|
One of the first investment "rules" I learned was that Wall Street doesn't ring bells to signify the start and end of a bullish trend. No one is going to tell investors exactly when to get in and out of the stock market.
But suddenly I'm hearing bells -- and lots of them.
The first, faint bell rang in July 2002, when individual investors started pulling money out of stocks in droves and pouring it into bond funds that had already run up. Those investors were feeling smug, proud and arrogant when stock prices hit those ugly October lows, supposedly proving to themselves what astute investors they were to shun stocks. But as Steve Leuthold told us last Friday, individual investors rarely get in on the ground floor of a bull market. They generally buy at the top of a market, be it stocks or bonds.
History is on our side when using the Nasdaq's winning streak to predict future market action, and it even works using the Dow and the S&P -- for now, the path of least resistance is up. Since October, major stock market averages have rallied 20 percent -- the classic definition of a bull market -- and those autumn lows held without the participation of the individual investor. Markethistory.com goes one step further in noticing that the Nasdaq Composite Index had its fourth winning month in a row, while the Dow Jones Industrial Average and S&P 500 have booked three consecutive positive months. The last time the Nasdaq put in such a winning streak was December 1999, and what a five-month party that was!
And as Leuthold pointed out, a rally doesn't need individual investors. It can be, and usually is, carried by institutional investors: hedge funds, pension funds and the like. Smart money is called "smart" because it recognizes opportunities and seizes them. Well, smart money has just been given yet another reason to start buying stocks, aside from low interest rates (two-year note rates are now beneath the overnight fed funds rate) and the recently passed tax cuts: deregulation.
In a sweeping move, the Federal Communications Commission relaxed decade-old rules against media concentration and voted to allow companies to buy television stations reaching nearly half the nation's viewing population, and to own newspapers and broadcast outlets in the same city. Even Sen. Byron Dorgan, D-North Dakota, heard that bell; he predicts an "orgy of mergers and acquisitions." Whether it's an orgy or not is debatable, but given the stark absence of such fee-generating activity in the last couple of years, the upside potential is real.
Whether they're agreements in which companies pool interests, or outright purchases of a company's assets, mergers can push the price of the acquirees' stock higher and take supply out of the market, thus driving shares even higher. Remember the go-go '80s when most M&A activity was financed with debt? Or the stock-funded deals of the '90s? The results were the same: rising stock prices.
High valuations, the bursting of the dot-com bubble and the slew of business scandals that ensnared innocent investors dampened the appetite for mergers here in the United States, giving Europe the edge in 2002 for the first time in 10 years. But now that accounting scandals have receded from the headlines and valuations are more manageable, don't be surprised to see a renewal of some merger and acquisition talk if not action.
And it's not just big media that's talking marriage. Banks and insurance companies are revisiting the idea of combining, in a delayed reaction to the repeal of the Depression-era Glass-Steagall Act that prohibited commercial banks from owing insurance and other financial businesses. While banks have snapped up brokerage operations, few have tested the waters of insurance company ownership. One reason was that insurance was seen as a "low-return" business with hard-to-quantify risks, but now that banks are looking for ways to grow revenue, insurance companies are now starting to look a bit more attractive. Returns are stable, prices are cheap and insurance companies can augment banks' wealth-management product lines. Last Friday's roundtable guests anticipate that life insurance will be a growth industry because of retirement savings - clearly a demographic play.
One more bell is poised to ring for initial public offerings. IPOs are at 30-year lows despite the recent stock market rally, so it may take a bit more time, but they'll be back. Geopolitical uncertainty is one reason for the drought, but other factors such as corporate governance and individual investor reluctance to get burned again continue to hold the IPO market back. Once a bull market takes hold and lures investors off of the sidelines, look for IPOs to revive. But keep an eye on smart money investors. If they have the courage to buy something new, illiquid and untested, this rally will really have some legs.
|
