On the other hand, I heard a NY Times financial writer interviewed on NPR today who said the 14,000 market is simply keeping even with inflation.
Bob W --- Dennis Claxton <ddclaxton at earthlink.net> wrote:
>
<http://www.latimes.com/news/printedition/asection/la-oe-weiner20jul20,1,6097495.story?coll=la-news-a_section>http://www.latimes.com/news/printedition/asection/la-oe-weiner20jul20,1,6097495.story?coll=la-news-a_section
>
> From the Los Angeles Times
>
> 14,000 reasons to be skeptical
>
> Corporate takeovers -- not a strong, stable
> economy -- are fueling Wall Street's latest bubble.
> By Eric J. Weiner
>
> ERIC J. WEINER is the author of "What Goes Up:
> The Uncensored History of Modern Wall Street as
> Told by the Bankers, CEOs, and Scoundrels Who Made
> it Happen."
>
> July 20, 2007
>
> THE DOW JONES industrial average closed above
> 14,000 for the first time Thursday, a historic, if
> puzzling, milestone.
>
> Most finance experts agree that stock markets
> thrive during periods of steady economic growth
> and political stability. But today's economy
> hardly is clicking on all cylinders, and the
> geopolitical landscape has never seemed more
> perilous. So what's driving this market to such
> heights? In a word: takeovers.
>
> Wall Street is in the midst of a raging leveraged
> buyout boom that makes the "greed-is-good" 1980s
> look like the Great Depression. Leveraged buyouts
> are Wall Street's version of "Flip This House":
> Borrow a bunch of cash to buy a company, dress it
> up by scrubbing the books and streamlining the
> operation, and resell it all for a tidy profit.
>
> In the second quarter of 2007, companies around
> the world bought and sold an unprecedented $1.65
> trillion worth of businesses, 90% more than
> during the same three-month period of 2006. At
> this pace, global corporations should easily
> surpass the previous annual merger record of $3.6
> trillion worth of deals, which was set just last
> year. The market has gotten so crazy that
> notoriously secretive buyout partnerships such as
> Blackstone Group and Kohlberg Kravis Roberts &
> Co. actually are cashing in by going public.
>
> The fuel for all this buying and selling is cheap
> debt supplied by major banks and lenders.
> Desperate for a seat at the lucrative takeover
> table, they're willingly handing out gobs of
> money, with practically no strings attached, to
> anyone even contemplating a buyout.
>
> As a result, the market is rife with stock
> speculation, because practically every company is
> a potential takeover target. Just ask Dow Jones &
> Co., which essentially is being forced into a
> deal by an overwhelmingly generous unsolicited
> bid from Rupert Murdoch's News Corp. The merger
> guessing game has pushed countless stocks to
> all-time highs and is propping up most major
> indexes. Indeed, beyond the Dow, which already
> has gained 12% in 2007, the S&P 500 index is up
> nearly 10% and the Nasdaq composite index is up more
> than 12%.
>
> A rising stock market in and of itself isn't a
> problem, but this is all playing out as a classic
> financial bubble, which means we'll probably have
> quite a mess to clean up when it eventually pops.
> In case you need a refresher on bubbles, just
> consider what happened in 2000 when Internet
> stocks came crashing down to reality and a series
> of corporate corruption scandals began to emerge.
>
> But to truly get a sense of what to expect, you
> have to go back a little further in time, to
> 1989, when our last real buyout bubble burst.
>
> Takeovers became a big story in the 1980s
> because, much like now, cash was cheap and
> readily available. Then much of the money came
> from junk bond king Michael Milken, at the
> now-defunct investment bank Drexel Burnham
> Lambert, who eagerly backed swashbuckling
> corporate raiders and buyout partnerships like
> KKR in larger and larger deals. As is the case
> today, at the time it seemed like any publicly
> traded company could be a sitting duck for
> lurking predators. And this rampant speculation
> helped push the stock market to record levels.
>
> But in typical Wall Street fashion, the good
> times ended with an orgy of greed and
> overreaching. By the time Milken and KKR
> orchestrated their infamous $25-billion buyout of
> RJR Nabisco in November 1988, the merger market
> already was beginning to dry up. Soon regulators
> were zeroing in on Milken, intent on breaking his
> junk bond monopoly and threatening to take a
> closer look at all these takeovers.
>
> In June 1989, as prosecutors circled, Milken
> resigned from Drexel Burnham, sending the junk
> bond market he created into a tailspin. And with
> that, the buyout bubble collapsed, eventually
> taking the entire stock market down with it. For
> perspective, consider that at the height of the
> 1980s merger mania, between 1985 and 1989, the
> Dow gained roughly 130%. But in 1990 it lost 4%.
>
> So that's what we're up against and it's the
> reason everyone cheering the stock market's
> historic climb might want to keep the champagne
> on ice for now. Because if history is any guide,
> this party could turn ugly.
>
>
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