Watch Out: Companies are Flooding the Market With Hundreds of Billions of Dollars in New Shares
Watch Out: Companies are Flooding the Market With Hundreds of Billions of Dollars in New Shares. For the last 10 years public companies have been the major support for stock market prices by buying back stock and shrinking the market float. Logically, the less shares that are available, the more they are bid higher by buyers. Now, the reverse is happening. While companies have pulled back buying dramatically, the market is being flooded with new offering, among other things that increase the float. Some $310 billion in new offerings is headed for the market, as the charts from TrimTabs Investment Research show. Says TrimTabs, “new offerings are bearish for liquidity because they increase the shares in the stock market.”
Note : New offerings exclude Capital Pool Companies and Closed end funds . Jul 2020 data is as of Jul 16
Meanwhile as the floodgates are opening for new shares, there’s strong warning signs of danger ahead for the market. For one thing, investor sentiment, which is an important contrarian indicator of the stock market’s direction is extremely bullish. So that’s one bad sign. Another is that the dramatic retreat in corporate buybacks means insiders themselves are uncertain about their companies’ own prospects. And last but certainly not least, there’s the fact that the pandemic is causing great uncertainty about where the economy and the market is headed. So, all this added liquidity comes at a time of great market uncertainty. That raises major questions about the availability of enough buyers to keep prices up. particularly with so much stock flooding the market. In other words, all this added liquidity means stocks will fall further in a downturn. There’s a joke about a panicked investor calling his broker to sell all his shares as the market is headed sharply down. The brokers reply: To who?