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Thanks Bruce ,
a very nice piece of work. I like to see the big picture instead of
trying to determine tomorrows move.
IŽld really like to see this chart, so if someone could post it please.
Thanks.
Since I missed my chance from Ž82 till today, whats the chart telling
you about 2007 - 2017?
Ulrich
bruceb@xxxxxxxxxxxxx wrote:
> Jim, Gerrit, and Tom, I think you better take a look at the other side
> of
> the coin. If you want to know why the market has kept going up and
> will
> continue to do so, you can start with the most basic principle of
> economics-
> supply and demand.
>
> The supply in this case is the amount of shares of stock available to
> the
> public to be purchased. Despite all the IPOs you hear about on a
> daily
> basis, the amount of shares available in US stock markets has only
> marginally increased over the past ten years. Why? Because while
> some
> companies have been selling shares, many others have been buying their
> own
> shares back (or eliminating shares because of mergers). GM recently
> announced it was buying back 5 billion dollars worth of shares.
> That's 5
> billion dollars that will now go chasing other shares of stock that
> are
> still available. That one buyback alone will more than offset all the
> Yahoo
> and Excite IPOs of this world.
>
> The demand side of the equation is a little more interesting. Many
> people
> like to compare this market to the one just before the 1929 crash, but
>
> they're overlooking one very important point. Back then, investors
> were
> only required to put down as little as 10% of the face value of the
> stock in
> order to buy it. I don't know what the exact figure was, but I do
> know that
> just before the crash an enormous amount of that market value was
> built on
> "paper" profits that investors just kept "pyramiding" back into the
> market.
> People truly were speculating with money they didn't have. That
> simply
> isn't the case today.
>
> The vast majority of stock now owned in this country was purchased
> with
> "real" money, not paper profits. I again don't know what the exact
> figures
> are, but I do know that the dollar value of outstanding shares that
> were
> bought on margin as a percentage of the whole market is not only low,
> but
> has actually DECREASED over the past few years. Who was it that
> panicked
> last October and sold during the Asian crisis? It was primarily hedge
>
> funds, who did have highly leveraged positions. Individual investors
> actually BOUGHT during the sell-off.
>
> This raises an interesting question- where exactly is all this "real"
> money
> coming from? The answer: the baby boom generation. The BB
> generation has
> just begun to enter the phase of their professional careers where
> their
> earnings are greatest. These earnings, combined with the fact that
> their
> children are now out on their own and their parents are covered by
> government programs, means these boomers have LARGE amounts of
> disposable
> income. In other words, they are not only in their peak earning
> years,
> they're also in their peak SPENDING and SAVINGS years. Their savings
> directly fuel the market by increasing demand and therefore the price
> of
> stocks, and their spending indirectly fuels the market by keeping the
> economy humming (just look at the sales of RVs!).
>
> Anyone who doubts the effect the BB generation is having on the stock
> market
> should draw a line chart of the number of births per year in this
> country
> starting in 1940, and shift those numbers forward about 48 years.
> Thus, the
> number of people born in 1950 would appear on the chart above the year
> 1998.
> On top of this draw a line of what the S&P 500 has done over the last
> 50
> years and guess what you find? That's right, they're absolutely
> identical.
> There are plenty of bumps along the way, but they both slowly inch
> their way
> upward and then begin to take off almost exponentially in lockstep. A
>
> picture of this chart appeared in TASC about a year ago (maybe John
> can post
> it to the list for us...)
>
> Of course, a cynic will say "this huge pool of savings may exist and
> continue to grow, but who says people will continue to buy US stocks
> with
> it?" My answer would simply be "where else are they going to put the
>
> money?" People could suddenly decide to buy a lot more bonds, but we
> all
> know there's a direct relationship between stock prices and bond
> yields. If
> bond yields get cut in half because of a massive influx of money, what
> do
> you think will happen to housing and auto sales? What will then
> happen to
> the stocks in the auto, housing, steel, rubber, lumber, plastic,
> glass, and
> copper industries. You get the picture. I guess a lot of people
> could
> suddenly decide to invest overseas, but I think the recent Asian
> meltdown
> has removed that temptation for the next ten years or so.
>
> This is why all the talk about the stock market being "overvalued" is,
> with
> all due respect, meaningless. Overvalued compared to what? The
> past? That
> kind of thinking doesn't take into account the massive growth in the
> pool of
> savings over the past 15 years. You're comparing apples to oranges.
> As
> long as large amounts of savings continue to be generated, people need
> to
> put the money somewhere. It doesn't matter if the average dividend
> falls to
> .001% (that's still a better return what you get if you stick the
> money
> under a mattress), people are still going pump their savings into the
> stock
> market.
>
> Just out of curiosity, how many of you out there that think the market
> is
> overvalued are currently writing OEX call options long term? Not too
> many,
> I bet.
>
> By the way, in case you're wondering where the baby boomer / S&P chart
> says
> the stock market will end its hyper-up move and begin to fall...
> around the
> year 2007.
>
> Bruce
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