Thursday, November 18, 2004

Why is the Market Rallying?

While I am still pecking away on company comments and some other items, I've been answering a few e-mails. People are asking, "Why are semiconductor related issues moving up?" The jump in prices, especially following the rather dismal Applied Materials earnings report (the stock is up $0.30 as I type this), is mainly what prompts the question. Of course, quarterly earnings are just snapshots of a particular moment and though they are heavily scrutinized by media, analysts and investors, they tell us little about the long term outlook. What are investors looking at? A few of the reports I've read have said that Q2 of next year will usher in another turning point. Some are talking about the end of '05. Perhaps the best explanation for today's rally, other than the one that suggests semiconductor and semiconductor equipment share prices are primarily driven by gaming theory, is one that was offered by SunTrust's Chief Investment Strategist, Gail Dudack: Between Cingular's cash purchase of AT&T Wireless for $41 billion and Microsoft's (MSFT-$27.12) special dividend ($32 billion) payable on December 2, there will be over $73 billion of cash coming to investors in November - December. This figure is significantly larger than any two months of equity mutual fund flows since February - March of 2000. The November through January period tends to be a good period for the market due to normal liquidity patterns. This year we see an extra boost. Meanwhile, there is less than $3 billion in IPO's pending by year end. In short, the current supply/demand backdrop for equities is excellent. This makes it all seem rather simple.... It's just supply and demand.

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