Tuesday, October 7, 2014
Some people ask us this question incredulous with frustration, and others ask with profit-seeking glee..
Nonetheless we're repeatedly asked what the reasoning behind it is..
We've mentioned repeatedly about QE and the Fed and steering people away from save investments like savings accounts and CDs to chase better rates of return..
For starters, everyone who is someone has major investment in the market.
We're not speaking so much of individuals as we are of corporations, the various major central banks around the world i.e, the Fed, People's Bank of China, Bank of Japan, etc, are Heavily invested in the market..
And let's not forget that 50% of US public pension funds are now holding the US stock portfolios
According to a Bloomberg headline yesterday, S&P 500 Companies Spend 95% of profits ($914 billion) on buybacks and payouts rather than things important for the future such as research and development..
Buyback means the repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares of their stock on the market.
Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300 percent since March 2009.
The S&P companies have gained $3.59 trillion in ‘value’ since 2009 just through this little market trick which is why there is such a de-emphasis on actual selling of products/services or creating new innovation as a means to generate profit
In simple terms, what happened was this..
Say there was a company.. we'll call them XB, Inc. and at the lowest point in the market post-2008 crash, shares were selling at $8..
Then the flood of money poured in.. And now XB is buying their stock so they can show their financial position is stronger than it really is and to entice people to re-invest..
And as the company grows in "value", people start looking at XB as a good investment.. So now its $16 a share, then $18 then $20..
XB then sells a bunch of $8 shares at a profit of $12 per... The people at the top and shareholders pocket the profit, and then when the next back of free Fed money dumps into the system, more shares are bought which ultimately allow the next batch to be sold to generate greater profit..
And everything is kept in-house like re-circulated air
If they instead use their earnings to buy back their own shares, they’re on a fast track to oblivion, because they can’t keep on buying their own shares over and over again. At one point, they’ll own them all.
But we don't want to mislead.. it’s not as if corporations take every dollar that comes in and buy back shares with it. They don’t-- it’s not that simple. The problem is that they do buybacks with far too many of their dollars.
~ "Eww.. Don't kiss me.. You're full of contaminants.. Meoww.."
Much of what they buy back shares with is borrowed money and the Fed manipulated artificially low interest rates accompanying it..
These allegedly rich firms are loading up on debt and thus are more hollow a shell rife to be blown away by hurricane winds of economic collapse when it comes again
So the big reason that the market keeps going up and up is that every major and minor financial player from banks to corporations to pension funds to the savings of the 1% elite are all tied into it..
Problem of course is when markets do fall, it just drops like leaves or apples off a tree..
And the powers that be can't control everything indefinitely
Or else they would
Posted by Susquehanna at Tuesday, October 07, 2014