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.

 

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