Falling number of shares a key factor behind the market rally

By: Raul Elizalde
today's photoWhen a stock pays a dividend rate higher than the interest at which the company can borrow money, it makes sense for that company to issue debt and buy back its own stock. This is exactly what happened as interest rates fell to historic lows. We believe that the retirement of equities is a key factor in the stock market rally, making them look “expensive” when compared to traditional measures of value, but not when considering their shrinking supply.

We measured changes in the number of outstanding shares of about 350 stocks with an aggregate market capitalization of $17.4 trillion (the total market is currently around $28 trillion). We found that since the beginning of 2011, the number of shares dropped by about 8%. If those shares had not been retired, this group would have a $1.7 trillion larger market capitalization. This extrapolates to a $2.8 trillion shortfall for the total market of US equities due to corporate buybacks.

image 1This estimation is remarkably similar to the $3.0 trillion retired equities calculated by the Federal Reserve. In addition, the Fed tallies the value of shares retired due to mergers and acquisitions, which adds up to another $2.3 trillion, for a total of $5.3 trillion in that period. This was only partially offset by $2.9 trillion of new issues coming to market. On balance, therefore, corporate America retired $2.4 trillion of equities value, which is on par with the GDP of the United Kingdom.

image 2This has vast implications. Stock prices go up disproportionately to the number of shares retired, meaning that a 1% reduction in supply causes a price appreciation much larger than 1%. More precisely, the marginal change in price due to the marginal change in supply is very high. This effect is not easy to isolate and measure, but it is undoubtedly present, and we believe that it is an important factor behind the market rally.

It also helps explain why equities seem expensive against traditional measures of value, such as P/E ratios. A corporation finds value in buying its own stock if it reduces its cost of capital, regardless of what those indicators show. The fact that top management compensation is often linked to the price of their stock may also play a role in a company’s decision to repurchase stock.

As long as this activity continues, the market will continue to seem “expensive”, and it may become more so if the Trump administration’s attempts to reduce the corporate tax rate eventually succeed.

Many US corporations with profitable global operations have not brought back those funds because they are subject to taxation once they come in. According to Moody’s, non-financial US companies hold close to $2 trillion abroad. If a corporate tax cut persuades companies to bring back their overseas profits, the likelihood is that they will be used to repurchase company stock. It is quite doubtful, as proponents of the tax cut argue, that they will be invested in their respective lines of businesses. Given that businesses have easy access to historically cheap credit, money sitting abroad does not seem to be a hindrance to financing any investments that seem promising.

Most recently, both our numbers and the Fed’s numbers show a slight decline in the pace of equity retirement. It could be “noise”, or it could be due to the modest interest rate rise of late last year.

It is reasonable to assume that if interest rates or equity prices go up much further, the economic benefits of retiring shares will end. The danger of higher rates is small, in our view, because it is difficult for the Fed to justify lifting rates much more when inflation has been falling further and further away from its target. As much as the Fed wants to “normalize” monetary policy, hiking rates when inflation is falling is risky.

On the other hand, earnings-per-share have been climbing, both on a trailing and (especially) on a forward basis. Moreover, Europe looks stronger and global GDP projections have improved. These fundamental factors support higher equity prices everywhere, regardless of the impact of corporate demand for equities.

These fundamental factors could make equities seem less expensive in the medium term when compared to traditional measures of revenue and earnings, and could well spur a new wave of demand from retail investors who, because of low interest rates, have few other places to go for returns. The market rally will end one day, but the combination of corporate demand, improving fundamentals, benign outlook for rates and a potential for growing retail demand are pushing that day further into the future.

What now?
We are a Registered Investment Advisor held to a fiduciary standard of care. We believe that our portfolio management process, focused on measuring and managing risk, can be very effective at creating a sensible balance between risk and return, partly by measuring financial and investment conditions often and adjusting portfolios through a well-defined process. We implement this process for our clients and we tailor it for their specific circumstances, and we always put their interests first. That means we do not profit from transactions or by selling any products. Our only compensation is based on the assets we manage, which goes a long way of aligning our interests with yours. We can also help you evaluate your current goals and establish an investment plan aiming at achieving steady, long-term returns while managing downside risk. You can download our report describing our investment methods and goals, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success. Read more.

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Raul cropped for facebookRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or raul@pathfinancial.net.

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Path Financial Expands Investment Advisor Team

Oxana Saunders Vice President Path FinancialSarasota-based investment advisory firm Path Financial, founded by president and chief investment officer Raul Elizalde, has named Oxana Saunders as vice president. Ms. Saunders will focus on business development, client relations, and portfolio management; she holds a NASAA Series 66 Investment Advisor Representative license and joined Path in early January 2017. Together, the two senior executives provide clients with 47 years of investment expertise honed during their respective careers on Wall Street.

Ms. Saunders will work with new clients to provide investment advice based on their life goals and personal circumstances. She is available to speak to individuals and organizations on a variety of investment-related topics, including helping clients better understand family investments, and how individuals can protect assets in times of life transition. Initial consultations are complimentary; Oxana Saunders may be reached at 941.894.2571, and oxana@pathfinancial.net.

A graduate of Baruch College with a degree in Finance and Investments, Ms. Saunders enjoyed a successful career on Wall Street prior to relocating to Sarasota in 2016. She began her investment banking career at Lehman Brothers (later Barclays Capital), where she rose to the position of Senior Vice President and was responsible for distributing a full line of products to U.S. institutional investors. She was instrumental in propelling the bank to the top of industry surveys, and was later was hired by Deutsche Bank to expand its client base. Her clients included first-tier financial institutions such as Alliance Bernstein, Oppenheimer Funds, and T Rowe Price.

“Ms. Saunders is a consummate professional with tremendous experience and intimate knowledge of financial markets,” stated Mr. Elizalde. “Throughout her career, she has made it a priority to help her clients and put their interests first. I am delighted she has joined Path Financial.”

Path Financial is a Florida-registered investment firm, partnered with preferred account custodians such as Charles Schwab & Company and TD Ameritrade. Path is rated “A+” by the Better Business Bureau, and is located at 1990 Main St., in Sarasota, Florida.

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Best Practices for Updating Revocable Trusts Explained in Free Seminar

Raul Elizalde Raul Elizalde, president and chief investment officer of the financial advisory firm Path Financial, is presenting a free seminar, open to the public, covering essential concepts of legal and financial protection of family assets through revocable living trusts, with an emphasis on best practices for strategically updating existing trusts. Guest speaker will be Sarasota attorney David G. Bowman Jr., Esq, of Bowman, George, Scheb, Kimbrough, Koach & Chapman, P.A. Elizalde will join Bowman to discuss specific strategies for assessing and mitigating financial and investment risks within portfolios, including trusts. The seminar is offered Thursday, January 21 at 2 p.m., at 1990 Main Street, Suite 750, downtown Sarasota; building parking is complimentary and refreshments will be provided. To register, call 941-366-5510.

The seminar will include discussions on tax law changes, Florida domicile, and particular circumstances such as second marriages, changed relationships with trustees or beneficiaries, and more. Other topics will include how trusts may help cut tax bills, and how to protect and grow investments, while minimizing exposure to risk.

David Bowman, Jr., is a partner with the Sarasota law firm of Bowman, George, Scheb, Kimbrough, Koach & Chapman, P.A. His practice is focused in the areas of estate planning and administration, as well as real estate and corporate law.

Elizalde is a contributing columnist for Oxford World Financial Digest, and has a national reputation for financial insights and analyses that are published online by some of the most respected financial media in the country, including Morningstar, Motley Fool, the Street and Yahoo! Finance. In 2014, he was a featured expert panelist during National Financial Advisor Week in New York City, and in 2012, was named among the country’s most respected and innovative money managers in Max Isaacman’s 2012 book, “Winning with ETF Strategies: Top Asset Managers Share Their Methods for Beating the Market,” published by Financial Times Press. Elizalde is a current member and past chair of the Asset Management Committee for the State College of Florida Foundation.

Path Financial is a Florida-registered investment firm rated “A+” by the Better Business Bureau, and is located at 1990 Main St., in Sarasota, Florida.

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Junk-Bond Wake-Up Call Column Quotes Raul Elizalde of Path Financial

herald tribune logoIn his newspaper column in today’s Sarasota Herald Tribune, contributing columnist Ernest “Doc” Werlin quoted Path Financial President and Chief Investment Officer Raul Elizalde on the topic of the current challenges facing the junk-bond market. Drawing from Path Financial’s Dec. 15 article for investors, “Junk Bond Troubles Could Be the Tip of the Iceberg,” Werlin noted Elizalde’s comment that “it’s too soon to say the worst is over for investors….It took over a year for the earliest signs of serious problems in the mortgage bond market to metastasize into the collapse of Lehman Brothers and a full-blown financial crisis.” Werlin also quoted Carl Icahn’s Dec. 12 appearance on CNBC where Icahn “warned that a lack of liquidity could cause the high-yield market — otherwise known as the junk-bond market — to implode and contribute to a broad market crisis.”

Read Werlin’s full column here.

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As we were saying – “Fed should wait with liftoff to see firm inflation signs: IMF note” [Reuters]

“The U.S. Federal Reserve should wait to see firm signs of rising inflation as well as a stronger labor market before hiking benchmark interest rates, an International Monetary Fund paper said on Thursday.” (November 12, 2015)

This is according to Reuters, and agrees broadly with our October newsletter, “Low inflation should keep the Fed on hold.” (October 27, 2015). Inflation remains low, and yet the market seems convinced that the Fed will hike rates soon, and Fed officials seem poised to do just that. We remain unconvinced that this is the right move.

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Raul Elizalde tapped as columnist for Oxford World Financial Digest

Path Financial President and Chief Investment Officer Raul Elizalde

Path Financial President and Chief Investment Officer Raul Elizalde

Raul Elizalde, president and chief investment officer of Sarasota-based investment advisory firm Path Financial, has been selected as a Contributing Author for the Oxford World Financial Digest (worldfinancialdigest.com), an online publication and daily newsletter with over 90,000 subscribers across the U.S. Elizalde’s first monthly column for the Digest was published September 23, 2015, and provided in-depth analysis of current market conditions capable of creating the next debt-led economic crisis.

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A silly story that investors should ignore

Path Financial President and Chief Investment Officer Raul Elizalde

Path Financial President and Chief Investment Officer Raul Elizalde

Have you heard the one about how bad it is to miss the top-performing market days?

It goes like this: If you miss just a handful of the market’s best days, your portfolio returns will be significantly reduced. For proof, the story comes with a chart that compares being invested in US stocks every single day versus missing a few of those top days.

One version of that chart shows that $100 invested in the S&P 500 since inception (from January 3, 1950 through February 20, 2015) would have grown to $12,667. Missing the top 5 days, however, brings the end value to just $8,203, or 35% less. Missing the top 25 days gets a miserable $2,966, or 77% less than just leaving the portfolio alone. The conclusion seems inevitable: it is a bad idea to cash out of the market for any period of time, lest you miss those crucial days.

As it turns out, this argument is seriously flawed. But because it has been parroted over and over, it has gained undeserved credibility. What’s wrong with it?

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Listen to Raul Elizalde live on the radio Tuesday!

10498490_730975873615854_7979695858033269295_oRaul Elizalde, president and chief investment officer of Path Financial LLC, will share his thoughts on major headline issues affecting investors in America and across the globe on The Nilon Report (WSRQ Sarasota Talk Radio) with host Susan Nilon on Tues., Sept. 30, from 4:45 to 6 p.m. Southwest Florida audiences can listen to the broadcast at 98.9 FM, 106.9 FM and 1220 AM, and listeners everywhere can enjoy the program livestreaming online by clicking here.

Elizalde will discuss Federal Reserve policy and interest rates, the outlook on U.S. and European stock prices, how global unrest may affect savings and investments, and other topics. Listeners may call into the show by dialing 941-373-1220.

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Pitfalls of Exchange Traded Funds explained in free education roundtables

Path Financial LLC President and Chief Investment Officer Raul Elizalde

Path Financial LLC President and Chief Investment Officer Raul Elizalde

Raul Elizalde, president and chief investment officer of Path Financial, will lead a free educational roundtable explaining the challenges and pitfalls investors face when dealing with Exchange Traded Funds (ETFs). The roundtable will be presented three times from Sept. 30 to Oct. 2, with each event hosted by First Security Capital Management of Venice, Florida.

Elizalde recently appeared as a “Rapid Fire” panelist during National Financial Advisor Week, an outdoor event held in the middle of Times Square, Sept. 15-19, where he provided insights on headline news stories affecting investors — including the topic of ETFs The popularity of ETF has grown tremendously in recent years because the funds are flexible and low-cost, but some can present significant challenges with potentially dangerous ramifications for an investor’s portfolio. In the Venice presentations, Elizalde will discuss why an ETF sponsor matters; how to know when an ETF is overpriced; ETF liquidity and ratings; how leveraged ETFs can destroy a portfolio; when and why to choose an ETF over a mutual fund; and how to use ETFs to build strong portfolios.

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Elizalde named panelist for National Financial Advisor Week in Times Square

Path Financial LLC President and Chief Investment Officer Raul Elizalde

Path Financial LLC President and Chief Investment Officer Raul Elizalde

Raul Elizalde, the president and chief investment officer of Path Financial LLC, will travel to New York City in September to participate in National Financial Advisor Week, an outdoor event taking place in the middle of Times Square.

On Mon., Sept. 15, Elizalde will help kick off the first day of the weeklong event during a 4 p.m. “Rapid Fire” panel discussion. Elizalde will contribute his expertise on headline topics affecting everyday investors, including high-frequency trading, Federal Reserve policy, the outlook on stock prices and interest rates, and how global unrest may affect savings and investments.

The event is presented by AdviceIQ, a national online service dedicated to helping consumers make decisions about how to manage their investments, and sponsored in part by USA Today, Reuters and the Financial Planning Association.

Elizalde was selected for the panel because of his expanding reputation in providing financial insights and analyses—which are frequently published online by some of the most respected financial media in the country, including Morningstar, Motley Fool, the Street and Yahoo! Finance. In the course of his career, Elizalde has held positions as a Wall Street strategist for first-tier financial institutions, and has been quoted by the nation’s leading newspapers—The Wall Street Journal, The Washington Post, the Financial Times and The New York Times—and appeared as a guest commentator on Reuters and Bloomberg TV.

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