Investors worried about prospect of stock market fire sales


With the largest buyer evicted from the market, the prospect of a torrent of stock sales on the verge of being triggered by cash-strapped companies is causing anxiety for investors who remember the financial crisis.

As things have changed since those days, especially in the credit markets, secondary deals are appearing among struggling companies, including United Airlines Holdings Inc., which has raised $ 1 billion. Combined with a resumption of buyouts, it adds to the concern about something that many believe has been major support for the market over the years – that it is shrinking.

The repetition of the crisis plan is not without ambiguity, of course. Despite all the dilution they create, stock sales are better than the alternative when you run out of money. It is important to note that the S&P 500 jumped 23% in the largest year on record for stock sales, 2009. But the possibility of a wave of actions occurring is a consideration for bulls. trying to determine if the bounce is late.

“Some companies may be motivated to reduce their debt by reducing investment or even selling new stocks in any rally in stock prices,” TS Lombard chief economist Charles Dumas wrote in a note. “The latter being one of the reasons why a stock market rebound should not gain much traction for a long time. “

The underwriters sold more than $ 230 billion in public capital in 2009, according to data compiled by Bloomberg. This year, small issuers are already selling stocks at the highest rate ever. Other agreements by Carnival Corp., Performance Food Group Co. and Carvana Co. suggest that large issuers consider equity financing as a viable alternative to borrowing.

A banker from a securities company who asked not to be identified said he was busy pitching to companies in dilapidated areas like cruises. The buoyancy of the stock market since its trough on March 23 was publicity for the proposals.

What a shrinking stock market means to investors and the general public is hotly debated on Wall Street, although it is clearly getting smaller. Today there are approximately 298 billion common shares outstanding among the S&P 500 companies, up from a recent high of 332 billion in 2010, according to data compiled by S&P.

The buyback of thousands of billions of dollars in stocks over the past decade is one of the main reasons for the decline and, for many, it explains the worrisome resilience of the market during the 11-year bull market completed in February. Since buyouts could cut in half in 2020 as companies cut spending, bulls naturally fear that the cuts will happen at the same time as a bunch of new stocks are being dumped on them.

“There is no doubt that this is coming,” said Mike Stritch, chief investment officer, BMO Wealth Management. “Increasing the supply of companies in certain sectors would be a drag on performance. These would be the industries you most likely suspect of being subject to this, it would be just another drag – energy, real estate, some industrialists. “

One potentially mitigating difference between today and the financial crisis is interest rates. With lower borrowing costs at stake, some issuers may use debt and equity-linked securities to limit the amount of dilution. Carnival, for example, reduced the size of its stock offer twice in a day before fixing the price of new shares in parallel with the increase in debt and convertible bonds.

“If the returns stay where they are, I think the debt looks a lot, a lot cheaper than stocks. If you see a lot of equity issues, you’ll be looking at some of the over-exploited parts of the US equity market, “said Michael Shaoul, President and CEO of Marketfield Asset Management LLC. Shaoul said that if a big drop in supply were to hit the market, it would likely happen when the market rallies and reflects the fact that companies are strengthening their balance sheets and their profit power. “Besides, it’s a kind of happy story,” he said.


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