The Markets


Why have markets been rising?

Well this is always a conundrum, and explanations from the great and the good abound everywhere. However, there is one aspect that is often ignored, as most seem to follow what the institutions and private investors do as they chase their fashion fads into various asset classes of the day. They often overlooked issue is what the companies actually do themselves. It seems that in the US there has been a growing propensity just for companies to buy their own shares back. With the cost of debt being pretty cheap there is a logic for companies to buy some of their own stock back, reducing the number of shares in issue and thus increase earnings per share for investors – oh yes and improve the value of the executive stock options as well!

John Authers in the FT highlighted the stats from Goldman Sachs who said that US companies will buy $450bn of their own shares this year and that this figure “is 50% more than the mutual funds and ETFs will buy and cancel out households’ ongoing liquidation of direct equity holdings of $430bn”. Whilst this trend is maintained it will continue to be a key prop for market valuations, but if this were to turn then we should certainly take careful note. It is a key number to watch.

Oh yes and this seems to be very much a US phenomenon as data from JP Morgan shows that since 2002 US share floats have shrunk by 0.1%, whilst rising by 0.6% in Europe.