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Tuesday, October 7, 2014

Why Does Market Keep Going Up n Up?

One question people keep asking us again and again is 'Why does the stock market keep going up & up?'

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..
But there's more to it..

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
Then there's the buying up of one's stocks which expands profits but puts corporations into serious risk of catastrophe if there's ever a meaningful drop..

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.
Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

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
This of course was due to all the trillions upon trillions in free Fed money to bolster the banks and the corps, and they found it far more profitable to simply use that cash to buy and re-buy their own stocks then do something silly or frivolous like pay their workers fair wages.

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..
So $8 becomes $10 then $12 as XB is using that money to buy millions upon millions of their own shares..  And instead of cash bonuses, the big-wigs also get lots n' lots of stock options..

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
Companies need to invest their earnings into projects that will generate profits, into the development of products and services that they can sell to the world out there.

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..
And so many powerful and wealthy financial entities would never allow anything bad to happen to the market to allow it to drop in any meaningful way..

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