RTPIX and dividend payers continue to make sense. 

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