Bill Wexler's Dog Pound Message Board

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Non-Tech : Bill Wexler's Dog Pound

REFR 1.560

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To: JDN who wrote (6099)	1/15/2000 4:00:00 PM
From: Graeme Smith	Read Replies (3) of 10293

JDN, I agree that the market is a function of liquidity as well as interest rates. Markets go up when more money is poured into them and down when that money is pulled out. I think the more important question is where that liquidity is coming from. The baby boomers have a small effect, but main source of capital coming into the stock market has come from foreign investors and companies buying back their own stock using debt. Buying back stock is not a bad thing normally. However over the past few years companies debts have increased by exactly the same amount as they have spent buying back stock. Using debt to buy back stock is the down side of employee stocks options. Their is a definite motivation for CEO/CFO's to increase the stock price artificially by buying stock, even without the cash flow to afford the it. Companies cannot keep increasing their debt indefinately so eventually their buying must slow down or dry up. Foreigners have been big purchasers of US stocks in the 90's. However they are just as likely to become big sellers as they are buyers. Much more likely to become sellers if the US market is percieved to be overvalued and a risky place to invest. If there is an extended correction, caused by companies running out of debt to buy back stock, foreigners would also be expected to jump ship to safer shores. This leaves only the domestic investors to take the slack. However, at the moment the average Americans saving rate is negative. This is like a rubber band which is already pulled very tight. In the short term the rubber band could be pulled a little tighter, and the consumer could go a little bit further into debt, but eventually they have to pay off their financing and find money from somewhere to live off. This is a very dangerous situation since the general investor is relying on stock market gains to pay off their debts and act as their future income. If the market does begin a major correction, the rubber band is going to rebound and greatly exacerbate the correction. Your right when you say that any pullback of 30% will be seen as a buying opportunity. But that money has to come from somewhere and eventually the credit used to take advantage of these "buying opportunities" is going to run out.

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