In the last nine years Companies listed on US Stock exchanges have been buying more shares than they have been issuing. In the last two years the numbers of available shares have fallen by 2.3%. This is not just due to stock buybacks. Mergers and takeovers have also reduced the number of stocks on can purchase. This discussion was brought to mind by the report in The New York Times Dealbook that Dunkin is about to go private. As Dunkin goes private, one more stock disappears from your stock trading options. How should one approach a shrinking stock market?
The De-equitization of the Stock Market
Business Insider discusses this problem in an article, Stock Markets Are Shrinking.
The US stock market has de-equitized, a fancy term that basically means that companies are buying more shares than they are issuing, every year since 2011. It’s shrunk 2.3% since 2018.
This is natural, according to Citigroup strategists led by Robert Buckland. “This is a rational response to a radical shift in the cost of equity and debt financing,” the team said in a note.
Meanwhile, a second equity market, one for private equity, is growing just as the public market is shrinking.
Much of this has to do with the cost of debt (cheap) versus equity (expensive). In other words, low interest rates have driven up the prices of stocks and made it a better deal to borrow money to buy out companies than to keep buying shares. This works both for companies buying back their stocks and for Private Equity Companies buying whole enterprises.
An offshoot of this is that private equity companies are not going public as often or at all.
Why is this happening? Low interest rates are just part of the story. If a company wants to maintain its original purpose and direction, it needs to maintain its original core of ownership. This is hard to do when takeover artists threaten at every turn and investors come and go with a click on their Robinhood app. The need to sustain a stock price through thick and then can get in the way of long term goals. By keeping the core of ownership small, it is easier to manage a company. And, then all ownership is private, there are no stock owners who are their one day and gone the next.
On our sister site, Profitable Investing Tips, there is an article about whether or not you can buy shares of Space X. It turns out that your only option is to buy shares in Google in order to have access to a percent of so of the company. The reason is that the original investors want to go to Mars! They are not interested in being sidetracked from this goal if the company has a couple of bad years and the stock price falls.
Better for Companies and Worse for Stock Traders
So, it turns out that the falling numbers of shares of stocks makes good sense from the perspective of private investors and companies. Unfortunately, it does not make sense for folks who want to invest in or trade stocks.
We can expect this trend to continue so long as interest rates remain low and stock prices remain high. At that time it may reverse a bit. But, the desire for rich investors to maintain complete control of their destinies will not go away. Thus, the only profit that a trader might get is by accurately predicting when a company is about to go private and correctly timing their investment.
