NEW YORK-This is the good news for would-be issuers contemplating raising public debt or equity-the so-called corrections of mid-July began to turn into a rebound by early August.
In the seemingly perverse calculus of the capital markets, the Aug. 2 release of July employment data was a cause for celebration because the economy’s growth rate slowed somewhat. The jobs report helped assuage market fears of an inflation up-tick accompanied by a counteractive interest rate hike on the part of the Federal Reserve Board.
“Despite the recent gyrations in the U.S. stock and bond markets, I believe the markets are settling down to the view that U.S. interest rates are unlikely to rise in the near future,” said Matthew J.K. Hickman, senior vice president, Lehman Brothers Inc., New York. “U.S. interest rates have a profound effect on the stock and bond markets.”
In addition, the Electronic Industries Association, a trade association of American electronics manufacturers based in Arlington, Va., released positive preliminary data for the first half of the year. Overall, U.S. factory sales of electronics equipment, components and related products totaled nearly $197 billion for the first six months of the year, up 11 percent from the same period last year. Telecommunications sales rose by 14 percent to $29.1 billion during the first six months of this year, compared with the first half of 1995.
Ulric Weil, senior technology analyst at Friedman, Billings, Ramsey & Co. Inc., New York, predicted that “the high-tech carnage” of late July would turn by mid-August into a period of stability until September, partly due to the August doldrums. September heralds the season of high-technology conferences on both coasts of the United States, and these have resulted in an increase in stock activity in the past, he said.
“If tech company executives are reasonably encouraged at the conferences, many of the well-positioned high-tech stocks with growing revenues and meaningful earnings will perform satisfactorily,” Weil said.
Now for the bad news. Mutual fund investing growth, a key driver of the appetite for new and add-on stock and bond offerings, has drifted downward since hitting some spectacular highs early this year.
Net new cash flow into long-term stock and bond/income funds was $2 billion in July, a dramatic decrease from the $14.48 billion inflow posted in June, according to estimates released Aug. 7 by The Investment Company Institute, Washington, D.C., the national association of the U.S. mutual fund industry.
The net flow to stock funds in July was the lowest since November 1994, when cash flow was $3 billion, according to John Rea, the Institute’s chief economist. The slowdown came amid heightened volatility in the stock market.
The estimated outflow from bond and income funds was $1.5 billion, a dramatic increase over the outflow of $206.7 million in June. “The outflow in July appears to be a continuation of a downward trend that began in February 1996,” Rea said. “Investors have responded to rising interest rates this year by shifting demand for fixed-income investments to shorter-term maturities.”
Additionally, the expected September bounce after the August doldrums could fall flat because of pre-presidential election concerns, something that has happened historically.
Furthermore, a glut of telecommunications-related stock and bond issues earlier this year may have sated somewhat the investor appetite for these types of securities. At the same time, at least some would-be issuers in the wireless telecommunications sector are under the gun to raise public capital to satisfy the requirements of other types of investors and lenders.
