It’s The Supply and Demand Stupid

As the stock market continues to soar to never seen before levels in 2017,  warnings about excessive prices persist.  This past week the Shiller Cape Ratio hit its highest level since 2001.    

Is it time to sell everything and hide it under a mattress for 5 years?

Not yet.  But just in case you want an idea when it will be time to sell - this preceded the last two market collapses.  And for those perma bears out there, this, hasn't happened yet.

One of the main drivers behind this bull market doesn't care about a Shiller Cape Ratio,  a Price per earnings ratio,  political drama, military conflict, or the declining middle class.  It's the reason every dip has been bought, why downside action for the market has an ever shrinking half-life.  Why, despite all of the negative headlines, the stock market continues to head higher.


At first glance you may mistake the chart above for one covering retail stores in the United States, but no, you are wrong.  It's the number of publicly listed companies.

from 13d research:

between 1996 and 2016, the number of publicly-listed stocks in the U.S. fell by roughly 50% — from more than 7,300 to fewer than 3,600

and it's not getting any better.  IPO's aren't surging, actually they remain subdued.     Don't expect a surge in publicly traded corporations any time soon.

and while the number of publicly listed companies declined over 50% during the last 20 years, the stock market has done the exact opposite.

Along with the ever shrinking number of publicly traded companies is the ever shrinking supply of shares.

With corporations looking to boost their earnings per share numbers, they have been buying back their own stock at a record pace since the financial crisis in 2009.  Even in 2017, with stock prices trading at their highest levels in recorded history, corporations are increasing buybacks.

And it shows no signs of stopping.  This past week banks were given the green light  to start utilization their capital by the FED.  In response the banks 'unleashed'  massive buyback announcements.

  • JPMorgan hiked its dividend 12% to 56 cents and OK'd a $19.4 billion buyback
  • Bank of America lifted its dividend 60% to 12 cents and approved a $12 billion buyback
  • Citigroup doubled its dividend to 32 cents and approved a $15.6 billion repurchase
  • Wells Fargo (WFC) hiked its dividend 3% to 39 cents and approved an $11.5 billion repurchase
  • Morgan Stanley (MS) raised its dividend 25% to 25 cents and OK'd a $5 billion buyback
  • State Street (STT) upped its dividend by 11% to 42 cents and OK'd a $1.4 billion buyback
  • American Express lifted its dividend 9% to 35 cents and OK'd a $4.4 billion buyback
  • Capital One kept its dividend flat at 40 cents and OK'd a $1.85 billion repurchase

All told some $70 billion+  worth of share-buybacks were announced after the bank stress tests.   To put that in perspective, it would cost half that figure to solve world hunger.  Corporations in the stock market remain hungry for their own shares.   They look in the mirror every morning and just can't get enough.

Imagine going to the Supermarket and 75% of the shoppers you see  at the store are the  employees themselves buying to increase the price of its products.  Each trip you wonder if you'll be able to get enough milk before the store buys it all for itself.  Welcome to the equity market. On a long enough time line there will be just one share left to buy.

Corporate buybacks continue to dwarf everything else.

Wondering why every dip gets bought?  The Corporate buyback machine doesn't watch the news., scour financial documents, research the market.   Is JP Morgan's buyback machine going to turn on CNBC or check its p/e ratio before it starts buying back its recently announced $19.5 billion in stock?    Exactly.  Just buy it!


A great chart by Yardeni research shows that over the last 20 years, only in the midst of the financial crisis has issuance trumped buybacks.  Supply continues to SHRINK.


It’s The Buybacks Stupid


The fall in the number of listed companies has major consequences from an investor’s point of view. Investors have less access to companies that are owned by private equity firms or that remain private. Further, those companies that remain public are older and more profitable than they were 20 years ago and compete in industries that are more concentrated. Even as the investable universe has dwindled since 1996, the sophistication of investors has marched steadily higher in the past 40 years. While less than 20 percent of stocks were owned by institutions in 1976, a majority are today. Direct ownership by individuals shows the mirror image, dropping from 50 percent to 21 percent over the same period. There are fewer public companies in which to invest, those that are accessible are more mature, and the population of investors is vastly more informed than four decades ago - Credit Suisse




Price in a market  is determined by supply and demand.  Over the last 20 years supply has shrunk considerably.  Publicly traded corporations are down over 50%.  Shares of the largest companies are being bought hand over fist by those same largest companies.  Central banks easy money policies have forced investors into the stock market regardless of price.  Central banks themselves are also in the market buying stock as evidence by the Bank of Japans foray into the stock market.

Ironically local media calls  the Bank of Japans ETF purchases  as a buying spree.    Something a rich housewife would do, not a Central Bank.   But hey.... it's all in the name of saving the Global economy.

Central Banks buying, Corporations buying more than they ever have, 401k and retirement investment.... it's safe to say demand for stocks is at least constant.

As long as the corporate love affair with itself continues, the supply of publicly available shares will continue to shrink.  While it may be a market with covered with the finger prints of the Central Bank, it is still market.   And in any market when the demand remains constant or increases amid a decreasing supply price will invariably rise.



Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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