Click to enlarge
Chart

 

Fewer U.S. shares are available to purchase, which is driving prices higher.

Repurchases are magnifying gains in U.S. stocks, and are poised to lift prices further, as seen in the Wilshire 5000 Total Market Index. According to Bloomberg, it has risen “more than the market value of all U.S. companies since the current bull market started in March 2009. The gap was about 13 percentage points.

“The difference comes from a reduction in the number of shares. The resulting de-equitization is giving a boost to this stock-market rally,” wrote Pierre Lapointe, head of global strategy and research at the Montreal-based Pavilion Global Markets.

The S&P 500 now has 2.3% fewer shares than it did in July 2011, when share total reached its high for the bull market. The drop in total stock outstanding accounted for 25% of the past year’s earnings-per-share growth for companies in the index.

 
Source:
David Wilson
Bloomberg, May 14, 2013

Category: Corporate Management, Investing

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3 Responses to “De-equitization Juicing Market Gains”

  1. Thanks, I have been wondering about this myself.

    What could possibly go wrong with corporations buying back shares at all-time market highs?

    There’s a semi-famous Buffett comment about this, or rather about why he didn’t do this with Berkshire, having to do with two factors: (1) it’s a lousy use of capital to repurchase shares at market highs and (2) it’s too easy to abuse a system in which capital that belongs ratably to all shareholders, is used to purchase shares from some in order to reward those who are left by driving up the price further.

    It’s a pity this chart doesn’t span a few market cycles. Isn’t the whole corporate-buyback share-reduction thing typical of bubbles and major tops?

    • VennData says:

      Problem for that argument is P/E multiples are not near all-time highs. So little (un-inflation adjusted) numbers are “all-time highs” really don’t mean much.

      But everyone’s got a reason for hating the Obama rally.

    • Agreed…all of these buybacks could be scary.