Does This Really Spell Doom for the Market?

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My Foolish colleague Morgan Housel definitely got one thing right in his article yesterday: Blackstone (NYSE: BX) scored big when it IPO'd back in 2007. That IPO couldn't have been timed any better, reaping billions for Blackstone management right before the economy and stock market unraveled.

Now, an internal memo indicates that the company may be getting ready to sell -- through IPO and outright sale -- up to 13 of its portfolio companies. Logically, Morgan asked: "When smart people are selling, should you be buying?" 

And while I think the selling spree could be reason for pause, I hardly think this spells pending market destruction.

Executing a business model
Warren Buffett is renowned for having a decades-long view of his investments at Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). When Buffett buys something, it's typically because he wants to hang onto it for a long time. Heck, many of his "investments" today involve buying companies outright so that he can have access to their cash flow for years to come.

Not so with private equity. Whether we're talking about Blackstone, KKR, or the private equity divisions at Goldman Sachs (NYSE: GS) or Morgan Stanley (NYSE: MS), private equity firms are in the business of buying and selling companies. They all have investors to answer to and those investors want to see portfolio companies get sold so that they can get paid back -- hopefully with a handsome profit.

The past couple of years have put private equity firms face to face with some of the most unaccommodating capital markets in recent memory. Now that financial markets are starting to open back up, it makes perfect sense that these shops would finally make some portfolio exits.

Does private equity really call a top like this?
Blackstone may be planning exits, but it has also been making noise on the purchase front. Last week, the company agreed to buy Anheuser-Busch InBev's theme park business for $2.7 billion. And I expect that in short order, we'll be hearing even more from the buyout front, particularly as private equity investors start salivating again, and buyout companies are able to start raising new funds.

But is this what a private equity top looks like? Sure, Blackstone may have called the previous top by selling itself, but there wasn't a whole heck of a lot of selling going on at that time. Back when the market was topping, private equity firms were tripping over themselves to raise ever-larger funds and put together mind-boggling deals.

When private equity funds can again raise multibillion-dollar sums with nothing more than a wink and a smile, then it's time to worry.

And for the rest of us?
Even though I'm not fretting about Blackstone's "tell," I have made it known that the market's valuation concerns me. I'm hesitant to call this a top, but I'm likewise not all that bullish on how much further it can run.

So what should we individual investors do? I think we can take a page right out of Blackstone's book, and selectively buy and sell. Blackstone has no doubt chosen the companies it plans to sell for specific reasons, and we can do the same thing.

Concerned that a stock has run up too much in the recovery, or that its business isn't as solid as you once thought? Wave bye-bye. At the same time, though, there are many high-quality companies still selling at attractive prices. For instance, Motley Fool Inside Value picks UnitedHealth Group (NYSE: UNH) and General Dynamics (NYSE: GD) are trading at forward price-to-earnings ratios of 8.2 and 10.5, respectively -- both much better than the overall market.

Still cynical about the financial services industry? Join Jordan DiPietro for John Thain's walk of shame.