Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Where is the Dow Stock Market Santa Rally? - 17th Dec 18
With Weaker Climate Consensus, Expect Elevated Climate Change - 16th Dec 18
SMIGGLE Advent Calendar 2018 UK Contents - What You Get Look Inside Review - 16th Dec 18
Is there a Lump of Coal in Santa's Stock Market Bag? - 16th Dec 18
This Market Will Drive Gold in 2019… - 16th Dec 18
Gerald Celente:Central Banks Can’t Stop a 2019 Debt Disaster - 16th Dec 18
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

The Stealth Reason Why the Stock Market Keeps On Rising

Stock-Markets / Stock Markets 2018 Sep 20, 2018 - 10:48 AM GMT

By: Gordon_T_Long

Stock-Markets

KEY MESSAGE:

  • The US stock market continues to rise because it is increasingly dominated by shrinking "availability & supply",
  • All three stock "Pools" are shrinking in a stealth & unappreciated fashion,
  • There is an increasing potential for a "Minsky Melt-Up" based on an even stronger US dollar (i.e. An Emerging Market Flight to Safety),
  • Expect a coming M&A corporate focus using inflated stock as the takeover currency to answer slowing corporate growth .... further reducing listing and outstanding share pools.
  • Expect market rotation from Growth to Value in the near term versus the final Topping of the equity markets.

Too many investors have become fixated on stock Demand Growth due to global central bank liquidity injections, record high investor sentiment and (thanks to the sugar high of Trump Tax reductions) improving US Economic data. No doubt all have been important! However, it has become increasingly critical to properly assess Shrinking Stock Supply to know both why the stock market may still continues rising in the face of Quantitative Tightening and what consequentially might trigger an equity market reversal.  The Three Major US Stock Market "Pools" are all shrinking in a dramatic and stealth fashion.

  1. SHRINKING POOL OF # PUBLIC LISTED COMPANIES
  2. SHRINKING POOL OF # PUBLIC SHARES OUTSTANDING
  3. SHRINKING POOL SIZE OF PUBLIC FLOAT

Too Many Investors Trying to Get Into the Shrinking Stock Pool

SHRINKING POOL OF # PUBLIC LISTED COMPANIES

Stock markets have in recent years been shrinking by listings (but not by market cap).  According to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business in 1996, there were actually 8,023 public listed US  corporations. This has been reduced  to 3,627 by 2016 or a 55 reduction%.

Going back 40 years to 1976 (prior to the dotcom explosion in IPOs which occurred in the 90's) the US had 4943 public listings. This is still a 27% reduction in publicly listed firms over a 40 year period.  Meanwhile the population of the United States has grown nearly 50 percent since 1976, the drop is even starker on a per-capita basis where there were 23 publicly listed companies for every million people in 1975, but only 11 in 2016,

This is not unique to just the US.  In Germany  for example  the number of listed firms fell by 41 percent during the past decade alone , to only 450.

The reasons are multi fold and include:

  • Mergers & Acquisitions,
  • Dramatic reduction in US IPOs,
  • Increasing Buyouts and Control Blocks by Private Equity.
  • A few bankruptcies along the way (and more to come when Zombie Corporations are forced to face realities when higher interest rates come home to roost)

Also many companies are going “all the way into oblivion" by buying up all of their shares over time and "Going Private" or "Dark".

Many executives & boards have simply become tired of the quarterly “rat race” of reporting numbers which may “beat” or “miss” the expected earnings target by a penny or two and so the stock gets hammered. They don’t want to manage toward quarterly expectations, which they consider to be an unhealthy short-term focus for a company’s long-term health or are forced to divulge more information on Intellectual Property and Innovation advantage secrets than they want (giving both investors and competitors insights) and  so they keep the company private or take the company private.

Additionally, the punitive legal liabilities associated with Sarbane-Oxley for publicly traded corporate executives is also a major dis-incentive that can't be understated.

SHRINKING POOL OF PUBLIC # SHARES OUTSTANDING

But the even bigger Kahuna is Buybacks or the actual reduction of shares outstanding by major public traded entities.

As big as $3.5 trillion in buybacks has meant over the last 5 1/2 years,  it has only got larger in  2018 due significantly to Trump's Tax changes and US corporate repatriation of their off-short cash. It is anticipated by Goldman Sachs that stock buybacks in 2018 will approach $1 Trillion.

Historic low interest rates presently continue to spur corporate borrowing via historic levels of debt issuance.

SHRINKING POOL SIZE OF PUBLIC FLOAT

The stock pool reduction is the one pool least understood or fully appreciated.  In 2005 the US markets were changed to a "Float Adjusted Market Capitalization" system. This change in 2016 had the effect of reducing the public float by approximately $1 Trillion!

The market Float is the number of shares actually available for trading.  Float is calculated by subtracting the closely held shares -- owned by insiders, employees, the company's Employee Stock Ownership Plan or other major long-term shareholders -- from the total shares outstanding. The Float can be difficult to determine and therefore requires and depends on definitions. The public is unaware of how this is determined and generally have to pay service providers for this information. We encourage you to review our recent 16 minute video outlining the details and possible games being played here.

The size of those who are considered within the "control block" is surprisingly large. Shareholders concerned with control of a company generally include the following:

  1. Officers and Directors and related individuals whose holdings are publicly disclosed
  2. Private Equity, Venture Capital & Special Equity Firms
  3. Shares held for control by another Publicly Traded Company
  4. Strategic Partners
  5. Holders of Restricted Shares
  6. ESOPs
  7. Employee and Family Trusts
  8. Foundations associated with the Company
  9. Holders of Unlisted Share Classes of Stock
  10. Government Entities at all levels except Government Retirement/Pension Funds
  11. Any individual person listed as a 5% or greater stakeholder in a company as reported in regulatory filings (a 5% threshold is used as detailed information on holders and their relationship to the company is generally not available).

Additionally, the following holders’ shares are generally considered part of the control block:

  1. Depository Banks
  2. Pension Funds
  3. Mutual Funds & ETF providers
  4. 401K Plans of the Company
  5. Government Retirement/Pension funds
  6. Investment Funds of Insurance Companies
  7. Asset Managers and Investment Funds
  8. Independent Foundations
  9. Savings and Investment Plans

In other words the actual float available to trade is shrinking dramatically.

CONCLUSION

There is much more than just shrinking "Pools"keeping the market supply shrinking which include the failures of an obsolete accounting system and the changing role of public exchanges in the overall "capital raise" process. We suspect due as a result of our research on Zombie Corporations (here, here & here) that M&A will be the answer soon sought to slowing corporate growth (using inflated stock as the currency) which will further aggravate the shrinking stock pools phenomenon.

All of the above and more is explored in this 21 minute video.

Signup for notification of the next MATASII Macro Insights

Gordon T. Long
Publisher - LONGWave

Signup for notification of the next MACRO INSIGHTS

Request your FREE TWO MONTH TRIAL subscription of the Market Analytics and Technical Analysis (MATA) Report. No Obligations. No Credit Card.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments. © Copyright 2013 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.

Copyright © 2010-2018 Gordon T. Long

Gordon T Long Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules