So you don't buy the idea of the index funds being like a black hole that sucks up shares and doesn't sell them?
In the long run, no, although short-term effects are obviously bullish for the share-price (I hope its nonfundamentalness is obvious). There are a couple of caveats in the "black hole" theory:
a. (Correct me if I'm wrong, but) It seems that if there are net redemptions from index funds, then they have to sell the very shares that they now have to buy (not all of them, of course, but perhaps enough to cancel out the "Addition!!!!"-induced runup we've seen and will perhaps see more of). So if there should ever come a time when people en masse decide the S&P500 is not a great place to invest, and redeem their funds to "invest" elsewhere (I know, I know...this could never happen in the real world, but it is a philosophical possibility so humor me), then we might learn whether the sword cuts both ways.
b. (This doesn't matter to me, but it might matter to those betting on the "free money near-term!!!!" thesis with lots of JDSU front-month OTM calls) I would wait for the Wed. addition to come and go before declaring the coast clear on another theoretical possibility: JDSU could float a secondary a la QCOM last summer, to capture all that fund cash into the treasury instead of into the hands of daytraders. This could actually be fundamentally bullish (more money to handle capex plans) but would not benefit the stock near term, because the price "pop" which is supposed to happen when the funds effectively reduce the float comes from treasury stock instead of retail. One possible argument for this scenario (I'm not at all saying it will happen, just that it "could", ya know) is that, pending completion of the SDLI merger, JDSU will perhaps (hopefully?) take a breather from the acquisition binge. It might instead focus on that old bogey, Execution. In such a scenario, JDSU might be less concerned about its near-term stock price (since it won't be using a lot of "funny money" any time soon for another big merger) and more concerned about doing what it takes to expand existing businesses. That's where a couple bil in the till might come in handy. NB: Again, just an idea.
c. Replay of Tired Old Theory of "Market Cap Means Something"...irregardless** of the S&P addition, investors are supposed to look at a co's market cap (or EV, if you like) and create some kind of DCFA scenario where investing at today's price makes "sense" beyond the Greater Fool theory. So people should give a co. whatever market cap it's worth irregardless of whether it belongs to some clique like S&P. (Indeed, investors voted both SDLI and JDSU pretty decent valuations before any mention of that Hallowed Ground.) I'm sure some goober has done a study showing how S&P 500 members have higher valuations than comparable nonmembers, but I say: big deal. There are all kinds of ways to (measurably, and over a period of time) boost a stock. Look at all the Japanese cross holdings that kept members of the same keiretsu high-priced through their bubble. Look at the way many the IPOs in this country shoot to the moon when they only float like 3 million shares. These things have a way of imploding, and each implosion is beautiful in its own way.
**Please join me in making Irregardless a Real Word. Use it ofTen. |
