Lately we've been lauding the virtues of destruction. (See our past commentary, When Destruction is Good 10/19/06). Today, we salute another kind of economic annihilation. This time, it's the obliteration of stocks themselves!
People often forget stocks, like any other good or service, are subject to the basic economic tenets of supply and demand. And even when we do remember, most of the time we think in terms of demand for stocks as the main variable and supply as relatively static. Are investors bullish or bearish (i.e., do they demand stocks or not)? Basic Economics 101 tells us if demand goes up and supply is steady, by definition the equilibrium price goes up. Therefore, most believe that investors need to be bullish in aggregate for stocks to tread higher.
But what about supply? Most investors generally think about this issue in terms of IPOs and new stock issuances—that is, creating greater supply. Many forget supply can actually shrink, and that's exactly what's happened around the globe. M&A activity, privatizations, stock buybacks…all of them contribute to the destruction of stock supply. Therefore, holding demand constant, if you reduce supply by definition the equilibrium price goes up.
Tracking equity supply destruction is one of the least talked about, yet potentially most potent, ways for stocks to achieve higher value…and it's happening in record amounts today. Even Japan is getting into the act. Here's a timely report from today's Wall Street Journal: In Culture Shift, Japan Managers Warm to Buyouts:
The more stocks are destroyed, the more the remaining stocks are worth. More good destruction.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.