Robert Reich had an interesting piece on NPR Marketplace today. You can read the transcript or listen to it on the NPR site. I think Reich is a scary smart guy. But I can probably count on one hand the number of times I’ve agreed with his conclusions.
The net-net of his piece was that the stock market run-up over the past few years is because of PE and buy-backs. Specifically, at an ultra-macro level, the PE folks and corporations via buy-backs are taking public companies out of play, and thus reducing the amount of stock instruments available to be purchased.
Last year, corporate buybacks and leveraged buyouts totaled about $600 billion. That was roughly 3.5 percent of the whole value of the American stock market. At the rate buybacks and buyouts are going this year, the total is going to be close to about $900 billion. That’s another 4 .5 percent of U.S. market capitalization taken out of circulation.
Too much money pursuing too few stocks means higher stock prices. On the face of it, the argument seems to not be illogical.
But what occurred to me after I thought about this for a minute was that if the problem is simply supply and demand for fungible instruments, why hasn’t the IPO market gone berzerk? Here’s a quick stat from Hoovers:
Obviously, these numbers are relatively flat. Also note that these are pricings, not issuances. Furthermore, if the US stock markets represents $20T in value (Reich’s 4.5% number being $900B) then the IPOs represent nothing more than a rounding error – maybe, at the outside, one quarter of one percent of the value of the US stock markets.
He’s smarter than me, but I’m not buying his argument on this one. Anyone care to tell me why I’m wrong?