Saturday, August 7, 2010

Why Market Rallied Friday

Why, after such a bad jobs report on Friday (check out August 6th post for jobs report) did the broader market rally 1.3% off its lows of the day?  The numbers missed analysts' expectations and the unemployment rate sits at 9.5%.  What could possibly be positive about this?

My answer to why the market rallied has nothing to do with the economy; rather, it deals with the amount of cash that companies have on their balance sheets.  The financial crisis allowed companies to issue debt, in the form of corporate bonds, at very low interest rates.  Also, companies were able to take out large long term loans from banks at unbelievably low interest rates.  This means that companies were able to raise tens-of-billions of dollars at a low cost to the company.

Companies have spent very little of this money, and shareholders are starting to get angry that they are not putting this money to work.  I feel that companies will start to do one or two of the following three techniques to increase shareholder value, which would raise the stock price, and overall stock market.
          1.  Announce a dividend increase
          2.  Announce a share buyback program
          3.  Acquiring competitors
In my opinion, in the next couple months, the market will rally on large down days because investors think that these announcements could be coming soon, so they are buying on the dips. 

Currently, the economy is still sick, but the stock market (in particular companies' balance sheets) is rather healthy.  No one knows for sure how long the unemployment rate will remain at this level, but based on the health of the stock market, I think that you can buy the dips.  Make sure you stay in high quality companies with consistent growth.

No comments:

Post a Comment