In the short-term news about ephemera can drive stock prices—and that’s what’s happening today and this week.
In the longer term the stock market isn’t any different from the markets for chickens or Las Vegas real estate: it’s supply and demand that counts.
And one of the reasons for the weakness of stock markets around the globe right now is that they’re being asked to digest a huge amount of supply. Even when every investor and his uncle Sid are clamoring to buy stocks, a surge in supply can be enough to end a rally. When nobody is terribly enthusiastic about stocks in the first place, offering billions in new shares can send prices for all existing shares significantly lower.
How much new supply are global financial markets facing?
China’s banks alone need to raise $40 billion or so in 2010. Above that Agricultural Bank of China is trying to complete a $30 billion IPO (initial public offering.) That first $40 billion figure is equal to 50% of all the money raised on the Shanghai and Shenzhen stock markets in 2009.
India’s Finance Ministry has ordered all companies listed on India’s stock exchanges to sell new shares to increase the percentage of shares in public hands (as opposed to those owned by the company or by the government and that never trade) to 25% from the current 10%. The reason for the move is to cut down on the ability of companies to manipulate the price of their own thinly traded shares. The effect would be the issue of as much as $50 billion in new stock. Not all that $50 billion would need to be issued this year. But companies could wind up selling $13 billion in new stock because of this rule on top of $19 billion in new offerings already announced for 2010. The record for issuing new shares, set in 2007, was just $18 billion.
In Brazil Petrobras (PBR) is on the verge of getting government approval of a $25 billion rights offering. (In a rights offering current shareholders are offered the right to buy more shares often at a slight discount to market prices.) The offering would be backed by the government’s sale to Petrobras of the rights to up to 5 billion barrels of oil and gas in the recently discovered deep-water salt formations of the South Atlantic. The money from the sale of the rights offering would go to repay the government for those barrels of oil and the new shares would bolster the balance sheet at Petrobras so the company could borrow more money without jeopardizing its investment grade credit rating. Petrobras plans to invest almost $50 billion this year and between $200 billion and $220 billion in the next five years.
On the other side of the world, European banks need to raise billions in new capital and much of that will be in the form of offerings of stock or stock-like paper. Spanish banks alone are projected to need $60 billion in capital.
And, of course, banks will be competing with European governments for investors’ cash. Countries in the Euro Zone need to refinance $2.4 trillion in bonds over the next three years.
With these bonds carrying higher yields to attract reluctant buyers that’s a lot of competition for stocks.