Supply And Demand

June 01, 2007

I heard a great report on Wednesday on Marketplace about exactly what Jim mention’s in his blog, and what I called the “universal bull market.”

Commentator and former Labor Secretary Robert Reich was talking about why stocks keep going up in the face of lackluster economic growth. His argument is basic supply and demand: investors are putting money to work in a shrinking pool of publicly traded stocks.

According to Reich, corporate stock buybacks and leveraged buyouts are taking huge quantities of stock out of public circulation: 8 percent of all publicly available shares over the past two years. I hadn’t heard that 8 percent figure. That’s impressive. IPO activity is strong, but it is not making up for this vanishing supply.

Reich argues that, eventually, this boom will collapse: after all, the reason private equity firms buy up companies is to float them again at a later date … and a higher price.

Worth considering…

(Reich’s argument is not airtight, of course. You could argue that Sarbanes-Oxley and related regulations have raised the cost of doing business as a public company, leading to a discount to public prices … and an incentive to take and keep companies private. But in the end, I think he has a point.)

 

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