June 11, 2014
- “Who is buying stocks” if investors have record-low stock allocations?
- Fewer stocks, fewer shares: Supply and demand does the rest
- A $20 billion market in the making: The breakneck pace of hepatitis C breakthroughs
- Palladium at new highs: Byron King on why more is to come
- Pulling apart the mystery of low, low European bond yields
- Workplace gossip: A federally protected right!
“Something is amiss in the data,” a reader writes us. “Who is buying stocks and driving them up in price?”
Usually we end our daily missives with the mailbag. But this inquiry is important enough to go up top. The reader was perplexed after we mentioned a study on Monday that showed investors have the lowest percentage of their portfolios invested in stocks since at least 1959.
“But unless I’m mistaken,” the reader writes, “stocks go up because somebody wants to buy them, and at a higher price than they went for yesterday.”
So… what gives? Who are the buyers?
“One of the biggest buyers of stocks today are the companies themselves,” says our investment director Paul Mampilly.
“The companies in the S&P 500 index spent $477 billion last year buying back their own shares, a 29% increase over 2012. So far in 2014, it’s estimated that companies have spent $153 billion on stock buybacks. So that’s one major and critical source of demand for stocks today.”
But it’s not the only one…
“The other thing you should know is that stocks are more scarce today than in a long, long time,” Paul goes on. “In other words, despite assets allocated to stocks being at an all-time low, there are fewer stocks to buy.
“Here’s what I mean by this. At the end of 2013, there were 5,008 stocks traded on U.S. exchanges. But here’s the kicker — according to the World Federation of Exchanges, this number is down by 44% from a peak of 8,884 in 1997
“This is how bad things are: The Wilshire 5000 index, which is the broadest, most inclusive U.S. stock index, cannot find 5000 stocks to invest in. The Wilshire 5000 has only 3,776 stocks in it. The number of stocks in the Wilshire 5000 stock index peaked at 7,459 stocks in 1997.”
Drill down further and you reach an inescapable conclusion. “If you look at stocks as a physical quantity like shoes and just treat every share as if it’s the same thing,” says Paul, “you also see a shortage.
“The total number of outstanding shares of stock available has shrunk by nearly 10% since the end of 2010. This is according to S&P Dow Jones Indices.
“Hard to believe, but the stock market is driven by something that’s no one is talking about. In a way, it’s too simple — and too obvious.
“Too few stocks. And too much demand compared with supply. This is Market Economics 101. If there’s more demand than supply, prices go up. Until supply increases.”
But even with supply and demand out of whack, it’s something of a stock picker’s market now.
The S&P leaped 30% in 2013. With 2014 nearly half over, the increase so far is a more modest 5.5%. This morning, the major indexes are in retreat. Barring dramatically bullish news before day’s end, Dow 17,000 will have to wait.
And even when it arrives, it’s obvious the dartboard approach that worked in 2013 won’t work as well this year.
With that in mind, we’ll spend the rest of today’s episode exploring some of our editors’ favorite sectors and ideas…
“It’s amazing that we had a huge population of millions of people with an undiscovered, highly infectious virus until 1989,” writes Ray Blanco on the science and wealth beat.
Hepatitis C wasn’t discovered until that year. It infects 150 million people worldwide and kills 350,000 each year. Blame it on (mostly) contaminated blood supplies, needles and sexual contact. The infection targets the liver. You can live for decades without knowing it.
“The chronic phase of hepatitis C may be silent,” says Ray, “but if the disease enters an acute phase, people soon find out about it. Acute hep C infection begins to shut the liver down through inflammation, cirrhosis and, eventually, cancer.”
By the late ’90s, researchers developed a treatment cocktail of interferon and ribavirin. “The adverse effects of this therapy are chemotherapy-grade awful,” Ray tells us.
Suddenly, events are gathering momentum.
A genuine breakthrough arrived in 2011 — an antiviral agent developed by Vertex Pharmaceuticals. Ray’s Technology Profits Confidential readers bagged a 150% gain on that one. It was the most successful drug launch ever… until the arrival of another hep C treatment late last year, Gilead Sciences’ Sovaldi.
But each of those treatments works only in tandem with that ’90s-era cocktail, with all its hideous side effects. “The goal of hepatitis C research — indeed, its holy grail — is an all-oral regimen that can hit that 90%-or-better cure rate record set by Sovaldi without requiring interferon injections,” Ray says.
“Competition in the hep C space is red-hot, and Sovaldi’s days in the sun are counted. Storm clouds are gathering, and new drugs are on their way to knock it off its pedestal, along with the epic revenues it has generated for Gilead.”
And there’s room for more than one ultimate winner, Ray says: “The hepatitis C market was only $3-4 billion a year a couple of years ago, but with new effective ways to treat the disease, that number could be as high as $20 billion in 10 years.”
Gold has moved little in the last 24 hours. The bid as we write is $1,262. Silver’s at $19.24, and platinum’s at $1,473.
And palladium, the darling of the precious metals sector this year? It’s reaching for another 39-month high at $858 — now up 19% on the year.
Another attempt by the South African government to end a 19-week miners strike has failed. Impala Platinum, the world’s No. 2 producer, says it “has exhausted all its financial means” in its latest wage offer.
“South Africa’s mine strikes are bitter,” says Byron King, who’s visited the country and its mines more than once. “The strikes evidence years of frustration within the rank and file, as well as complex, internal national politics.
“There’s a new union in the field, called the Association of Mineworkers and Construction Union (AMCU). Leadership of AMCU has to show spine with this strike action if it expects to keep its members paying dues. The union wants monthly base pay to more than double over the next four years, while mine operators state that they can’t afford the demands. Thus, don’t expect a quick ‘deal’ just for the sake of labor harmony. This strike will persist.”
Meanwhile, the mining companies still have to meet demand from buyers like automakers, which need palladium (and platinum) for catalytic converters. Inventory is dwindling, with no new supply.
“We’re coming to the end of the aboveground ore stockpiles,” says Byron, “so expect processing to tighten even more. That is, the world really is ‘running short’ of these metals, and fast. There’s more upside to come.”
The yield on a 10-year U.S. Treasury note is little different this morning from equivalent debt issued by… Spain.
A 10-year Spanish bond yields 2.64%. The T-note yields 2.62%.
“The European bond markets are putting up some noteworthy and, at first glance, head-scratching numbers,” says our Chris Mayer. Chris is in the Balkan nation of Macedonia this week — “an interesting little country” he emails us — on the way to his primary destination of Greece, where he’ll do some serious bargain-hunting.
Talk about head-scratching numbers. The panic that wracked the so-called PIGS countries two years ago? Well, that’s so two years ago…
“It seems investors are taking crazy risks,” says Chris, diving into the mystery. “Unlike, say, the U.S. or Japan, these countries face real solvency risks.
“The U.S. has all of its debts denominated in dollars, a currency that it issues. The U.S. can’t run out of dollars. And Japan can’t run out of yen. But each of these countries has its debts in euros, a currency they do not issue. In this, they are more like U.S. states.”
But then there’s the backstop of the European Central Bank (ECB).
“Mario Draghi, the ECB chief, has vowed to save the euro,” Chris reminds us. “He gave his famous ‘whatever it takes speech’ in July 2012. And in September 2012, the ECB adopted the Outright Monetary Transactions (OMT) program. There is no limit to how much public debt the ECB could buy.”
Last week, as we mentioned at the time, the ECB resorted to negative interest rates. And it could still resort to full-on “quantitative easing,” U.S.-style.
“There are some,” says Chris, “who think that the market will call the ECB’s bluff. But it would be like trying to bluff a guy out of an ace-high straight flush. The ECB creates euros. It can’t run out. So it can buy all it wants. The market has decided it is not going to play chicken with the endless money-creating abilities of the ECB.”
Chris’ favorite way to play the recovery in the PIGS countries is up 138%… with more to come, he says. And who knows what he might find in Greece?
[Ed. note: For the next six days only, we’re making it possible for you to see the fruits of Chris’ globe-trotting… Byron’s natural resource recommendations… Ray’s high-tech and biotech plays… and much more.
All you need to do is cancel your existing subscription to our monthly advisory letters.
Yeah, we know, it sounds ridiculous. But we swear we’ll make it worth your while if you subscribe to any of the following publications…
Click here to “collect” up to $4,790 by canceling your current subscriptions
For the record: Workplace gossip is an act protected by federal regulation.
The Overlawyered blog informs us of a recent decision by the National Labor Relations Board. The NLRB determined several sections of a hospital’s employee handbook ran afoul of the law. Specifically, these passages…
11. We will not make negative comments about our fellow team members and we will take every opportunity to speak well of each other.
16. We will represent [the hospital] in the community in a positive and professional manner in every opportunity.
21. We will not engage in or listen to negativity or gossip. We will recognize that listening without acting to stop it is the same as participating.
Explains Overlawyered writer Walter Olson: “Under NLRB doctrine, in both nonunion and union workplaces, negative discussion of managers and other co-workers could count as ‘protected activities’ linked to the potential for concerted labor action.”
Now you know.
Your editor can attest from his former career that at least one profession would shut down tomorrow if employers could successfully enforce such a ban.
A newsroom thrives on “negativity and gossip” at least as much as it does on bad coffee and stale doughnuts…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. Jonas Elmerraji of our trading desk informs me he’s still looking for courageous souls to take his $10,000 trading challenge.
If you missed it earlier this week, here’s how it works: You put in five minutes of “work” for five trading days… and Jonas will prove it’s possible to add $10,000 to your retirement fund with a few simple short-term trades.
No previous trading experience is required. And there’s absolutely no obligation once you let us know you want to take part. For now, just take 30 seconds to drop us your email address here.