How Many Shares Can One Market Handle?

The S&P had a remarkable 30% run since its lows of March 9. Many of my favorite stocks have done well, as I'm sure have yours.

However, several troubling things bother me about the market that aren't discussed.

1. Supply of new stock seems extraordinary. Bank of America (BAC) just issued 1.25 billion shares of stock! That's on top of its base of 6.4 billion (more than enough to provide every man, woman, and child on earth with a share). BB&T (BBT) is offering 75 million shares, diluting its existing 550 million shares over 13%. Wells Fargo (WFC) is selling 341 million. The list of bank offerings seems endless and is nowhere near done.
   
   Other sectors are raising capital in a big way. Ford (F) is making a 345 million share offering bringing its total shares to 2.87 billion. Where will all the buyers come from? The stock deals have so far been successful. The new owners are in. But they've had to come from somewhere. New money just didn't materialize over a three week period. It's got to have come from elsewhere; it couldn't have just been sitting on the side lines. And so, it's got to have come from somewhere: oil, retail, tech. To me, supply of stock just blew past demand.


2. Companies with troubled balance sheets have found great success "fixing" themselves with these equity offerings. I'm afraid that the "deluge" of such solutions has just begun. The companies may get fresh cash to bail themselves out but the investor may find he has been left with confetti.


3. This recession hasn't had a lot of bankruptcies. Not much company stock has been taken out despite one of the most dramatic financial collapses in seventy years. Before you can rebuild the house, you've got to clear away the rubble.

Investors who hold troubled companies may find themselves with confetti on their hands. I would look for businesses with strong balance sheets to ride out what will probably be some very bumpy months ahead.

Comments

[Tdot:]

Well, placing more common outstanding shares on the open market is one short term way for the company to raise some much-needed cash. Frankly, once sold, in tough times the company hardly cares what happens to the share price, other than perhaps those who are supposed to represent the share holders (or are shareholders themselves). They just wanted the cash, preferably before the share values fell. In any case, it is cash for the balance sheet, and the only risk is dilution and a possible net drop in market cap in a panic-sell situation, but that is the stock holders' problem.

If at some point the company's cash position improves to the point where it is paying out "too much" profit in dividends, then it can always reverse-split or start to buy back shares if they are seriously underpriced. Or a Kerkorian-type invester can try to buy up the cheap shares, and try to make some profit in the trading process, or maybe even take control, if the company doesn't take the poison-pill route. If it hasn't already.

May 26 07:25 AM

[buoy:]

And no, you could be very wrong. The money could have been sitting on the sidelines.

May 26 08:59 AM

[pesa:]

More than 6million american are jobless,eventually when they get a job..inflow of money from their spending,IRA accounts etc...will absorb the issued shares...pushing prices higher...for now the market will be in a trading range until that happens

May 27 10:05 PM