Are the Stock Market’s Days Numbered?
12/23/2011 11:00 am EST
Seasoned investor Louis Navellier discusses the recent surge of stock buybacks, and what it may mean for the future of the stock market.
Louis, these are very interesting times. We’ve got lots of volatility. We’ve got a market that’s being held hostage to events overseas that we can’t control. What advice are you giving your clients?
Well, we came out with a market outlook from my management company where we propose closing the market every August, OK? (laughter)
The truth of the matter is markets are illiquid in August…and that’s the truth. A lot of people took advantage of the situation. The illiquidity continued through September. It was about a six-week sell-off if you analyze it, but then it was all over. We had our capitulation day. It was a Tuesday.
I remember that Tuesday morning very vividly. I held a bunch of small-cap stocks up 15% that morning, so there was a short squeeze underway. Then we had the follow through in the afternoon with large-cap, and since then we haven’t looked back. It was a very good capitulation. They were not going to retest those lows.
If you don’t mind me being slightly bearish about the market, the worst news I have for you is we’re losing the stock market. It might literally be gone in five to seven years.
What’s really going on is corporate America was selling $20 billion a week in debt. Now they’re selling up to $60 billion a week in debt. They’ve gone from raising $1 trillion a year to $3 trillion a year. The last I looked, the stock market is only worth $14 trillion. A lot of our stocks keep on buying their stock back with all the bond debt.
So you’ve got companies like Coke (KO) that can borrow at 2.375% for ten years. Caterpillar (CAT) borrows in China 1.375% on two-year notes. They can borrow in short-term cash on the Libor market at above five basis points. When you return equities 12% or 15%, you can borrow at 2% or 3% and you just keep borrowing and buying your stock back.
You saw that in late June. In late June, we had this rally out of nowhere for nine days carrying into July, which were aggressive buybacks. So when September came, I kept waiting for the quarter-end buy backs. We saw a little of it, but it seemed to continue more in October. I guess they were trying to time it.
But we’re losing the stock market. That explains why everyone’s share is going up. So if we’re not going to price stocks properly, the companies will just keep buying the bottom market and eventually the stock market will go poof and it’ll disappear.
So investors should not be in stock market?
No…they should get on the bandwagon for the companies to buy their stock back. (laughter)
But not for the long term then?
You know, it’s hard to say. It’s a national sentiment thing. We have to break out of our national funk.
I just flew in from New York, and I was trying to cheer everybody up. Then the week before, I was in LA. We have a lot of Asian clients down there, and they know all about the Asian financial crisis and they’re very upset, they’re very worried.
It’s hard for me to cheer them up, but the truth of the matter is that companies are borrowing to buy their stock back. I think that’s a good sign.
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