The Shrinking Market

[Midpack]

Read this on another forum, something I hadn't realized (among many things). FWIW...

The Wilshire 5000 was so named in 1970 because that was approximately the number of listed stocks on NASD, AMEX, and NYSE at the time. The number has varied since, hitting a peak in July 1998 at 7,562 listed stocks. The Wilshire 5000 held 4,009 companies on December 31, 2010.

Today, December 31, 2011, the Wilshire 5000 holds 3,761 stocks, according to Robert Waid, Managing Director at Wilshire Analytics. This is about half the number of stocks at the peak in 1998 and very close to the absolute low of 3,715 in 1978. I would not be surprised to see the Wilshire 5000 hit a new low in listing during the first half of 2012.

There are far more US stock mutual funds and ETFs than there are listed US stocks. Most companies have little incentive to go public today. There is significant private money looking for investment and borrowing costs are rock bottom. Also, the government has not helped by significantly increasing the regulatory burden on public companies over the past decade. Investors are wise to hold international equities just for the company diversification alone.

Rick Ferri

 

[brewer12345]

This was a predicted outcome of SarbOx. Since there are lots of other forces at work, I wonder if we have seen the same trend in other developed markets?

One of the impediments to new listings is the generally low valuations of public companies in the recent past. If you had a business you had carefully grown and nurtured for years, wouldn't you want to wait to go public until the market was offering an appealing valuation multiple? One of my equity holdings has an operation that is growing like a weed and at some point will need additional capital to grow. The parent has said for some time that this business is not a long term core one for them and that they will eventually look to capture the value of the business via a separate listing (IPO or spin off). They have said this for 3 or 4 years now. When I have talked to management they have repeatedly indicated that since the business can execute on its growth plans for the time being without access to external equity capital, they are content to bide their time

 

[tightasadrum]

Taken to its extreme, as fewer and fewer public companies are listed for investing your money, and with no shortage of MF's required to invest the money they have, it provides an interesting dilemma. With too much money chasing too few stocks, isn't that an inflationary formula? Could company stock prices be driven up far above their intrinsic value simply because of demand? We hear that individuals are also sitting on a huge cash stash also. So at the first hint of significant inflation or stock price updraft, stock prices could soar! And I still believe significant inflation will be the developed world's ticket of choice out of the sovereign debt problem. I'm no economist, but what am I missing?

 

[ERD50]

Interesting info Midpack, thanks for posting.

Taken to its extreme, as fewer and fewer public companies are listed for investing your money, and with no shortage of MF's required to invest the money they have, it provides an interesting dilemma. With too much money chasing too few stocks, isn't that an inflationary formula? Could company stock prices be driven up far above their intrinsic value simply because of demand? We hear that individuals are also sitting on a huge cash stash also. So at the first hint of significant inflation or stock price updraft, stock prices could soar! And I still believe significant inflation will be the developed world's ticket of choice out of the sovereign debt problem. I'm no economist, but what am I missing?

Well, I'm no economist either, but I think you are mostly on track. All I'd say is that I think this will be somewhat self-limiting. If the price of the 'too few' stocks rises, then those private companies that Brewer gave examples of will start to make offerings, because now the market is ready to value them at something that will drive them to an IPO. The effect will probably still be there, but it can't run wild, IMO.

-ERD50

 

[clifp]

It does appear that IPO have been meet with only tepid interest as many are below their IPO price. Although one can argue that companies like Groupon really aren't worth $13 billion. On the other hand that fact that IPO haven't run wild is sign that market is doing a decent job in properly valuing them.

One of the phenomena I've observed with startups is an increasing interest in going public on the Toronto Stock Exchange, Canada doesn't really have the equivalent of SarbOx and so the expense and listing requirement are considerably lower than the NASDAQ, much less the NYSE.

You really get a sense for the shrinking world, when you hear a small Hawaii based company with operations primarily in Australia talks about going public in Toronto.

 

[Ed_The_Gypsy]

This was a predicted outcome of SarbOx.

I remember. And I concurred.

 

[Hamlet]

Yes, although once that price increase hits, there would be a much increased incentive to go public.

So I think much of this ends up being self-correcting, in the long term.

Taken to its extreme, as fewer and fewer public companies are listed for investing your money, and with no shortage of MF's required to invest the money they have, it provides an interesting dilemma. With too much money chasing too few stocks, isn't that an inflationary formula? Could company stock prices be driven up far above their intrinsic value simply because of demand? We hear that individuals are also sitting on a huge cash stash also. So at the first hint of significant inflation or stock price updraft, stock prices could soar! And I still believe significant inflation will be the developed world's ticket of choice out of the sovereign debt problem. I'm no economist, but what am I missing?

 

[brewer12345]

I remember. And I concurred.

It was pretty obvious that this would be a consequence. Simple economics.

I have mixed feelings about it. I am dismayed at the shrinking number of listed companies. OTOH, from what I have seen of the accounting systems of public companies from the inside, many of them needed a kick in the ass (with a steel toed boot) to upgrade their reporting capabilities.

TANSTAAFL, I guess.

 

[Nords]

One of the phenomena I've observed with startups is an increasing interest in going public on the Toronto Stock Exchange, Canada doesn't really have the equivalent of SarbOx and so the expense and listing requirement are considerably lower than the NASDAQ, much less the NYSE.
You really get a sense for the shrinking world, when you hear a small Hawaii based company with operations primarily in Australia talks about going public in Toronto.

I'm about to diplomatically suggest to one of our larger startup entrepreneurs that he take a look at a Hong Kong IPO. He's already establishing strong connections in Asia (especially China) so he may be way ahead of me.

It was pretty obvious that this would be a consequence. Simple economics.
I have mixed feelings about it. I am dismayed at the shrinking number of listed companies. OTOH, from what I have seen of the accounting systems of public companies from the inside, many of them needed a kick in the ass (with a steel toed boot) to upgrade their reporting capabilities.
TANSTAAFL, I guess.

Maybe enhanced GAAP and SarbOx are doing our due diligence for us...

Remember when Reg FD was going to destroy the markets? I think that the trend has just helped trash a lot of emperor's new clothes. Immelt & Ballmer have had to deal with far different accounting & reporting practices than their predecessors, and considering what their predecessors were getting away with I think today's rules are a very good thing.

It's interesting to read the financial press' comments about today's companies displaying sustained knockout performance. Instead of deifying the CEOs as visionary gods, the media is digging through their trash and hacking their servers looking for the fraud. The only thing people seem to trust is dividends.

 

[Ed_The_Gypsy]

The only thing people seem to trust is dividends.

Gosh, who would have imagined?

 

[W2R]

The only thing people seem to trust is dividends.

I trust them for now. However, I do expect that at some time, after share prices have gone down to almost nothing, then dividends will nearly vanish.

My expectation is not based on sophisticated analyses, so much as on a lifetime history of finding myself in bad situations despite all efforts (and I am living on dividends right now). Fortunately, I also have a lifetime history of extricating myself from whatever disasters life presents so I am ready.

 

[HFWR]

One of the downsides of index funds, and/or huge pension/mutual funds that are required to follow some portion of the market, is that both due diligence, and corporate governance via stockholder action, are not as likely to occur. Add to this the [-]free[/-] stock options awarded to company management...

I don't give Congress credit for much, but the machinations of talking heads on TV about over-regulation almost appear rehearsed. Corporations are making money, and, here at least, you can't swing a dead portfolio without hitting a bank; there's one on every corner. Much like Starbucks, pretty soon they have banks inside banks...

One final thought, I've heard it said that most of the regulators in the financial services field are not "smart" enough to spot issues with [-]Ponzi schemes[/-] complex financial instruments, but, rather, are trained to make sure the proper forms are filed. Wonder if Kyle Bass wants to give up his $B hedge fund, and be a bank examiner.