Equity Issues hitting market at Record Pace

I read a great blog by Jeff Benjamin about record levels of stock issuance by public companies over the past several weeks. According to Jeff, these record levels of stock issuance could come back to haunt the market and hurt investors, at least in the near term. Jeff goes on to discuss the record pace of stock issuance in his blog below.

While the market rally from the March 9 low has started to level off, the impact from the record $64 billion in shares issued in May could linger for months, according to market analysts.

Historically, when the stock market experiences a one-month infusion of $30 billion or more in stock issuance, the Standard & Poor's 500 stock index declines by an average of 4% over the next 90 days.

“It is absolutely dilutive to shareholders,” said Steven Roge, a portfolio manager with R.W. Roge & Co. Inc., a Bohemia, N.Y.-based firm with $180 million under management.

“We saw the first couple of good months in the market in almost two years, and companies that were strapped for cash used the opportunity to raise money,” he said. “But as you increase the supply of stock, the intrinsic value of each share goes down.”

The May flood of stock issuance represented a 68% increase over the previous one-month record of $38 billion, set in May 2008, according to TrimTabs Investment Research in Sausalito, Calif.

In the 90 days following May 2008, the S&P fell by 8.4%.

In the context of an extreme economic downturn coupled with a credit crunch, it is not a big mystery why companies turned so quickly to the equity markets for cash.

However, what is somewhat jarring is the way that the equity markets responded with such enthusiasm, according to Conrad Gann, president and chief operating officer of TrimTabs.

“It is still surprising how quickly they raised the money, and the magnitude of it,” he said. “It is puzzling as to why the companies issuing all that stock were so successful.”

The initial push in the recent issuance trend was sparked by financial institutions that needed to prove to the federal government that they are capable of raising cash, which was required before the companies were allowed to start paying back loans that came through the Troubled Asset Relief Program.

Many of these firms, including Bank of America Corp., BB&T Corp., Capital One Financial Corp., The PNC Financial Services Group Inc., U.S. Bancorp and Wells Fargo & Co., timed their secondary stock offerings to the market rally by seizing on a growing investor appetite for equities.

But as the market gobbled up the new shares, the issuance trend expanded beyond financials to include companies such as The Dow Chemical Co., pharmacy benefit management firm Express Scripts Inc. and Ford Motor Co.

“Every company now seems to want to pay down debt and build a cash cushion,” said Jeffrey Kleintop, chief market strategist with LPL Financial in Boston.

“It's a very uncertain environment right now, and companies are more concerned about making it through the next 12 months, as opposed to making the most of the next 12 months,” he said.

A large part of the appetite for new shares is being attributed to institutional investors who have seen the equity portion of their once strong financial portfolios pulled out of balance by the stock market's downturn.

“Share issuance is very convenient for institutional investors, and they were glad to provide the capital,” Mr. Roge said.

Even as he recognizes the driving forces behind the recent pattern of secondary offerings, he is critical of the strategy, from an investor's perspective.

“We believe companies should raise capital the old-fashioned way — by earning it,” Mr. Roge said. “I'm not a huge fan of management teams' wasting shareholder capital and then going back to the shareholders for more.”

Although there are many cases that can be made for secondary stock offerings, including the need to raise capital as a step toward paying back TARP loans, the immediate result for shareholders is always dilution.

As opposed to a stock repurchase program, which reduces the amount of outstanding shares and usually increases their value, a secondary issuance can have the opposite effect on share value.

However, it is also important to consider that a secondary offering usually results in a better-capitalized company.

“As an investor, I would look at why a company is issuing the new shares,” said Uri Landesman, head of global growth in the New York office of Hartford, Conn.-based ING Investment Management Americas.

“A company might be raising the cash because it has a big debt maturity coming up,” he said. “Or it might be raising cash to make acquisitions, in which case I would consider the company's track record with acquisitions.”

The more likely scenario for most companies was a well-timed tapping of pent-up demand, according to Mr. Landesman.

“Companies decided they needed the capital or that they might need the capital,” he said.

One irony of the recent flood of stock issuance is that it barely touched the sleepy initial public offering market, which has seen only nine IPOs so far this year.

The three IPOs in May combined for a total of $450 million, which is less than one-tenth of 1% of the total new issuance for the month.

“This is an IPO market that has basically shut down for the past six months,” said Bill Buhr, an analyst with Morningstar Inc. in Chicago. “I think people are still a little fearful when it comes to IPOs.”

Don't Give Up

It's easy to give up in the current economic climate, but a savvy investor knows that there are opportunities in every market.

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Get Ready to Invest Again

You've been burned. Been burned bad. Your portfolio has betrayed your trust, and you've lost not only money, but also your feelings of safety. If you can't trust that the market will return an average 10% gain over the years, who can you trust?

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Staying Calm In A Year Of Uncertainty

Investors,

2008 has been a tough year and tragic in many ways to those who depend on returns for pensions, 401k and general living expenses.

Moving on into 2009 we must remind ourselves that we are leaving 2008 and all its baggage behind and entering into a brand new year where every day is still possibility for betterment.

It is important amongst the deluge of bad news investors keep a cool head and continue to look for the best vehicles to grow their money. Hiding under the bed is not an option for our country or for you as an investor.

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Such Thing As A Safe Investment?

Are there any investments that are 100% safe? The answer to that question is no. All investments can come undone one way or another whether it's stock in a company that goes under or money in a country that defaults on its loans. Even paper money can blow away on a strong gust of wind.

The key to smart investing is minimizing the risks while maximizing the potential for profit.

As we've seen in this difficult year, many investments that were thought to be safe are beginning to unravel under the weight of the slowing economy and mortgage crisis.

However, there are still safe investments available for investors willing to take their time and really develop their financial portfolios.

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The Omega Fund is a Safe Investment

It seems the U.S. economy and many economies all around the world have entered into a period of great fear and hestitation. What once seemed like safe financial bets have turned out to hold great risk instead.

In droves, investors are flocking to safer investments. While such investments may allow you to sleep at night they do not offer the type of yield that will help your money grow and keep pace with inflation, much less exceed it.

The Omega Life Settlement Fund offers a safe investment environment with strong yield potential. Because it does not invest in the stock market, the fund is shielded from the wild lows we have been seeing recently. Instead, the Omega Fund invests in senior life insurance settlements and expects an annual 12 - 15% return.

This fund is looking for serious investors who appreciate long term and steady growth with little of the risk of the stock market. The Omega Life Settlement Fund LLC investment pool is open to high net worth investors who are willing to keep their money in the fund for at least three years.

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Allocate Funds to Creative Investing

Investing is a crucial part of any savings portfolio. There are always risks involved, but rewards as well.

To anyone beginning an investment plan, it is important to make sure you have adequate funds in safe investments before moving into anything that could put your money at significant risk. For high net worth individuals, we suggest employing the services of a professional investment manager who can give you the best advice on how to correctly allocate your funds.

After you have a comfortable amount in savings - enough to cover yourself in the case of emergencies - take a small portion of anything left over and see how far you can grow it.

Many investors stick with tried and true stocks. This is OK, but there is another class of investor, people who are looking for something beyond traditional investment vehicles. These people want unique investment opportunities. They want to take charge of their money. They want to watch their money grow.

For these investors we offer the Omega Life Settlement Fund. For anyone who is weary of the violatile stock market, or who is looking for steady growth in a relativly safe vehicle, the Omega Fund is an option worth considering.

The Omega Life Settlement Fund expects to bring in solid returns annually through the acquisition of life insurance policies, also known as life settlements. Life settlements are a new, yet safe investment vehicle now gaining interest and favor in many investment circles.

To find out more, visit the Omega Life Settlement Fund page on the BCAJ Investments Website.