Tags: treasuries

Rally Dampened By Burgeoning Supply of Stocks

Monday, 01 Jun 2009 07:47 AM

By Gene J. Koprowski

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New stock issues this year are nearly "five times as high" as they were a year ago, a factor which analysts figure will dampen the three-month old Wall Street rally.

According to a report in MarketWatch, companies are raising capital by issuing more stock, thus taking advantage of the rally. But this, interestingly, will slow the overall increase in share prices, and could even cripple the rally by the summer.

As firms issue new stock to raise funds, the overall supply of stock increases, and that lowers prices overall in the market, unless there is a new surge in overall demand.

"The market has already calmed down," Andrew Brooks, director of U.S. equity trading at T. Rowe Price. "We've had a fire hose of equity issuance and that tends to put a damper on the market, because people need to sell other things to buy that."

So far this month, 3.1 billion new shares have been issued by firms which are listed on the S&P 500 index — three times as many shares as were issued during April and five times the amount a year ago, according to Standard & Poor's. Overall this year, 4.5 billion shares have been issued by firms on the S&P 500.

The market has rallied 35 percent since March. But most of those gains were in March and April and the market has been more subdued this month, up just four percent.

According to a recent report on CNBC, much of this comeback is incumbent on the government's continuing ability to spend.

The fear is that higher yields on T-bills could help suffocate this stock market rally by making it more expensive for the government to borrow, as well as for consumers, whose mortgage rates are pegged to the 10-year Treasury.

Higher bond yields could be foreshadowing a troublesome spike in inflation, CNBC reported.

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