Friday, June 03, 2005


I recently saw an old retired stock pro at a graduation ceremony. He was across the auditorium and I regret that I did not get the chance to speak with him. He is often in my thoughts.

Today he comes to mind as I watch the interplay between the price of oil, the cost of money, the price of stocks and the value of the dollar. Bill Leinbach, he must have worked for Merrill Lynch for 40 years or more, used to teach young brokers that the market is sometimes like a series of several carried buckets of water. The water sloshes back and forth until someones bucket starts to over-flow. This bucket holder tries to move water to the other man's bucket and it starts to over flow. We sometimes have more water than we have buckets.

The stock market bucket, the money market bucket, the bond market bucket and the real estate bucket are all close to over-flowing. Corporations have increased capital spending but they are still on average building cash! Many have raised dividends, bought back stock or even purchased other companies but they still have buckets of cash over-flowing.

Yesterday it was amazing for Sun Micro to buy Seagate. Sun Micro stock is one of those companies that dropped from triple digits to single digits 5 years ago. The company will use $4 Billion of its $7 Billion cash hoard to buy Seagate. When the deal is complete, Sun will still have $4 Billion in cash. Even the company that is being acquired has an extra Billion Dollars laying around.

Money market buckets have been over-flowing for the past several years and now the bond market buckets are about to over-flow. Real estate prices have put the "bubble scare" in the thoughts and hearts of men so the only bucket left with any room at all is the stock market bucket. Many investors have mentally fought the stock market ever since they were burned when the bubble burst. Investors are faced with the option of carrying another full money market bucket or moving water into the stock market bucket.

I don't know if any of the above makes sense to you but Bill had the knack for explaining things well. I understand his point and the situation. It all boils down to the fact that stocks are moving up because real estate, bonds and money markets don't pay as well as stocks.

Some will see today as a "flight to quality". Millions of dollars are at least temporarily flowing into the full bond market bucket. The discounted value of stock future earnings has increased today as the competing rate of return has made a significant decline.