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UPDATE: The Dow did it today, crossing the 13,000 mark less than six months after cracking Dow 12K for the first time ever. Is Dow 14,000 far off? That's just a mere seven percent gain from where we are right now; if the factors that drove the Dow this far continue, Dow 14K could become a reality in 2007.
Tuesday, April 24, 2007
Well it's almost here and you can thank the barbarians for paving the way to this new blue chip milestone.
That's right, those very same type of leveraged buyout specialists who were immortalized for breaking into the boardroom of RJR Nabisco in the best-selling novel "Barbarians at the Gate" almost two decades ago are back — and with a vengeance. Only this time, the so-called barbarians are being lionized, not criticized, and operating under the kinder, gentler moniker of private equity.
In fact, several top economists and market watchers are crediting these private equity pirates for the Dow's recent record run. It all boils down to not much more than Econ 101 — supply and demand. As more and more household names like Sallie Mae and Texas Utilities are taken private, the supply of outstanding stock goes down, ostensibly driving up the price of shares still in the market.
And lately the supply of common stock in the U.S. has been dwindling rapidly. As economist Paul Kasriel of Northern Trust astutely points out, a record $548 billion in stock was "retired" last year, and 2007 looks to be on pace as another record year as well. As public companies disappear, mutual fund and pension fund managers have to deploy those billions elsewhere in the public market.
Think of it this way — every time a Sallie Mae or Claire's Stores or a Linens ‘N Things get bought out, fund managers flush with cash from the deals and plow it back into another financial stock or retailer. Add that to the speculative pop many stocks from Dow Chemical to Advance Micro Devices get for merely being mentioned as a buyout target, and you have a nice cocktail for a higher stock market — and that's just what we're seeing.
And it's not just the private equity firms who are doing the buying — public companies are also snapping up their shares at a record pace. Sure, these so-called "share buybacks" are often seen as a management vote-of-confidence in the stock, but they're also a nifty means of supporting a stock price to boost the value of management stock options. Given the choice of buying back stock or increasing dividends — guess which one an options-laden CEO might prefer?
Yes, as Kasriel explains, "If the supply goes down, the price will go up." That's what's certainly happening in the spring of 2007.
Unfortunately, as they did in the late 1980s and late 1990s the barbarians and those in the boardroom have a penchant for buying when prices are high. Enjoy the record rally while it lasts.
Terry Keenan is anchor of Cashin’ In and is a FOX News Channel business correspondent. Tune in to Cashin' In on Saturdays at 11:30am and find out what you need to know to make your money grow and keep what you already have!