Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on
It seems like just about every morning these days, you switch on your radio and hear about another gigantic payday for corporate fat cats. On the Monday of Thanksgiving week alone came word of $50 billion worth of deals to buy a big Arizona copper miner, a Chicago skyscraper developer, an Oregon steelmaker and a New York bank.
That was a lot of loot for someone to be thankful about, but what about us little guys? The people who actually do the work around here, with mortgage payments in the low four digits, 401(k) plans that seem stuck in neutral, two jobs and three tuitions?
Dow Jones Industrial Average
may be at a new high and merger mania at a fever pitch, but it sure doesn't feel like the good fortune is being spread around. It's nothing like the late 1990s, when every waiter, grandma and karate teacher was watching
, swapping stock tips and checking their online brokerage accounts every five minutes to see if they were millionaires yet.
If you're among those who are feeling left out of the market's 15% surge this year -- with more of your savings in cash than in stocks -- it has nothing to do with your brains, luck or discipline. It has more to do with your willingness to stomach new risks and the fact that it can take a long time for your aggressive, money-hungry inner shark to reawaken and wipe out your fearful, money-protecting inner pussycat.
I urge you to get reacquainted with your shark as soon as practical, even though it's uncomfortable.
The problem, in a nutshell, is that for most of the past seven years, stocks have been a lousy bet. That has forced the majority of people to turn their back on those abstractions known as securities and build wealth through the purchase of things that they can see and touch: homes and land.
But things change, and in the past 12 months residential real estate values have quickly faded from a very high level while stocks have slowly rebounded off a very low level. And it is hard for most folks to flip the mental switch that allows them to exchange their real, hard-earned cash for something so seemingly unreal as shares of corporations.
It may take a while for your transition to occur, but it will. Stocks are back and are likely to remain the best investment for at least the next nine months, if not several years.
Why doesn't it feel that way already? For one thing, this decade has turned out so much different from the ones that engendered a rabid stock culture. Check this out: By the end of November in the seventh year of the 1980s, the Dow Jones industrials were already up 126% for the decade. By the end of November in the seventh year of the 1990s, the Dow was up 133% for the decade, while the Nasdaq-100 was up a whopping 267%.
The first seven years of this decade have been a joke in comparison. Even though the Dow is at a new high, it's only up 7% so far this entire decade, while the Nasdaq-100 is down 51%. No wonder most people cannot get the equity religion. Stocks have been dead money.
So where has the recent advance in shares come from? Strangely enough, it has been almost entirely a corporate phenomenon. Those buyouts you've been hearing about are companies' way of saying that stocks are cheap. Not just a little cheap, like a 10% off coupon for Coke, but really, really cheap -- and not just in the U.S. but worldwide.
With a month to go, 2006 is already the biggest year in history for mergers and acquisitions, yet we're seeing just a corner of the phenomenon domestically. Of the five largest deals this year, just one was American:
The second-largest was German utility
( EON) $66 billion grab of the Spanish electric utility
( ELE). The French, Italian and Dutch have done similar deals in the $15-billion-plus range.
Meanwhile, the industry research group Dealogic reports that Chinese companies have made 85 purchases in 2006 worth $15.5 billion, while Indian companies have made 146 purchases worth $20.2 billion. Both figures are up more than 15-fold from 2000.
If you accept the cynical notion that the stock market is like a casino, in which companies are the house and we're all suckers, then the house is basically saying now that it's the right time to be playing the game, not watching over the big boys' shoulders.
These deals are being accomplished with genuine cash out of companies' and buyout funds' treasuries, as well as through the issuance of corporate bonds at interest rates that are almost laughably low. These stumpy rates -- for example, the 10.125% coupon on the junkiest debt issued to finance the sale of Freescale Semiconductor to a private equity group -- mean that the conservative, pessimistic types who buy bonds think that the deals are neither expensive nor risky.
Brian Reynolds, the chief market strategist at the boutique brokerage M.S. Howells in New York, sees the disconnect between corporations and average investors as the difference between believers and nonbelievers.
flow-of-funds data, he says, show that individuals have been selling equities the past three years as heavily as they did during the bear market, while buyers on the other side of those transactions have mostly been the companies themselves who are repurchasing stock and going private.
Essentially, Reynolds noted, corporate bond investors are valuing companies' earnings as if they are going to grow for years to come, while individuals seem to think there's a depression coming.
That Freescale deal is again a great example. At the time the buyout was announced, the stock was one of the most heavily shorted on the
New York Stock Exchange
, and bears decried the price offered as insane. Yet the bonds issued to pay for the transaction were oversubscribed by a factor of three."It's the exact opposite of 2000 and 2001, when it was corporate bond investors that were pessimistic and the public was optimistic," Reynolds said.
The veteran strategist says the last time he can remember this wide a gulf between smart money and the public was in late 1994 and early 1995, at the start of a five-year ascent for stocks. It's a matter of mistaken perceptions in some cases. For instance, many investors are leery of stocks because of a concern that a real estate crash may crush stocks. But it doesn't work that way.
Reynolds pointed out that in the last real estate crash, from 1988 to 1993, 750 thrifts went bankrupt, and the government created the Resolution Trust Corp. to sell real estate at pennies on the dollar. Yet the
Standard & Poor's 500 Index
doubled in that period, as investors paradoxically came to consider the stock market a haven.
Slow, Steady and Sustainable
Phil Erlanger, an expert on investor sentiment and the publisher of the Erlanger Research Web site, said he thinks the current rally is sustainable because it has been a low-volatility advance -- not a screaming, one-sided race. "I haven't seen any kind of froth at all," he told me from his office in Boston. "We've seen nice, tight uptrend with no super-strong one-day moves. You can tell that there are a lot of people still waiting to get in; they're paralyzed."
Charles Biderman, another veteran observer who publishes institutional research on market liquidity called TrimTabs, said the most bullish effect at work today is companies' efforts to reduce the number of outstanding shares for sale in the market at an annualized rate of 3%. A "float shrink" of this size is unprecedented, he said.
The only faintly similar episode came in late 1994 through 1995, with share shrinkage of a bit more than 1%. Stocks went on to advance 33% in 1995 and 25% in 1996. He advises clients to align themselves with the corporate "smart money" and get fully invested now in exchange-traded funds tracking small-cap and large-cap indexes.
Bert Dohmen, a seasoned investor and research publisher in Los Angeles, noted that the big buyouts have done two things that benefit all investors: They take supply off the market and release more money back into the target's sector. Once this week's
Equity Office Properties
( EOP) deal is completed, for instance, most of its former shareholders will redeploy their money into other real estate investment trusts, buoying their prices.
The bottom line, said Dohmen, is that there's a lot of money sloshing around the world economy, from tripled oil prices in the Middle East to windfall manufacturing profits in Asia. All that money needs to find a good home, and right now, billions of it is pouring into stocks.
So no matter how much you may fear the economy is bound to slow or that the consumer is tapped out, or that Congress will overspend, or that North Korea will blow up the world, you need to realize that liquidity -- the fancy word for rivers of cash -- conquers all. "Sometimes you just need to pretend you're dumb and not look too closely at all the details," Dohmen said. "Just admit you don't know everything and go with the flow."
I made the same recommendation
in a column in midsummer at the start of this move, and I stand by it: An advance backed by companies and buyout-funds optimistic over future earnings growth potential, rather than sheer speculation, should be durable. Take advantage. I still like the stocks listed in my prior columns
At the time of publication, Markman did not own or control shares of companies mentioned in this column.
Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
to send him an email.