Supplying Risk

Seeing the number of deals in the pipeline for this week, Cramer fears we'll soon see some oversupply shocks to the market.
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Why do we fret over a little something like supply? Why do we care about how many underwritings there are or whether they succeed? Isn't that IPO market hermetically sealed from the regular market by daytraders anyway?

We worry because supply in this market kills demand. And it does it in a way that is so insidious that most newer players and many younger pros don't understand. So let's walk through what happens when Wall Street saturation-bombs us with initial public offerings.

For the market to do nothing, supply has to be in balance with demand. We will get trading-range moves, but nothing monumental, where there is equilibrium. Periodically, there will be so much money coming in the market, so much stock being repurchased and so little available supply, that stocks get pushed up.

Sometimes the major firms on Wall Street have to provide that inventory, even when they don't have it. They short stock to institutions and try to bring it back in at roughly the same price. When they can't and they have to pay up, you can get an explosive move to the upside, or a ramp.

But then there are other times when there is simply no place to put more merchandise, when the market is stacked to the gills, when there is stock everywhere you look.

That is what's threatening to happen now. Normally, I would like to be a contrarian when people are this negative about the market. However, supply doesn't lie. It can't be bet against like sentiment can be. It is simply the enemy, and when it is strong, you have to retreat.

As deal upon deal gets done, increasingly, institutions will have to sell other stocks to finance these new purchases. Or the underwriters themselves will be on the hook for the merchandise. Either way, the brokers will end up getting too long. They will have too much inventory. When that happens, prices get cut to move that inventory. The market, of course, goes down.

When the Street is long, look out. That's when you get the biggest shocks to the market. After looking at

Ben Holmes'

column and reading

Cory Johnson's

piece I can see that by Friday, barring some deal cancellations, the Street will be very long.

Good time to take a vacation. I think I will.

Random musings:

Your worst nightmare as a columnist is to not be read. To be ignored is simply dreadful. That's why I don't mind much this third assault on my character in

Alan Abelson's

column in

Barron's

. Lord knows I have been more critical of this unrelenting bear than virtually anyone on the planet. Judging from this particular ad-hominem attack, my repeated efforts to show how wrong he has been since

Dow

800 have hit pay dirt. That accuracy bugaboo -- I am not the proprietor of

TheStreet.com

-- keeps haunting him, but he is freelancing with no institutional accountability anyway. I would send him a nasty email ... if he used email. I no longer doubt that he reads me, though! Hoo-hah!

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.