Going for Eight in a Row

Today, the world’s most widely followed stock market average could easily post its eighth consecutive daily gain. Why not? Money seems to be everywhere… lots of capital chasing investments providing diminishing returns.

The rumor mill has Dow Chemical being bought, BCE being taken over, Chrysler being close to announcing a sale, mining companies being snapped up, Sam Zell getting into the newspaper business, and private equity funds building cash fast. Is any company, public or private, safe from a takeover?

As I have written before, there is no doubt that liquidity (in terms of cash available to invest) is readily available in large denominations. And that’s what is fueling the big stock market averages.

Money isn’t going into tech like it did in 1999 because the damaging effects of the tech boom can still be felt. Money is not going into real estate anymore because yields have gotten too low, and the residential property bubble has burst. Money is cautious about the stock market as well, because it’s overpriced. Capital is flowing into private equity funds that, in turn, have a mandate to invest in “good quality and stable” companies. Most of the time, that goal is achieved by taking a company off the stock market.

Corporate profit growth is declining. The housing market is in trouble. Auto sales are down. The economy is slowing. A recession in the U.S. within the next 12 months is expected. No, the big market averages like the Dow Jones Industrial Average should not be rising.

If there is one thing I’ve learned in the investment business it’s that the trend is your friend no matter what else is going on. At some point, we will face regression to the mean. But, for now, despite all the problems in the U.S. economy, the large amount of capital in the marketplace (in private equity funds, in mutual funds, in retirement funds, from inheritances) is fueling the general stock market higher and higher. Enjoy it while it lasts because the sun can set quicker than investors can imagine.

NEWSFLASH — American Home Mortgage shares plunged yesterday as the subprime lender reported it failed to find a buyer for the company. According to Bloomberg data, over 40 U.S. lenders have either now closed their doors or are looking for takeover offers because of soaring defaults on U.S. subprime mortgages. The carnage continues almost unnoticed by Wall Street. I believe the subprime lending bust will come back to haunt the U.S. economy.