Inflating The Stock Market - When Trillions Of Dollars Chase Fewer Stocks

by: Financial Sense

by FS Staff

What happens when more money chases fewer goods? Prices inflate. Although many understand this principle when it comes to goods or services, it also applies equally as well to the stock market.

In a recent interview with Financial Sense Newshour (click here for audio), Craig Johnson at Piper Jaffray explains how there are far less stocks available to buy in the market today compared to the tech bubble, even though the amount of money has grown immensely with central banks around the world engaged in quantitative easing.

With trillions of dollars now created chasing fewer stocks, it's no wonder prices keep going higher!

Here are some excerpts from his recent interview that aired on Financial Sense and iTunes over the weekend:

FSN: What's your take on stocks here?

JOHNSON: I think what we're seeing happen with equities right now is that a lot of people, including myself, have been looking for some sort of pullback this year. Typically, when you see record years like you had last year, then as you can also see for the last two years in a row there's has been no "Sell in May and go away" and the odds of going three years in a row are statistically quite low. That everybody has started to get a position for some sort of pullback and, thus far, we have not seen it. So investors are seeing the Dow and they're seeing the S&P 500 moving higher and they are beginning to chase the tape a bit here over the last several weeks.

FSN: Craig, if you take a look at the amount of money the Fed was printing with QE last year- $85 billion a month- along with corporate buybacks, which were over $400 billion, that's a lot of purchasing power coming into the market.

JOHNSON: Absolutely. There is clearly a lot of purchasing power in the market. And if you also take into consideration… we are also seeing money come out of fixed income and go back into equities so there certainly is that rotation that had been starting to occur. You've been seeing it in some of the money flow numbers and, yeah, money was coming in. And the other thing I'd also note, along with those statistics in terms of corporate buybacks and also money rotating out of fixed income, is that there are about a third fewer stocks today in the market than there was in the year 2000. So there's less product out there is the bottom line- and more dollars chasing fewer goods.

FSN: Yeah, and what does that cause? Prices go up. Craig, right now the leading economic indicators are looking pretty good, which should help the corporate earnings picture. What's your take on corporate profits moving forward?

JOHNSON: I think in terms of overall profits for corporations I think they've done a lot over the years: they've cut costs; they've done a lot to improve their overall profitability. But I think you're getting to a point in time where it's low hanging fruit of cost savings and cost cutting of improved margins... and I think we're finally at a point in time where the street is starting to pay for top line growth and that's why I think you're seeing the acquisition activity beginning to pick up, because corporations know that there's a lot of easy money out there. Rates are cheap; it's easy to borrow from that perspective and they're looking to find some sort of top line growth. That will be the next, I think, catalyst for stocks. And when you look back at the companies that have been doing or are being acquired, you're not just seeing the typical situation where the acquirer's stock is going up and the other one is going down, and the arbitrage occurs. You're seeing both stocks going up, which tells me that investors and the street itself are actually rewarding top line growth more so than just cutting costs and driving bottom line numbers.

FSN: And when you look at this, we haven't seen this kind of M&A activity since 2006 or 2007 before the peak. So, that raises the question of whether this is indicative of a topping process when you see this take place?

JOHNSON: I think it's too early to say that we're at a topping process. I think it's just a natural progression among the executive suite to say that I'm not sure that the strategy of 'we're going to buy back stock and we are going to raise our dividend' is going to be enough of a value-add proposition to the board for these corporations to continue to justify the strategy that has been laid out in the compensation packages that are put out there. I think corporations are hungry for growth. They're looking for new things to do and I think this acquisition activity is just another phase, but I don't think it's a topping process. In fact, I think we're going to continue to see this secular bull market that we've talked about since August 2012… continue to push its way higher and this acquisition activity is, I think, just another phase in this, but I don't view it as a top by any stretch.

FSN: So, Craig, from your perch, are you still sticking with your 2100 number on the S&P 500?

JOHNSON: I am. I'm sticking with the 2100 number on the S&P 500 for year-end 2014 and I think we're getting really close- the last time I had looked about a little over 2.5% away to the 2000 number we laid out in August of 2012 and I like this market. I just think that we are going to get some volatility. We are going to get some pullbacks along the way and I think some of the activities we're seeing here with geopolitical concerns are kind of fanning nervousness across the street right now, which is certainly helping to lead to this kind of pullback or setback in the marketplace. But, if we take a little more of a long-term perspective- say 6-9 months- I think we're going to look back at this period of time and it's going to have been a pretty good opportunity to buy stocks.

FSN: What looks good to you out of the S&P 500 ten sectors?

JOHNSON: Well, right now, we are overweight the consumer cyclical sector. It's obviously a sector that's been under quite a bit of pressure, but I think as we work through the summer months, which are typically seasonally weak based on our seasonality project that we've done over the years, and they strengthen as you get into the fall and into year-end, I think the consumer cyclical sector can do well. Specifically, inside of that, the homebuilders still look pretty good despite the concerns in the marketplace and despite concerns about the economy. Companies like Lennar (NYSE:LEN) look very good on the charts as well as Horton (NYSE:DHI) and Toll Brothers (NYSE:TOL)… I'd also just mention that the industrial stocks have done well…whether its things like Ingersoll-Rand (NYSE:IR) or Boing (NYSE:BA) or Dover Corp (NYSE:DOV) or these kinds of names. These stocks are doing well. They're hitting all-time new highs…We also like tech. The semi-conductors also look very constructive. Intel (NASDAQ:INTC) looks very constructive on the charts along with things like Texas Instruments (NYSE:TXN).

FSN: Looking at the bigger picture, what do you see as a critical factor that will have to take place in order to see this bull market head much higher?

JOHNSON: I think if we're really going to get the next big secular bull market to unfold- and keep in mind that in the 1950s it was about a rebuilding of Europe; in the 1980s it was about the Wintel cycle and it was about the internet- if we're going to get that next big bull market leg up I think it's going to have to come from energy independence and a rebirth of manufacturing. And with all the fracking activity and drilling activity that's happened in the states, I think we're setting ourselves up for a pretty reliable low cost source of energy that will help fuel that next big leg up.

Disclosure: No positions