BLANKET INSECURITY:

The Mystery of the Disappearing Stocks: A bizarre explanation for the stock market rally. (Daniel Gross, Nov. 20, 2006, Slate)

The continuing stock rally in the face of a slowing economy and a cratering housing sector is something of a mystery, baffling economists and investors alike. But there could be a simple explanation: supply and demand.

Simply put, the supply of U.S. stocks available for individual investors, mutual funds, and index funds. Call it de-equitization. In the last few days, deals have been announced or concluded to take large publicly held companies private. HCA, the giant hospital chain, last Thursday announced the completion of its $21.2 billion leveraged buyout. The same day, Reader's Digest said it would be acquired by private equity firm Ripplewood Holdings for $2.4 billion. This morning, Equity Office Properties, the huge real estate company, struck a deal to be acquired by the Blackstone Group for $19 billion. (Throw in the value of Equity Office's debt, and it may be the biggest LBO ever.) At the same time, publicly held firms are buying back big chunks of their shares. Last Friday, Wendy's said it would spend $800 million buying 19 percent of its outstanding shares.

This year is shaping up to be a record for both leveraged buyouts and stock buybacks. According to Thomson Financial, buyouts worth $334.5 billion have been announced or completed so far this year, up from $115 billion for all of last year. According to Standard & Poor's, members of the S&P 500 Index spent $325.15 billion on their own shares in the first three quarters of 2006 and have spent more than $674 billion since Jan. 1, 2005. Between buybacks and buyouts, that's more than $1.1 trillion of stock taken out of public hands in less than two years.

Chairman Greenspan managed to stall out the US economy before the balanced federal budget and the resulting shortage of US debt became a huge problem at the turn of the century, but as the war winds down we face that danger again and it would be disastrous for the world economy to lose its only safe harbors for money.

Posted by Orrin Judd at November 21, 2006 8:05 AM