The stock market is ripe for a fall. It’s May and the summer sleepy season is supposed to kick in about now. Stocks are, by all and every measure overbought. The US economy shrunk in the last set of figures released. So why isn’t the stock market obeying the laws of economics? The following quote from Gary Dorsch tells us why:
“Flush with $2-trillion of cash stashed away in their US-banking accounts, corporate America has decided there’s nothing more attractive than itself. So, the S&P-500 companies are spending big bucks to buy back their own shares. Last year, they plowed about 80% of their profits into the hands of shareholders, through buybacks and dividend payments.Over the past 3 ½ years, the number of shares of stock available to be bought or sold on the US-stock exchanges has dwindled by -10%. Shareholders like buybacks because they automatically increase earnings per share (EPS). And most often, though not always, a higher EPS leads to rising stock prices. It’s also made it more treacherous for short sellers to maintain bearish bets.”
These companies don’t care about stock prices. Each and every share they buy back mechanically on a regular basis is shrinking supply and increasing demand. Who knows how long this could go on, but its pretty dumb.