jbt@burl.UUCP (jbt) (02/28/86)
As has been mentioned here recently, there are several apparent reasons
that the stock market has been going up so dramatically. Reasons that
have been mentioned include the following:
- lower interest rates that:
1- Drive money from fixed income options such as CD's and money
funds into stocks in search of a more acceptable return and
2- Drive the "Present Value Machine" mentioned in a recent
article to higher levels; i. e., lower interest rates raise
profit margins and eventually dividends.
- lower inflation rates, and
- lower oil prices.
Another simple and very powerful force acting on the stock market now is
the first law of economics: supply and demand. On the supply side, there
has been a tremendous amount of merger and takeover activity in the last
couple of years. This activity has reduced the supply of stock available
to be bought (to say nothing of higher prices usually created for the
surviving stock). The market will eventually respond by bringing new
issues to market, but it will take some time for new issues to mature to
the point where they will be bought by many investors. At this stage of
the bull market, by far the most attention is focused on stocks that are
listed on the major exchanges. Thus, the supply of stock is down!
On the demand side, the growth of the mutual fund market has been dramatic
in the last few years. This growth is due, in part, to the growth of IRA's
that has injected huge amounts of cash into the stock market through
self-directed IRA's and indirectly through mutual funds. To a lesser extent,
I suspect that non-IRA cash is entering the market at an increasing rate
as confidence in the economy continues to grow. This confidence is spawned
by the reasons listed above: oil, inflation, interest rates, etc. Thus,
demand for stocks is up!
In summary, I would expect to see the stock market to continue to move up
until the forces are balanced. They won`t be balanced until acquisitions
and mergers slow and/or until cash starts entering the market at a slower rate.
Incidentally, a friend/broker of mine is looking for a way to use the
Black-Schoals(sp?) option pricing model on futures options. He has done
a lot of work with cycle analysis using Fourier transforms and wants to
combine that work with the pricing model to identify "cheap" options
to buy or write. If anyone is interested in developing a computer program
on an Epson computer using the option pricing model, I can provide contact
information.
Obviously, the preceeding comments are personal views based on a few facts
and a lot of conjectute but they are all mine!
Remember, buy low, sell high and don`t diddle around in between!
Jack B. Turner
burl!jbt
EMSP Project
AT&T Federal Systems Division
919/228-4321
Cornet 291-4321