Stock Up

This is the first time in modern history that we've seen a prolonged worldwide interval - 56 months - of equity arbitrage. This results when the earnings yield on equities (earnings divided by price) is more than the after-tax cost of money.

Today's equity arbitrage comes in three forms: (1) corporate acquisitions; (2) share buybacks; and (3) leveraged private equity buyouts of public companies. Altogether, the global equity supply will shrink by 5% this year, which will boost earnings of the remaining shares.

Shrinking equity supply and higher earnings per share may help stocks register a fifth straight winning year.

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