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Strategies & Market Trends : Watching the market collapse
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To: Amelia Carhartt who wrote (128)8/15/1999 7:23:00 PM
From: pater tenebrarum  Read Replies (1) of 150
 
Susan, it is not potential, but actual dilution. what's more, the seemingly beneficial practice of stock buy-backs will come to haunt the market one day - the net effect of this practice is to enhance earnings per share while reducing book value(since share prices trade at the highest multiple to book value ever) and raising corporate debt levels. it is of course only prudent to buy back one's shares on credit if the bull market never falters. normally, corporations should be inclined to issue shares to take advantage of high prices rather than buy them back with debt at high (and rising) rates. there are so many aspects of this bull market that carry the seeds of it's demise that i fear once a bear market begins, it could be of the devastating variety, where every rally turns out to be a selling opportunity. the overhang created by ESOP's is just one of these: another one is the overhang of stock held by mutual funds and index funds. should redemptions start at a certain level (say if the market takes a 30% tumble - we know already that 20% are not enough to shake the 'long term' investors' faith) the favorable supply/demand equation that ruled in recent years would be stood on it's head and transform the virtuous circle into a vicious one. however, if the Japanese example is taken as a guide for the durability of modern day manias, we should expect even higher prices before a bear market begins. most likely the market will first ruin all the shorts before it proceeds to ruin the bulls as well....

regards,

hb
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