Eoin Treacy's view Over the last number of years it has been a contention of mine that the shares of globally oriented companies were in many cases becoming collectors' items. This conclusion was based on the fact that monetary conditions remain conducive to share buybacks. In addition brisk M&A activity has also led to shares being delisted which reduced the inventory of stocks even further.
However, some might argue that equity issuance in the USA has been trending higher over the last four years. For example, the value of new equity offering in 2012 hit $220 billion. This is more than 50% higher than the value of equities listed in 1999. Some of this new issuance has been driven by the financial sector and other rights issues. The surge in issuance from the social media sector has also increased the supply of inventory. The question I am concerned with on this occasion, though, is on the quantity of stocks rather than their aggregated value.
In order to corroborate my hunch I went in search of an index displaying the number of shares outstanding on the NYSE. I soon discovered that Bloomberg does not have such an index. Therefore in order to depict this information I had to take a somewhat circuitous route. NYSE publishes data on the percentage of shorts relative to the number of shares outstanding. It also has an index showing the absolute number of shorts at different intervals. With this information I created a proxy index displaying an estimate of the number of shares currently trading on the NYSE.
We would naturally assume that the supply of stock rose during the technology boom. Demand for equities drove the premium one might receive from listing on the stock market to impressive heights. This encouraged companies to cash in by seeking an IPO. As the market peaked and technology shares crashed listing activity collapsed. >From 2002 as commodity, real estate and debt markets rallied demand for new share issuance was muted.
As listing fees evaporated stock exchanges were forced to innovate. This is at least part of the reason they embraced high frequency trading with the consequent boost in volume traded. Offering colocation and other services have helped to offset the decline in other parts of their business.
As the credit crisis unfolded investor confidence in the financial markets was shaken once more. The response of politicians has been to pile additional regulation, oversight, reporting commitments and disclosures on listed companies which have increased costs. The stock market volatility that has become such a feature of investor experience over the last few years has contributed to further ambivalence towards the sector not least among corporations. Dell's decision to go private is but one example of this trend.
The above proxy index of shares outstanding on the NYSE has fallen by 13.5% in the last two years, demonstrating that the inventory of shares is decreasing.
One of the reasons we have been so adamant that government bonds represent a bubble that has yet to burst is that supply of bonds has increased so quickly. The Fed's balance sheet currently stands at more than $3 trillion. This represents a rise of 200% since late 2008. Without the artificial support of government intervention this wall of supply would overwhelm demand and yields would inevitably rise.
If a rush to increase supply is symptomatic of a mania then the desire to reduce supply is symptomatic of the opposite condition. Equities are becoming progressively rarer even as sentiment towards the sector remains at best uncertain. It is too early to conclude that equities are about to return to a position of pre-eminence among investors. However, as we teach at The Chart Seminar, one of the necessary conditions for a breakout to occur is that excess supply above the market must be thinned out. We can now say that this is occurring in equities.
If subscribers with more knowledge of the supply of equities have additional information on the efficacy of these conclusions and would like to share their views I would be most happy to hear from you.