Alibaba IPO Pours Shares Into Shrinking Pool of Stock

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Alibaba Group’s (BABA) initial public offering was a success by any measure. At $25 billion, it was the largest in history. Investors were so eager to add the Chinese e-commerce giant to their portfolios that the shares soared 38 percent on their debut, the biggest first-day jump for an IPO of at least $10 billion, according to data compiled by Bloomberg. When trading ended on Sept. 19, the company had a market value of $231 billion, more than Amazon.com’s (AMZN) and EBay’s (EBAY) combined.

Some investors warned that the clamor for Alibaba shares could trigger a broad market decline, as the new stock drew money from existing equities. In an article published before the IPO, Mohamed El-Erian, the chief economic adviser at Allianz (ALV:GR), predicted that most investors would sell other stock to buy the shares rather than borrow money or use idle cash. “This leaves plenty of potential for downward market pressure as investors sell existing holdings in order to make room for their Alibaba purchases,” wrote El-Erian.

The tech sector is particularly vulnerable, according to Randy Bateman, chief investment officer of Huntington Asset Advisors. The Nasdaq Composite Index declined 1.5 percent in the two days after the Alibaba IPO. “People want a piece of that pie,” he says, referring to Alibaba. “In order to not screw up holdings and sector weightings, people are letting go of other tech stocks.”

Yet fears that Alibaba’s debut would suck the life out of the broader market may have been overblown. Before the record offering, U.S. companies such as Facebook (FB), Twitter (TWTR), and LinkedIn (LNKD) had already added $1.4 trillion in shares to the market via IPOs and other share sales since March 2009—without slowing the rally. In fact, there’s actually less stock trading than there was four years ago, because corporate stock buybacks and takeovers have been draining the pool.

Flush with profits, companies in the Standard & Poor’s 500-stock index returned cash to shareholders by repurchasing $2 trillion of their own stock from March 2009 through June of this year, according to data from S&P Dow Jones Indices. ExxonMobil (XOM) bought back almost $99 billion of its shares, IBM (IBM) $76 billion, and Apple (AAPL) $51 billion. Stock also leaves the public exchanges when companies go private, as computer maker Dell did in a $16.4 billion buyout in 2013, and when one company buys another using cash and debt or when the acquirer issues less than one share for each share of the company it is buying. Companies that liquidate in bankruptcy also erase shares (although they may continue to trade on tiny over-the-counter markets). Counting all the stock flowing in and out of the market, Ned Davis Research Group found that the pool of U.S. shares has shrunk by $900 billion in the four years from March 2010 through June.

That could be a good sign for investors. “The supply-and-demand balance should remain fairly healthy in favor of stocks,” says Ed Clissold, U.S. market strategist at Ned Davis Research. “The biggest forces at play here are the Fed keeping interest rates low and forcing investors to look for stocks. Then you throw on these corporate buybacks that are going to remain strong. Alibaba in and of itself isn’t enough to move the needle.”

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