The stock market is vanishing


The stock market is disappearing

Activity has all but dried up in the riskiest part of the stock market

The stock market is vanishing


Buyback :

~20% of S&P 500 companies have reduced their share count by at least 4% yoy in each of the last five quarters, and that appears to be continuing into Q2:

But not completed one [1]

However, it means earnings per share is 4% higher and P/E is 4% lower than a year ago for those companies, which helped stocks outperform.


The question might be the price [2]


One thing certain: There is simply less “stock” in the stock market. 


As of the end of 2014, outstanding share count was well below where it was about 10 years ago, and the lowest in FactSet’s data set.


While net flows into US stocks have been relatively flat since 2006,  net issuance has plummeted.


The biggest factor behind the decline in IPOs is the heightened volatility in the stock market. [3]


Secondary offerings is also dropping.

Listed firms is disappearing 

The number of firms with shares publicly listed in the University of Chicago’s Center for Research in Security Prices aggregate index has fallen to 3,267 from a peak of 6,364 in 1997. Reason:

“Between the lack of IPO activity, the pick-up of M&A, and buybacks, the US equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes. [4]
Companies may not want to come public due to the additional cost of Sarbanes-Oxley or the fact that the private market has become a bigger source of financing than it has been in the past.”





In 2015, announced buybacks are up 50% compared to 2014.

however, that the increase in announced buybacks is not bringing about an increase in completed buybacks and also notes that much of the increase in buyback announcements comes from a few big players.

For example, Apple and General Electric have both announced $50 billion buybacks this year, while the Home Depot said it would be repurchasing $18 billion worth of shares. And Gilead Sciences, Qualcomm, Pepsi, American Express, and Merck also have all announced buybacks worth $10 billion or more.[


Buying back stock is, for example, Warren Buffett’s preferred way of returning cash to shareholders (rather than paying a dividend). But Buffett thinks share buybacks make sense when stocks are undervalued.


“IPOs are a higher-risk proposition because the market isn’t totally sure of their value. So you want a relaxed market when you enter with that higher risk.”

“January and February are typically bad months for IPOs anyway,” “Typically, these companies have financial periods ending in March so they wait for that next set of statements before going to market.”


The argument is that with fewer companies to choose from, active managers are forced to crowd into certain stocks. Crowding makes it impossible to differentiate returns and causes these managers

UBS outlined 3 major trades in the market right now that seem to look a lot like bubbles: long US healthcare, short US energy, and a bet against emerging markets.







Investment Themes in US market


Eight Investment Themes for Global Growth: 2016 & Beyond


Digitalization of the global economy brings opportunities as well as negative implications [1]

– Profit themes are on areas of the market that have demand tailwinds: pricing power and rising ROI

1. Millennials (born at 1981 – 2000)

スクリーンショット 2016-08-17 22.17.56.pngThe Millennial generation (Generation Y) is the largest in U.S. history

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this demographic transition will pressure consumer spending dollars by roughly 1% a year until 2019, at which point spending should then accelerate.

demographic theme for Millennial:

  1. Homebuyers (U.S. has a shortage of entry-level housing. ) but late marriage and Rental Culture
  2. E-commerce-Biased consumption and Social Media as advertising, not brand-conscious
  3. Experiences than material goods
  4. Higher Health-Conscious
  5. Lower financial obligations but also lower income
  6. Thus larger part of disposable income spent on fixed housing and education

(Social consumption as whole will surely be depressed under the new behavior pattern of  Millennial along with less shopping of baby boomer.)

スクリーンショット 2016-08-17 22.39.31.pngA recovery of aging after 2020

2. Digital Disruption


  1. pivoting by moving to asset-light, subscriptionbased services
  2. leveraging shared infrastructure that can adapt quickly to rapidly changing trends
  3. capital expenditures (capex) is often rationalized and converted into operating expenditures (opex) (reason for the underperform in many capital-goods sectors and muted inflation)

3.The Internet of Things

スクリーンショット 2016-08-17 23.01.06.png



personal IoT (Wearables)/ The Automated Home/  Lighter, Connected and Intelligent Car/ Mass Manufacturing to Mass Customization (3D printing and advanced robotics)

4. Data Wars

User trends continue to drive exponential growth of data and traffic

  1. Social media now accounts for 90% of traffic
  2. users checking their social media site an average of 14 times a day
  3. internet impatience: every 100-millisecond delay can cost an e-commerce site 1% of revenue
  4. Consumer appetite for bandwidth remains insatiable

スクリーンショット 2016-08-17 23.20.29.png

Given the prospects of traffic growth from content-rich applications and device proliferation

– opportunities in companies that provide the infrastructure to manage, move, store, and analyze this data in cloud-based architectures

5. Biotechnology

Challenges: A high R&D hurdle + Prices of biotech drugs have risen and managed-care firms have steadily restricted prior authorization  [2], but

  1. many biotech firms are well-capitalized
  2. The FDA seems more open to approvals than it has been in the past [3]

Two primary challenges of gene-therapy companies

  1. clinical trials typically include no more than 10 patients, which makes the trials very risky.
  2. If one adverse event occurs, such as an unfortunate death, the trial could be doomed.

6. Health Care

スクリーンショット 2016-08-17 23.36.38.png

The Affordable Care Act (ACA) is to increase health-insurance coverage and have contributed to multi-year outperformance in the Health Care sector, but this tailwinds may diminish:

  1. an increase of 4% in national health-care expenditures on programs
  2. the rate of change in the newly insured is slowing
  3. offset to cheaper plans is higher out-of-pocket expenses
  4. demographic shifts are causing an increase in the Medicare population at the expense of the commercially insured demographic cohort

スクリーンショット 2016-08-17 23.43.29.pngThe digitalization of health care remains a longer-term byproduct of reform. 3 primary areas: business intelligence-driven opportunities, population health management and big data/predictive analytics.

(innovative, disruptive technologies aimed at high return on investment (ROI) solutions.)

7. Fiscal Spending

スクリーンショット 2016-08-17 23.46.47

The economic cycle has reached a natural transition as the baton is passed from monetary easing to fiscal spending.
State and local government expenditures are growing again, a trend that began in 2014, and federal spending followed

スクリーンショット 2016-08-17 23.46.54


  1. Infrastructure upgrading, particularly among construction and materials companies
  2. Defense sector particularly programs tied to cybersecurity, intelligence and surveillance
  3. renewable energy, health care sector

8. U.S. Energy

スクリーンショット 2016-08-18 1.07.31.pngTechnology-driven explosion in U.S. oil and gas production: the U.S. energy renaissance isn’t dead.

  • The U.S. is a major swing oil producer. Low prices will cause supply to fall and demand to rise. The world will probably need the U.S. to start ramping up production to meet demand by 2017.
  • companies with balance sheets that can weather the 2016 speed bump and be poised to take future market share.
  • natural gas infrastructure is a compelling area to invest in volume growth, as U.S. natural gas prices remain well below international prices.



  1. Barriers to entry are rising for a few dominant companies such as Amazon and Google, but are crumbling for many companies.
  2. The sharing economy should improve asset efficiency, but capital spending as a percentage of GDP may have forever peaked.
  3. Software and connectivity are ubiquitous, but traditional measures of productivity are stagnating.


  1. biotech drugs are far more complicated to manufacture than small molecule drugs and require greater capital expenditures and knowledge. Biotech drugs are manufactured in a living system, such as plant or animal cells, and tend to be large, complex molecules. Any company attempting to enter the biosimilar market would have to invest in bioreactors, mass spectrometers and other similarly highpriced laboratory equipment, which would require seasoned Ph.D.’s and other well-trained individuals to properly operate them.
  2. the U.S. Food & Drug Administration has historically cast a dim view on such drugs and has seemed reluctant to yield to market entrants. While it has always set a high bar that some may view as overly cautious, the FDA would likely respond by saying that such caution has been prudent.
  3. doctors have resisted the idea of switching their patients from proven biotech drugs that, while expensive, do save lives.

the collective inflation for biotech drugs was roughly 30% in 2014, the highest annual increase on record) but recently


possibly because of progress in Europe, where biosimilars have been a safe and cheaper alternative to branded biotech drugs for several years.

Quality over Quantity

A paper that discuss the topic of passive v.s. active from AB Investments


Quality over Quantity


The common refrain: “Passive is cheaper and less risky”, but


スクリーンショット 2016-08-03 19.35.38

Beyond a threshold of 20-35 stocks, the marginal benefit is largely reduced.

スクリーンショット 2016-08-03 19.53.00.png

Among US equity managers, those with 35 or fewer stocks tend to have higher active share and higher annualized rolling excess return over the last 5&10 years

By using research to focus on fewer but higher quality stocks, concentrated investing has the potential to produce substantial alpha

(however, it’s difficult to find how active a manager is. Managers can claim to be active but really run benchmark-hugging portfolios)


Hidden risk of Passive

スクリーンショット 2016-08-03 20.06.13.png

Passive portfolios would have followed along for the ride (market capitalization skewed), not only sectionally but also regionally (by the end of 1988, Japanese stock had grown to 44% of MSCI World index)

higher volatility, especially at market peaks, makes the true cost and risk


Concentrated investing may reduce downside risk

スクリーンショット 2016-08-03 20.16.20.png

Investors who stick with a concentrated approach over long run have been rewarded with better returns with less downside volatility

It makes sense to combine passive strategies with highly concentrated strategies that identify exceptional stocks

(But this time may be different?)



Equity Outlook from Janus Capital

Some pictures from Q3 Global Equity Outlook of Janus Capital


Danger Part:

スクリーンショット 2016-07-26 20.24.19スクリーンショット 2016-07-26 20.22.27スクリーンショット 2016-07-26 20.23.40


Cloudy Part:

スクリーンショット 2016-07-26 20.33.09スクリーンショット 2016-07-26 20.34.12スクリーンショット 2016-07-26 20.36.22スクリーンショット 2016-07-26 20.37.47

Historically, when VIX – as the collective expectation of future volatility – is highest, the market’s subsequent three months are better than more benign risk environments スクリーンショット 2016-07-26 20.38.38スクリーンショット 2016-07-26 20.39.10


Sanguine Part:


Health care: Innovation still matters most and nowhere is innovation more profound, more long lasting and timelier than in the health care sector
Technology: The cloud revolution continues – the two key trends are the adoption of cloud computing and the Internet of Things

スクリーンショット 2016-07-26 20.43.00


in a slow-growth environment, firms will look to buy market share, rather than invest and build it organically
M&A revalues sectors and signals confidence
“we anticipate that technology, health care and industrials will see the most M&A activity”

スクリーンショット 2016-07-26 20.48.40



“Perma-bears” overanalyze how bad Brexit may be

Two articles from ABglobal


Beware of “Perma-Bears” in Volatile Markets

Since the Great Recession of 2008–2009, a few macro scares have rattled the global capital markets:
the Greek default crises; the US “fiscal cliff”; the Ukraine–Russia conflicts; the collapse in oil prices; China’s slowdown and currency devaluation; and now, Brexit.

“despite the many corrections and spikes in volatility during this cycle (from March, 2009), the S&P 500 Index hasn’t collapsed. In fact, it climbed 206%, or an annual average of about 16%, over that period. ”
– Volatility have created attractive opportunities to buy stocks! It holds true over the past seven years, perhaps even more than .

– At least it shows slow global growth mean nothing with abandoning equities

For roughly the past 12 months, the net market movement has been flat despite increased volatility.
– Past tide probably won’t help an investor’s returns going forward?

“There’s a mad dash to safety assets, so the rates on Treasuries continue to fall”
“Interest rates are likely to stay lower for longer.”  – ??
      – double positive for stocks:
1. helps support equity valuations
2. providing investment-grade issuers with the ability to borrow cheaply and increase shareholder value.

“maintaining higher-than-average long exposure—and tilting into the weakness that’s slammed the markets to buy specific stocks with strong long-term fundamentals.”

Concerns: oil prices, the US dollar and credit spreads



Headwinds to US Earnings Growth Abate

The US stock market has gone nowhere for the past 15 months, with plenty of volatility along the way.
– Investors have been reluctant to push the market higher without earnings growth.??

Falling oil prices and the strong dollar are losing force 
 – will reveal growth in earnings, particularly for the energy and tech sectors
– more than 75% plunge in oil prices (2014/6 – 2016/2) made the operating cash flow of the 21 largest oil-focused E&P companies fell 50% in 2015
– US technology firms generate nearly 60% of their sales internationally. “Gartner Research estimates that the strong US dollar reduced global IT spending by $217 billion dollars in 2015—more than the most recent financial crisis did.”

(“Oil prices have recovered from recent lows and the US dollar has stabilized” is anything but a strong argument!!!)