Why The Market Is Rising

Charles Biderman, founder of Trim Tabs, has done extensive studies on liquidity. When a company is bought out in a cash takeover, investors holding the shares are likely to take the cash they receive and buy other stock. His models show that half of the cash infusion is realized the week the deal is announced as arbs buy stock from shareholders. The other half is realized the week of closing.

In the past week, the Merck/Schering Plough deal closed, which had an $18 billion cash component. At the same time the takeover of Burlington Northern and IMS Health were announced this week which had combined cash components of $18 billion. According to Biderman's work those deals amounted to a whopping $18 billion inflow.

Many will dismiss Biderman's work because he had a horrible call. The reason Biderman went wrong was that he only focuses on corporate liquidity and ignores what market participants are doing. In most cases that is fine but when participants have record amounts of cash to deploy, that is a mistake. However, that does not mean his work does not have value.

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