Why you're down when the market's up

By Jon Markman

It seems like just about every morning these days, you switch on your radio and hear about another gigantic payday for corporate fat cats. On the Monday of Thanksgiving week alone came word of $50 billion worth of deals to buy a big Arizona copper miner, a Chicago skyscraper developer, an Oregon steel maker and a New York bank.

That was a lot of loot for someone to be thankful about, but what about us little guys? The people who actually do the work around here, with mortgage payments in the low four digits, 401(k) plans that seem stuck in neutral, two jobs and three tuitions?

The Dow Jones Industrial Average ($INDU) may be at a new high and merger mania at a fever pitch, but it sure doesn't feel like the good fortune is being spread around. It's nothing like the late 1990s, when every waiter, grandma and karate teacher was watching CNBC, swapping stock tips and checking their online brokerage accounts every five minutes to see if they were millionaires yet.

If you're among those who are feeling left out of the market's 15% surge this year -- with more of your savings in cash than in stocks -- it has nothing to do with your brains, luck or discipline. It has more to do with your willingness to stomach new risks and the fact that it can take a long time for your aggressive, money-hungry inner shark to reawaken and wipe out your fearful, money-protecting inner pussycat.

I urge you to get reacquainted with your shark as soon as practical, even though it's uncomfortable.

Getting physical

The problem, in a nutshell, is that for most of the past seven years, stocks have been a lousy bet. That has forced the majority of people to turn their back on those abstractions known as securities and build wealth through the purchase of things that they can see and touch: homes and land. But things change, and in the past 12 months residential-real-estate values have quickly faded from a very high level while stocks have slowly rebounded off a very low level. And it is hard for most folks to flip the mental switch that allows them to exchange their real, hard-earned cash for something so seemingly unreal as shares of corporations.

It may take a while for your transition to occur, but it will. Stocks are back and likely to remain the best investment for at least the next nine months, if not several years.

Why doesn't it feel that way already? For one thing, this decade has turned out so much differently than the ones that engendered a rabid stock culture. Check this out: By the end of November in the seventh year of the 1980s, the Dow Jones industrials were already up 126% for the decade. By the end of November in the seventh year of the 1990s, the Dow was up 133% for the decade, while the Nasdaq-100 ($NDX.X) was up a whopping 267%.

The first seven years of this decade have been a joke in comparison. Even though the Dow is at a new high, it's only up 7% so far this entire decade, while the Nasdaq-100 is down 51%. No wonder most people cannot get the equity religion. Stocks have been dead money.

So where has the recent advance in shares come from? Strangely enough, it has been almost entirely a corporate phenomenon. Those buyouts you've been hearing about are companies' way of saying that stocks are cheap. Not just a little cheap, like a 10% off coupon for Coke. But really, really cheap -- and not just in the United States but worldwide.

New buyers

With a month to go, 2006 is already the biggest year in history for mergers and acquisitions, yet we're seeing just a corner of the phenomenon domestically. Of the five largest deals this year, just one was American: AT&T's (T, news, msgs) purchase of BellSouth (BLS, news, msgs). The second-largest was German utility E.ON's (EON, news, msgs) $66 billion grab of the Spanish electric utility Endesa (ELE, news, msgs). The French, Italian and Dutch have done similar deals in the $15 billion-plus range.

Meanwhile, industry research group Dealogic reports that Chinese companies have made 85 purchases in 2006 worth $15.5 billion, while Indian companies have made 146 purchases worth $20.2 billion. Both figures are up more than 15-fold from 2000.

If you accept the cynical notion that the stock market is like a casino, in which companies are the house and we're all suckers, then the house is basically saying now that it's the right time to be playing the game, not watching over the big boys' shoulders. These deals are being accomplished with genuine cash out of companies' and buyout funds' treasuries, as well as through the issuance of corporate bonds at interest rates that are almost laughably low. These stumpy rates -- for example, the 10.125% coupon on the junkiest debt issued to finance the sale of Freescale Semiconductor to a private equity group -- mean that the conservative, pessimistic types who buy bonds think that the deals are neither expensive nor risky.

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