December 19, 2017

On Tuesday, the S&P 500 was down 0.3% and Toronto was about unchanged.

The republican’s income tax reduction bill is expected to be signed by the President tomorrow.

Costco was down 2.1%. I will be updating my report on Costco very soon.

CRH Medical was up 4.0% in Toronto. Checking insider trading, the company did buy back some shares in November. I think that is a sign of confidence. They bought back about $1.4 million worth of stock.

Linamar was up another 2.0%.

Statistics Canada reported investments in new home construction in October. In Alberta, investment in new single family homes was up 30% versus October 2016 but was still 25% below the 2014 level. The big increase versus 2016 would seem to bode well for Melcor Developments although I don’t know how the timing of Melcor’s lot sales relates to the timing of new home investments.

Money for Nothing? 

The S&P 500 is now up 20% in 2017.  The market cap of the S&P 500 is $24 trillion. At the start of 2017 it was about $20 trillion. That’s a gain of $4 trillion dollars. It’s interesting to think about just where this added $4 trillion dollars came from.

Only a little of the gain would have come from new money raised from investors by S&P 500 companies selling shares to investors including through the exercise of stock options. Especially considering that stock buy-backs would have offset some or possibly more than all of that.

Some of the gain would relate to retained earnings. If the P/E was around 20 then earnings would explain 1/20 times $20 = $1 trillion earned times about 50% retained or $0.5 trillion.

About $3.5 trillion dollars came from the fact that investors bid up the prices of shares as one investor sold to another. Not a penny in new money enters the market in that process as the money put in by the buyer goes to the seller. In effect this $3.5 trillion came out of thin air.

What a wonderful thing! The owners of the S&P 500 as a total population gained $3.5 trillion and it really did not cost any other group of the population anything!

And I am not suggesting that there was anything at all wrong with this. But I will say that it is a process that can’t go on indefinitely. When it goes the other way, money, or at least wealth disappears into thin air.

Perhaps some readers would like to comment on this.



  • What goes up must come down. I have a fairly large cash position as I no longer feel comfortable with this market. When I analyze stocks it is very hard to find ones that are undervalued. In my opinion you can’t time the market but you can certainly get indications from it and keeping some extra cash around is not only insurance but it allows you to buy when the market does correct as it most certainly will correct at some point.

  • Just wondering if money was transferred into equities from bonds??

    • There is no true transfer of money from bonds to equities or the reverse. The financial press always claims that is what is happening. Well, not really. What actually can happen is investors bid the price of bonds down, one investor selling bonds to another. In that process the total value of bonds can go down but no net money “left” the bond market since the buyer of the bond paid whatever the seller received (trade commissions aside). The corporations that issued the debt are unaffected by the transaction. Next the seller of the bond can put in an order to buy equities which could push the price up. But his cash goes through the exchange to the seller of the equities and not a penny of new money went into equities in the net. Investors as a population are totally powerless to extract net money from bonds or equities by simply trading with each other which simply changes who owns the bonds or equities. Let’s think about it: The financial press sometimes states that investors (implicitly meaning as a population) sold stocks on a given day. But of course every stock sold was also bought so they really mean selling pressure pushed prices down in order to entice buyers to buy.

  • Thanks Shawn for the comment. I found it very useful to be reminded yet again how we can create wealth from thin air in the short term.

    My question: How about the short sellers covering their positions carried from 2016? Do they have to throw new money in this year?

    • So Short Selling: I am not very familiar with it but the existence of short selling does not change the fact that if, for example, the S&P 500 doubled tomorrow, that sudden new money (actually it’s wealth measured in dollars and not money as such) materializes out of thin air. Similarly if the S&P 500 fell by 50% tomorrow, $12 trillion dollars of wealth would simply vanish into thin air. If some investor made money on the short sale, someone else lost that money. The gain and the loss there would cancel out and the full $12 trillion, half the S&P 500 value would have been vaporized into thin air.

  • Does this ‘thin air’ wealth have the effect of drawing more money towards those holding a piece of the S&P500? For instance, if equities could be put up as collateral for loans (say as part of someone’s ‘net worth’ on a loan application)? Would that have the effect of moving money from banks into the hands of investors which could then be applied back into the stock market causing even more thin air wealth to be created? Or is this not a concern?

    • The answer is probably yes, higher stock prices can lead to still higher prices due to availability of borrowed money. Stocks prices ultimately should reflect both future earnings expectations and interest rates. Higher stock prices would be a concern if the stock prices are pushed higher than they should be. It’s hard to say where we stand now and it certainly differs by individual company.

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