One big reason for bull market: Stocks are more scarce

Corporate mergers and stock 'buybacks' shrink supply of shares, helping

Stock brokers aren't yet advertising, "Close out sale! Get your XYZ shares while they last."

But stocks are getting scarcer, and that is one factor in their rising prices. Corporations are buying back their own shares or merging with one another, shrinking the supply of stock.

"It's having an enormous impact," says James Bohan, an analyst with Merrill Lynch & Co. in New York. "It really explains what has been going on in the stock market in recent years."

There are other causes for the rampaging bull market on Wall Street: A "new economy." Strong growth. Low inflation. High productivity. Internet craze. Asian recovery. Federal budget surplus. Diminished defense spending. Pleasing corporate earnings.

Investors, cheered by such good news, snap up stocks. They pushed the Dow Jones Industrial Average through 11000 on Monday, though the index fell back back Tuesday. The 11000 breakthrough was only 24 trading days after the Dow inbroke the 10000 market for the first time.

The scarcity factor gets less attention on Wall Street. But last year, non-financial companies bought out $263 billion in stock. Since the stock market is an auction market, that is important. When buyers jump into the market on the demand side, and the amount of stock declines, prices go up - just as they would if the items being sold were antiques.

About half of the $263 billion is explained by mergers and acquisitions occurring at a pace Mr. Bohan calls "unbelievable." Last year, the Standard & Poor's 500 Index had to be altered 40 times to take account of mergers and acquisitions - a record number, notes S&P's chief economist David Blitzer in New York.

Included were such giant mergers as British Petroleum's purchase of Amaco, and Daimler Benz's takeover of Chrysler. Not all mergers shrink the supply of stock. But many do.

The other half of stock shrinkage arises from corporate "buybacks." In the past, companies were much more likely to be raising money from the public by selling new stock. Nowadays, with piles of cash available from solid earnings, many are buying stock from the public instead of giving the money to shareholders in the form of higher dividends.

There is, though, an advantage to shareholders in this approach. If they sell stock that has risen in price because of a buyback, they pay Uncle Sam at the lower capital-gains rate. "Buybacks are a preferable strategy for everyone but the tax collector," says Mr. Blitzer.

To some extent, corporate retirement of stock was cancelled out by increased holdings of foreign stock and by new stock issuance. Net retirement came to $178 billion last year.

WITH the rise in stock prices, the value of all corporate stock reached $15.7 trillion in the fourth quarter of 1998, up 21 percent from the same quarter in 1997. Today those stocks are worth close to $18 trillion, Bohan calculates.

Many reckon that the public is buying stock "like crazy," encouraged by rising prices. But the evidence is mixed.

James Glassman, managing director of Chase Securities Inc., figures that while many younger people are caught up with the enthusiasm of the market, many older people are "cashing out" as they near retirement or retire.

The numbers show that purchases of mutual funds have slumped decidedly in recent months after several boom years. Last year, mutual funds bought $143 billion in corporate equities, down from $168 billion in 1997 and $193 billion in 1996. In the first quarter of 1999, mutual fund purchases of stock were running roughly half those of the first quarter of 1998.

To a considerable degree, individual investors in recent years have gone from choosing their own stocks to letting mutual-fund managers choose for them.

Household ownership of stock represented 41 percent of the value of corporate equities at the end of 1998, down from 70 percent in the 1970s, says Bohan. Mutual funds held $2.5 trillion in equities at the end of 1998. This amounted to 16 percent of the value of all stocks. In the 1970s, mutual funds were minute by comparison.

Private pension funds owned $2.2 trillion in stock. But there has been a withdrawal of funds in recent years from regular corporate pension schemes, known as defined benefit plans, while defined contribution plans that include 401(k) and 403(b) plans added to their pile of equities.

One new trend, unknown in its impact so far on ownership of stocks by individual households, has been the rapid growth in "day trading" in recent months. Some investors, caught up with the hope of getting rich fast, have left regular jobs to trade stocks rapidly during the day.

"The migration of retail [brokerage] customers to the Internet could be the principal reason why flows into long-term mutual funds declined over 50 percent," speculates a study by CIBC World Markets Inc. in New York.

(c) Copyright 1999. The Christian Science Publishing Society

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