Stocks are certainly drifting lower lately. The stress test results have lead to many public stock offerings by financial institutions with more on the way. The market has been able to absorb this new supply of equity so Ford and MGM are following right behind with large stock sales. This onslaught of new equity is good for the stability of our nation and our financial system. However, it may not be good for stock prices.
New massive dilution should limit the upside of stocks in the short term but lower leverage could be good for the future. We have been concerned with the weakening economy and its effect on stocks. Investors have become more bullish with each positive tea leaf as stocks soared since March 9th. Will they become more concerned as the economic data doesn't improve as expected? Retail sales were weaker than expected as reported this morning and the S&P is off 1.85%. If the employment picture continues to look bleak, the commercial real estate market begins to really crack, and credit card defaults soar, where will stocks be?
The Obama administration is attempting to tackle many problems but the government debt continues to grow. If the rumors of a downgrade to the U.S. Government credit ratings becomes a reality, the cost of funding such debt will increase and the value of the dollar could decline. Such a result will not be good for stocks or the financial industry.
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