The Day of Reckoning Is Upon Us

This is a syndicated repost courtesy of Liquidity Trader. To view original, click here. Reposted with permission.

Stock buybacks have been widely reported as being responsible for much of the bull market. That is undoubtedly true. Buybacks reduce the supply of equities, and put cash back in the pockets of sellers. That cash burns a hole in their pockets, stimulating their demand for the reduced supply of equities that remains on the market.

Of course, that ignores the cause. Free money from the Fed promotes these corporate C-suite financial engineering scams. Executives get to issue ridiculous stock option grants to themselves, then they have their corporation do stock buybacks to push up the value of their options. They can then sell into the rallies that result. Nice work if you can get it.

I have warned for several years that such stock retirements are a two way street, that when prices get high, companies will reverse course and start issuing more stock. That is starting to happen.

More issuance means more supply of equities. That puts downward pressure on prices, unless there’s an equivalent increase in demand. But demand is starting to stagnate at best.

Here’s a chart on net new securities issuance (in the subscriber report) including both stocks and bonds, since both compete for investor dollars. The data is monthly, through January, which isn’t current, but isn’t bad. We have current rough data from news sources that enables us to visualize how these charts would look with the current data.

Bond issuance surged in the early days of the pandemic, through June of 2020. The Fed was printing mass quantities of QE, driving bond yields to as low as 0.5% for 10 year Treasuries. Those record high bond prices and record low yields brought forth a torrent of supply. That sucked a huge amount of investment capital into corporate bank accounts.

Then look what happened in June and July of 2020. Stock issuance surged to a breakout above the norms of recent years. This chart is through January, when stock issuance surged again. While new stock supply is only a fraction of bond supply, it is more material because some investment capital is earmarked solely for bonds and is not available for stocks. The capital pool available for stocks is being drained more quickly now.

This proves what we had expected. That stock supply would increase as prices rose. If demand growth is static, we know that supply would begin to exceed demand at some point, and stock prices will begin to fall.

My god, I sound like Randolph Duke.

So is this it, the day of reckoning.

Read on for the rest of the story.

Oh, jeeze, now I sound like Paul Harvey.

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Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.

Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here.