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The S&P 500 has risen by 16.7% year-to-date and 25% over the past twelve months. It has risen for almost 200 days without a five percent pullback, though ideas that the Fed may taper off its purchases of long-term assets prompted some profit-taking at the end of last week.
After a period of selling that predates the chart, money has flowed into equity funds since the start of the year, with that one exception last month. The buying has tapered off in recent weeks after a strong Jan-Feb period.
This next chart comes from Doug Short's post picked up by Business Insider. It shows the margin debt at the NYSE (red line) and the S&P 500 (blue line). The April margin debt was published recently. Low interest rates and a rising stock market has
encouraged tempted speculators to buy shares on margin.
Margin debt levels are approaching historic highs. The Federal Reserve can influence this, if it wanted. It sets the margin requirement. It has been at 50% since before the crisis. It means that one can buy common stock by putting up only half the money of the purchase price.
Equity ownership, as we have shown previously is declining. Most Americans who own stock do not borrow money to buy shares. The managers of our pensions and 401k, as a rule do not use leverage. Speculators, individually and collectively do. Raising the margin requirement could reduce the speculative element in the market at the risk of triggering a broader sell-off.
There is another category of buyers of US shares that swamps the margin buyers and the households buying equity funds: Companies. Ironically, traditionally we think of businesses as the supplier of equities, but their most important role now is in buying back their own shares.
According to Birinyi Associates, corporate boards have authorized the $286 bln in share buy backs so far this year. This is almost 90% more than the year ago period. Some analysts estimate that share buy backs have boosted the stock market by 40% more than it would have otherwise risen. Others say that the share buy backs have boosted earnings per share by 40%.
Share buy backs support prices as any buying would, but in addition, they reduce the supply of stock. This third chart is from JP Morgan. It charts the number of shares outstanding. It is calculated essentially by dividing the market value by the price. Share buy backs and mergers/acquisitions reduce the supply of shares. Since the end of Q3 2011, there has been a 2% decline in the divisor. They estimate that roughly $100 bln a quarter is being withdrawn. This means that about 2.5% of the US $15 trillion non-financial equities is being withdrawn a year.
There is another dimension of the share buy backs we will consider here, namely, corporations are borrowing to finance their stock buy back program. US companies, according to JP Morgan research, account for 80% of the global share buy back programs. By borrowing the funds to do so, this has bolstered US credit expansion. If it were not for this activity, US credit expansion would be as miserly as Europe and Japan.
Marc to Market