The stock market is shrinking.

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fennewaldaj
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Re: The stock market is shrinking.

Post by fennewaldaj » Mon Aug 06, 2018 1:07 am

Dan Rassmusen has made the argument that buyout firms are set up to have rather bad returns going forward because the firms they buyout are no longer all that cheap because so many institutional investors are crowding the space. He talked about this on meb fabers podcast if interested.

Valuethinker
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Re: The stock market is shrinking.

Post by Valuethinker » Mon Aug 06, 2018 3:42 am

fennewaldaj wrote:
Mon Aug 06, 2018 1:07 am
Dan Rassmusen has made the argument that buyout firms are set up to have rather bad returns going forward because the firms they buyout are no longer all that cheap because so many institutional investors are crowding the space. He talked about this on meb fabers podcast if interested.
I think there are a number of industry reports making the same point - Bain for example.

The EV/ EBITDA multiples of transactions have climbed by a lot.

That investment (EV) is either in debt or in equity. Debt measured by leverage ratio (net debt/ EBITDA) vs. equity (equity/ EBITDA). Add the 2 together you get EV/ EBITDA.

Leverage ratios have risen, if not to the 2007 peaks. But EBITDA performance has been very good, in line with the economic recovery. As that cycle peaks, you have PE players paying high multiples and with high leverage but for EBITDA that will underperform targets, rather than outperform.

And so the next PE cycle starts, as PE firms walk away from businesses, creditors take control, and businesses are sold off at distressed prices.

None of this looks good for prospective PE returns. The industry has raised so much money that returns have to come down.

Venture Capital is its own, and more obvious, bubble. A lot of these "Unicorns" will never realize value at $1bn or above for investors (the definition of a Unicorn is last-round funding at a valuation of $1bn or above).

jamapa
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Re: The stock market is shrinking.

Post by jamapa » Mon Aug 06, 2018 4:06 am

https://news.ycombinator.com/item?id=17 ... um=website

Another thread discussing this topic...

Raabe34
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Re: The stock market is shrinking.

Post by Raabe34 » Mon Aug 06, 2018 8:35 am

My semi-anecdotal evidence comes from a Bank President I know just a bit professionally/personally. They were a mutual savings bank that was a very successful organization and decided to demutualize a few years back. Total market cap is around 80 Mil, made roughly 3.5 mil in 2017 have a history of smaller % profit growth but growth. I asked him once ballpark what does it cost to be public annually and he thought around 1/2 mil. If these guys could buyout all the smaller shareholders to get under the threshold that would seem like a no brainer to me with that kind of cost.

Bacchus01
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Re: The stock market is shrinking.

Post by Bacchus01 » Mon Aug 06, 2018 8:45 am

Valuethinker wrote:
Mon Aug 06, 2018 3:42 am
fennewaldaj wrote:
Mon Aug 06, 2018 1:07 am
Dan Rassmusen has made the argument that buyout firms are set up to have rather bad returns going forward because the firms they buyout are no longer all that cheap because so many institutional investors are crowding the space. He talked about this on meb fabers podcast if interested.
I think there are a number of industry reports making the same point - Bain for example.

The EV/ EBITDA multiples of transactions have climbed by a lot.

That investment (EV) is either in debt or in equity. Debt measured by leverage ratio (net debt/ EBITDA) vs. equity (equity/ EBITDA). Add the 2 together you get EV/ EBITDA.

Leverage ratios have risen, if not to the 2007 peaks. But EBITDA performance has been very good, in line with the economic recovery. As that cycle peaks, you have PE players paying high multiples and with high leverage but for EBITDA that will underperform targets, rather than outperform.

And so the next PE cycle starts, as PE firms walk away from businesses, creditors take control, and businesses are sold off at distressed prices.

None of this looks good for prospective PE returns. The industry has raised so much money that returns have to come down.

Venture Capital is its own, and more obvious, bubble. A lot of these "Unicorns" will never realize value at $1bn or above for investors (the definition of a Unicorn is last-round funding at a valuation of $1bn or above).
I agree, the multiples right now seem insane.

I have been in and out of public, private, and PE-backed companies over the last 20 years. I worked for a highly acquisitive Fortune 200 firm for nearly 15 years, and spent about 5 years with a PE-backed acquisitive firm that went IPO in 2013. This is all in industrials. The EV/EBITDA ratios we targeted in industrials over nearly 20 years was buy at 4-6X, leverage to 8-10X, and then drive additional synergies. I'm seeing industrial deals going now for 12-14X EBITDA, and that's on average. Those are insane levels for industrial companies. For more than a decade, many PE firms would roll up several companies, get synergies and then spin off to a strategic buyer. That process is not happening now. There seems to be a return to the slash and burn mentality of deals in the 80s and 90s. We'll see how this works out.

I have talked to many, many PE firms. They all state that one large driver of deal activity increases has been SOX. The admin costs of SOX on a $200M firm, for example, kills them. PE is the only route for a buyer to get out.

Kevin K
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Re: The stock market is shrinking.

Post by Kevin K » Mon Aug 06, 2018 11:02 am

If I'm missing something obvious here (it wouldn't be the first time) I apologize, but when I read the NYT article my first thought was "isn't this a strong argument for sticking with market-cap weighted funds like Total Stock Market instead of tilting to small and value?"

MichCPA
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Re: The stock market is shrinking.

Post by MichCPA » Mon Aug 06, 2018 11:04 am

Raabe34 wrote:
Sat Aug 04, 2018 10:55 pm
gasman wrote:
Sat Aug 04, 2018 7:51 pm
1. Why is the number of publicly trade companies shrinking?
2. What can/should an investor do other than diversify as widely as possible?
Sarbanes Oxley - makes it expensive for a smaller company to be public and is incentive to stay private.
+1 Much of that decline has occurred since the accounting scandals of the early 2000s like Enron and Worldcom brought about increased government regulation and investor scrutiny. You also have the maturity and consolidation of the tech industry post dot com bubble.

HEDGEFUNDIE
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Re: The stock market is shrinking.

Post by HEDGEFUNDIE » Mon Aug 06, 2018 1:09 pm

Raabe34 wrote:
Mon Aug 06, 2018 8:35 am
My semi-anecdotal evidence comes from a Bank President I know just a bit professionally/personally. They were a mutual savings bank that was a very successful organization and decided to demutualize a few years back. Total market cap is around 80 Mil, made roughly 3.5 mil in 2017 have a history of smaller % profit growth but growth. I asked him once ballpark what does it cost to be public annually and he thought around 1/2 mil. If these guys could buyout all the smaller shareholders to get under the threshold that would seem like a no brainer to me with that kind of cost.
PwC did a detailed examination of the costs of going and being public.

https://www.strategyand.pwc.com/media/f ... an-IPO.pdf

“On average, companies incur $1.5 million of recurring costs as a result of being public.”

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jeffyscott
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Re: The stock market is shrinking.

Post by jeffyscott » Mon Aug 06, 2018 1:09 pm

Kevin K wrote:
Mon Aug 06, 2018 11:02 am
If I'm missing something obvious here (it wouldn't be the first time) I apologize, but when I read the NYT article my first thought was "isn't this a strong argument for sticking with market-cap weighted funds like Total Stock Market instead of tilting to small and value?"
I would actually think the opposite regarding small, since fewer small caps are in the index as more remain private?
press on, regardless - John C. Bogle

financeperchance
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Re: The stock market is shrinking.

Post by financeperchance » Mon Aug 06, 2018 1:28 pm

Much of this is explained by the general increase in industry concentration over the past couple decades:
https://finance.eller.arizona.edu/sites ... 1.4.16.pdf

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Rowan Oak
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Re: The stock market is shrinking.

Post by Rowan Oak » Mon Aug 06, 2018 9:07 pm

Ben Carlson:
I can't believe the "shrinking US stock market is alarming" myth has to be busted yet again but here we go...

The # of US stocks has been cut in half since 1997 but ex-US has doubled from 20k stocks to 40k in that time

Per Vanguard, the biggest reason for the dropoff in the number of stocks in the US is from micro caps. There were ~2k in 1979, over 4k in 1997 and around 1500 today. Micro caps make up 1% or so of the entire stock market. Most of those companies in the 90s were junky stocks

Also from VG, yes the number of IPOs has fallen but that's also only w/the smallest of companies. The larger IPO mkt has been relatively stable

the smaller number of US stocks since the late-90s is really a non-story. It was mainly micro caps that never should've been public anyways & it's never been easier to diversify globally as an investor than it is right now
Supply & Demand in the Stock Market

by Ben Carlson
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ReformedSpender
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Re: The stock market is shrinking.

Post by ReformedSpender » Thu Aug 09, 2018 3:07 pm

Fun with numbers, the average daily volume of the S&P has also seen a reduction. Interesting imo:

2010: 242M
2011: 452M
2012: 118M
2013: 114M
2014: 94M
2015: 188M
2016: 68M
2017: 68M
2018 so far: 48M

At the time of this post, today's volume was an anemic 32M share

:beer
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

HEDGEFUNDIE
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Re: The stock market is shrinking.

Post by HEDGEFUNDIE » Thu Aug 09, 2018 8:22 pm

ReformedSpender wrote:
Thu Aug 09, 2018 3:07 pm
Fun with numbers, the average daily volume of the S&P has also seen a reduction. Interesting imo:

2010: 242M
2011: 452M
2012: 118M
2013: 114M
2014: 94M
2015: 188M
2016: 68M
2017: 68M
2018 so far: 48M

At the time of this post, today's volume was an anemic 32M share

:beer
This is # of shares traded? Don’t think that’s meaningful. As stock prices go up numbers of shares traded will go down.

How about $ traded?

jalbert
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Re: The stock market is shrinking.

Post by jalbert » Fri Aug 10, 2018 3:17 am

The referenced article wrote: When I say “shrinking,” I’m using a specific definition: the reduction in the number of publicly traded companies on exchanges in the United States. In the mid-1990s, there were more than 8,000 of them. By 2016, there were only 3,627...
The mid-1990’s were an outlier in the other direction, not a standard against which other time periods should be measured.

If the concern is shrinkage because of corporate bankruptcies, the corporate bankruptcy rate apparently has fallen significantly over the last 30 years or so:

https://tradingeconomics.com/united-states/bankruptcies
Risk is not a guarantor of return.

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ReformedSpender
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Re: The stock market is shrinking.

Post by ReformedSpender » Fri Aug 10, 2018 7:22 am

HEDGEFUNDIE wrote:
Thu Aug 09, 2018 8:22 pm


This is # of shares traded? Don’t think that’s meaningful. As stock prices go up numbers of shares traded will go down.

How about $ traded?
That is a false assumption.

Regardless, the mean share price of SPY in 2010 was ~$98 (average $23.7B exchanged daily). Mean share price in 2018 thus far is ~$265 ($12.7B daily).

Less money is indeed flowing into the market in this particular example. Imo, culprits could be fewer companies going public and/or passive investing over day trading momentum.

:beer
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

Jack FFR1846
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Re: The stock market is shrinking.

Post by Jack FFR1846 » Fri Aug 10, 2018 7:48 am

Mergers and acquisitions.

When companies merge or one company buys another, what happens? The number of public companies listed drops by one. Just off the top of my head......

Where did all these public companies go?

National Semiconductor
Power Trends
Unitrode
Benchmarq
Burr-Brown

They've all been gobbled by Texas Instruments

Where did these companies go?

Hi-Tech Software
Silicon Storage Technologies
Atmel
EqcoLogic
ISSC Technologies
SMSC
Supertex
Microsemi
Micrel

All bought by Microchip Technologies.

If you want to do this for fun, go look at the big guys like Intel or Cisco or Google or the like. They've all bought and retired hundreds of public (and private) companies.

I would submit that there are not fewer companies out there....there are "merged" companies that still exist as sectors of the Borg. Resistance is futile.
Bogle: Smart Beta is stupid

Valuethinker
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Re: The stock market is shrinking.

Post by Valuethinker » Fri Aug 10, 2018 7:56 am

CurlyDave wrote:
Sun Aug 05, 2018 3:16 am


Is QQQ the right answer? I don't know, but I don't see a S&P 100, or S&P 200 index fund. If there were such an animal I would be very interested in it.

I can tell you that my QQQ shares have beaten the stuffing out of SPY or VOO over the past 5 years.
Which would have been true all the way to May of 2000.

A lot of us are veterans of the 2000-03 bear market, personally affected by the losses. Thus, we treat with a certain scepticism a "tech conquers all" mindset.

Our Cisco is your Apple. Our Dell & HP is your ?. Our Nortel is your ?. Our Amazon is your Amazon. Our Snark is your Boojum.

CurlyDave
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Re: The stock market is shrinking.

Post by CurlyDave » Fri Aug 10, 2018 11:43 am

Valuethinker wrote:
Fri Aug 10, 2018 7:56 am

...Which would have been true all the way to May of 2000.

A lot of us are veterans of the 2000-03 bear market, personally affected by the losses. Thus, we treat with a certain scepticism a "tech conquers all" mindset.

Our Cisco is your Apple. Our Dell & HP is your ?. Our Nortel is your ?. Our Amazon is your Amazon. Our Snark is your Boojum.
I have been an investor for over half a century. Started back in the days of pricing in fractional dollars and paying a premium for an odd-lot broker. I remember the days when mutual funds were treated with suspicion and sold at a significant discount to net asset value. Long before the internet was even a dream. You called your broker in a rotary dial phone and told him your instructions -- he would buy or sell and tell you the price you got the next day.

I started using on-line brokers back in the days of dial-up modems. I rode the tech boom down in the 2000-03 market and right back up.

IMHO there is a serious misconception about NASDAQ and QQQ. NASDAQ is not just a tech exchange -- it is where small, young companies list before they are big enough for the NYSE. Back in the day, there was a certain prestige associated with a NYSE listing and as soon as companies grew large enough they usually switched over. But for a few decades companies have kept their NASDAQ listing rather than switching.

What this means is that QQQ represents the biggest, strongest, young, fast growing kids on the block. Now a large percentage of these are tech companies, so the tech-heavy description fits, but confuses cause and effect.

Now, why wouldn't I want to invest in the biggest, strongest, fastest-growing companies in the world?

And, I think there is something very similar to the "survivor bias" we see in mutual funds at work also. The composition of QQQ is frequently updated. Young turks are constantly vying for a position in this elite group and companies that start to lag are pushed out, in a very rough-and-tumble competition. But, the ones pushed out are sold off before they have a chance to drag the index down too far, and the new ones are clearly faster growing.

Of course there is huge volatility and the chance for significant downside moves. But there is also faster recovery.

Over the past 5 years QQQ has beaten SPY (or VOO) by 67%. We are going to need a pretty big sector-specific crash to wipe out that over performance.

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jeffyscott
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Re: The stock market is shrinking.

Post by jeffyscott » Fri Aug 10, 2018 12:34 pm

CurlyDave wrote:
Fri Aug 10, 2018 11:43 am
IMHO there is a serious misconception about NASDAQ and QQQ. NASDAQ is not just a tech exchange -- it is where small, young companies list before they are big enough for the NYSE.
I don't think there is any misconception, sure NASDAQ is not limited to Tech but the fact is that QQQ is about 57% tech.

This touting of QQQ makes me feel like I entered a time machine and traveled back to the 1990s and the indexfunds.com boards. :wink:
Now, why wouldn't I want to invest in the biggest, strongest, fastest-growing companies in the world?
I don't know, maybe because that is already reflected in the price. :?:
press on, regardless - John C. Bogle

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