Increase of Dilutive Secondaries Threatens Stocks’ Advance

The inclination from a considerable number of companies seeking to repair their balance sheets by dilutive secondary stock offerings this year threatens to put a lid on the recent gains in the stock market, Phil Wahba reports.

From Reuters: Since January 1, investors have been tapped for $109 billion worldwide in secondary share sales — or 37 percent more than at this point last year, according to Thomson Reuters data.

Analysts expect that pace to continue this year as companies, particularly banks and other financial firms, desperately seek to shore up their capital after the destruction wrought by the financial crisis.

The results of the stress tests, set to be made public May 4, will likely determine the flow of secondary offerings.

Banks aren’t alone in trying to replenish their coffers.

While the largest secondary this year was a $19.4 billion deal by UK-based bank HSBC Holdings , companies in other sectors have sold billions of dollars in new shares too.

A major challenge to the market’s recovery could come from the number of shares some companies, especially banks, will need to sell to raise money.

That resulting dilution could prompt short sellers to pummel the shares even more.

The threat of more dilutive secondaries could make investors think twice about entering a long position, causing the market to start deteriorating, potentially wiping out the recent gain and then some. Let’s hope that won’t be the case.

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