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.
On the other side of the ledger, I read that if company stock buy-backs continue at their current pace, they could reach $198,000,000 this year.
southof8:
Interseting info on boomers, of which I am one.
A lot of those numbers are favorites for peopple to cite when trying to create a particular view. Some things to keep in mind:
Assets include homes, probably a very high %
Go look at retirement advice websites and discover the average amount saved for retirement by this group at which so much advertising was aimed.
It seems to me that housing will never recover fo the next 20 years, and the affect on stocks will not be anywhere near the dire predictions.
China is not playing fair and refuses to play “fair”. We have minimal tariffs on their goods imported into the U.S. They charge high tariffs on our goods imported by them. This was tolerable when we had 5% unemployment. Now with 10% unemployment, pressure is on to reimport some jobs from China by increasing tariffs on their products. Doesn’t China see the danger of this happening? China could relieve some pressure by letting their currency float, but they seemed backed into a corner also. Something is going to give here. It may not be pretty.
Hi Jim,
AS governments compete with companies for investors’ cash, bond yields will go up, as you noted. This makes me wonder whether goverments will start selling their gold reserves as an alternetive to issuing bonds ?
Can the money from bond and gold selling even go into the same pot?
Could we be looking at a modern version of Smoot-Hawley?
http://www.ft.com/cms/s/0/b19e7036-748b-11df-b3f1-00144feabdc0.html
Just when you think it might be safe to go into Chinese stocks…
Could this have a possible impact on the markets?
http://wcbstv.com/politics/nys.goverment.shutdown.2.1745114.html
I tend to think not, but one never knows…
jbr,
I’m not sure about the next 3 years, but the next major refinancing is Spain at the end of July. In fact, it will be the largest this year.
CallOfDuyFan:
To me it seems those numbers are already factored in to prices, seeing how much time everyone seems to have on hand . . . sorry! (Now ageism. What next?)
This is awesome information. Does anyone know if it is possible to get a schedule of this:
“Countries in the Euro Zone need to refinance $2.4 trillion in bonds over the next three years.”
Needless to say that would be valuable information, at the least to be forewarned about when Euro worries can escalate/subside over the next 3 years.
per wiki, 76 million.
Seventy-six million American children were born between 1945 and 1964, representing a cohort that is significant on account of its size alone. In 2004, the UK baby boomers held 80% of the UK’s wealth and bought 80% of all top of the range cars, 80% of cruises and 50% of skincare products.[18]
In addition to the size of the group, Steve Gillon has suggested that one thing that sets the baby boomers apart from other generational groups is the fact that “almost from the time they were conceived, Boomers were dissected, analyzed, and pitched to by modern marketers, who reinforced a sense of generational distinctiveness.”[19] This is supported by the articles of the late 1940s identifying the increasing number of babies as an economic boom, such as in the Newsweek article of August 9, 1948, “Population: Babies Mean Business”,[20] or Time article of February 9, 1948.[21] The effect of the baby boom continued to be analyzed and exploited throughout the 1950s and 60s.[22]
The age wave theory suggests an economic slowdown when the boomers start retiring during 2007–2009.[23]
Baby Boomers control over 80% of personal financial assets and more than 50% of discretionary spending power. They are responsible for more than half of all consumer spending, buy 77% of all prescription drugs, 61% of OTC medication, and spend $500 million on vacations per year and 80% of all leisure travel.[24]
Jim,
What about retiring baby boomers and their need to raise cash by selling equities as they age? Are there any numbers around that?
Thanks for your insight.
USDA–Thanks for the flip side. I too have seen a lot of companies raising or reaffirming guidance at the TOP END. There are many very positive signs in the economy. I believe the problem is our psychology. We expect a V-shaped recovery even though we know it won’t happen. We can pull through this without super fast growth.
I’m a buyer on large dips.
Are you all buying that POT yet? Many said they were waiting for a bottom or turn. Has it come?
Apologies. I also own shares of JCI.
Full Disclosure on the post above: I own shares of DD, DE, MON, and FSLR.
In my last post, I discussed why I expect earnings announcements at good corporations to easily meet or exceed expectations over the next few quarters. I have also discussed reasons to expect dividend increases and other shareholder “bonuses”, and increased CAPEX spending and M&A activity going forward.
Today, Texas Instruments issued a statement saying that earnings would be at the high end of previous estimates. DuPont also recently reiterated earnings guidance which predicts 20% compound annual earnings growth through 2012.
Yesterday, CAT increased its dividend. Deere increased its dividend at the end of last month. And both WMT and MON announced share re-purchase programs.
Finally, DE announced a $100 million investment in its John Deer Foundry in Waterloo, IA. FSLR is doubling its production capacity at its German plant, which will create hundreds of new jobs. And Johnson Controls is in talks to acquire Visteon Corp.
This is just a snapshot of activities at some of the companies I follow / own. Scouring the press releases will turn up countless other examples. I remain confident that now is a great time to buy shares in a solid company. Based on my simple calculations, the market as a whole is currently undervalued. Activities such as the ones I describe above will continue to add stimulus to the growth trend already underway.
Jim,
It is this kind of analysis that keeps me coming back here. Your macro analysis is outstanding!
Maybe there will be one less stock available soon… BP on it’s way out?
http://www.minyanville.com/businessmarkets/articles/todd-harrison-bp-oil-spill-transocean/6/10/2010/id/28694?camp=featuredslide&medium=home&from=minyanville
Jim,
Hats off to you for piecing all this together. Thats quite a supply !