Cramer says index fund buying and buybacks are creating a ‘stock shortage’

Source: CNBC: Aug 7, 2018

  • Two key drivers are helping the stock market to rally: increased index fund buying and corporate share buybacks, CNBC’s Jim Cramer argues.
  • Those two trends are creating a “stock shortage of epic proportions,” the “Mad Money” host says.

As employment ticks up and people find more money in their pockets, U.S. investors are becoming more frugal and choosing risk-averse index funds over individual stock-picking, CNBC’s said Tuesday.

“The game has changed since I first started picking stocks almost 40 years ago,” the “Mad Money” host said as stocks rose, bringing the within 1 percent of a record high.

“We didn’t even have index funds back then,” he said. “Now they’re the preferred way to invest for the majority of people who want to own stocks.”

The flight to index funds stems from more savings-conscious consumers who, even though they are likelier to find jobs and make more money, are now focusing on keeping their earnings close rather than spending freely, Cramer said.

“On average, … people are saving a larger percentage of their paychecks. So where do they put their money? A lot of it goes into index funds,” he explained, adding that companies introducing no-fee index fund investing is “a catalyst for even more money coming into the indices.”

At the same time, corporate share buybacks are quickly becoming another source of fuel for stocks, the “Mad Money” host said.

He pointed to a Goldman Sachs analysis in which researchers said U.S. companies could buy back over $1 trillion worth of their shares in 2018. As a result, stocks would likely hold steady despite individual investors’ concerns about various economic pressures including global trade tensions.

Noting that corporate buyback announcements are up 46 percent versus last year, Goldman said that August is historically the most popular month for share repurchases, Cramer recounted.

And even though companies are not technically allowed to push their stocks higher via buybacks, Cramer said that “as someone who’s personally authorized and executed buybacks myself, I can tell you that they have the potential to give stocks a serious boost.”

So, with frugal investors buying up index funds, thus sending stocks higher, and companies gearing up for more stock buybacks, the effect on the market is tangible, the “Mad Money” host said.

“The impact of these two trends? Simple: they’ve created a stock shortage … of epic proportions,” he said. “There just aren’t enough shares of big-cap companies to go around until sellers materialize.

To make matters worse for the bears, the bank stocks, a key market leadership group in Cramer’s eyes, are heading higher thanks to rising interest rates. And the price of oil — a flawed, but popular barometer for economic strength — is on the rise, signaling to money managers that there are “clear economic skies ahead,” Cramer said.

“If you only take one thing away from this segment, maybe for the whole night, understand that we’ve got a serious stock shortage on our hands at these levels,” the “Mad Money” host concluded.

“There just aren’t enough shares to go around, at least at the prices that we are trading at now, and it’s making even bearish money managers afraid to sell,” he continued. “At the end of the day, the stock market is a market like any other, which means it’s controlled by supply and demand. When there’s not enough supply, prices go higher. End of story.”

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Vanguard Is Now Using Blockchain Technology To Help Manage $1.3 Trillion In Index Funds

Vanguard, the 44-year-old mutual giant famous for popularizing index investing, has completed one of the most noteworthy implementations of blockchain technology for a financial institution to date. It’s now using blockchain—the distributed ledger software that underpins cryptocurrencies like bitcoin—to help manage data for some of its most widely used financial products, including its largest mutual fund, the $800 billion Total Stock Market Index Fund.

Since February, Vanguard has been using a blockchain product to ingest data for $1.3 trillion worth of funds, or one quarter of its total $5.2 trillion in assets under management. Many financial institutions have been implementing and testing blockchain on a limited scale, as Forbes recently reported in our first-ever Blockchain 50 list. But Vanguard’s project is live as the back-end platform powering millions of customer accounts. It’s likely the first major financial institution using blockchain for a core service.

The company behind Vanguard’s blockchain experiment is Symbiont, a six-year-old New York startup with 75 employees. Symbiont’s products aim to serve different functions for financial institutions, ranging from tracking the full life cycle of a mortgage security to settling securities trades. For now, Vanguard uses Symbiont just to manage index data.

The data source Vanguard uses for its mutual fund indexes isn’t changing. What’s new is its process for pulling in the data. Since 2012, Vanguard has used the Center for Research in Security Prices (CRSP), a research center at the University of Chicago, to support many of its indexes. CRSP indexes are baskets of securities that aim to mirror the value of a given market. Its research dictates what stocks should be included in a given index and what their concentration should be.

Before working with Symbiont, Vanguard used a manual process to update its CRSP-based indexes. It received individual files with point-in-time securities data. Then it had to clean that data, load it into a separate database and perform checks to ensure its accuracy, says Warren Pennington, head of Vanguard’s fintech strategies team. “All day long, throughout the day, we had data team members making sure they could keep data in sync with what CRSP had in mind,” he says.

With Symbiont’s blockchain platform, Assembly, Vanguard has “a synchronized database that is constantly updated every time CRSP makes a change to the index,” Pennington says. “No more manual updates or manual pulling of data. No more manual reconciliations.”

Technically, you don’t need a blockchain to get instant updates to a shared database—that could be done with older technology. But Symbiont has pursued a blockchain architecture to try to increase client trust. Its blockchain aims to serve as an independent third party that hosts information securely across a network of computers that Symbiont doesn’t own (they’re owned by the organizations participating in the shared blockchain ledger), preventing Vanguard from having to trust the startup to keep the data safe.

For now, Vanguard, Symbiont and CRSP are the only organizations with access to the index data blockchain. But Ron Papanek, a managing director at Symbiont, says half a dozen other asset managers have run test versions of the software and are considering participating.

Vanguard first started working on this project in mid-2017, and using a team of less than ten people, it took nearly two years to go live. “One of the challenges in a highly regulated industry is just lack of familiarity,” Pennington says. “That’s what takes time—letting people get familiar.” Much is at stake—any errors can cause Vanguard’s funds to fall out of sync with the markets they’re trying to track, which would lower the quality of its products and could scare off investors.

For Vanguard funds that use CRSP indexes, Symbiont’s software has fully replaced Vanguard’s old system of manual data updates. Pennington says Symbiont’s software has saved time for Vanguard, but that’s not the primary goal. “It’s more like an R&D investment with an actual deployment as a result, which truly improved the way we run our fund.”

Pennington isn’t yet ready to use blockchain to replace a higher-stakes process, like clearing trades, but he’s not ruling it out for the future. “This project isn’t the end,” he says. “It’s a step where we thought we could get more comfortable.”


Stock Buybacks Enrich Management (Bad Stewards)

Dimon, Iger, Cook, Nadella, Pichai, Fink … they’re not founders like Gates or Bezos. They’re not investors like Buffett or Dalio. They’re management. And now they’re billionaires. And all their captains and lesser brethren are centimillionaires. And all their lieutenants and subalterns are decamillionaires.

And everyone is perfectly fine with this. No one even notices that this is happening or that it’s different or that it’s a sea change in how we organize wealth in our society. It’s not good or bad or deserved or undeserved. It just IS. This is our Zeitgeist.

This Is Water
One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

It’s the triumph of the manager over the steward. The triumph of the manager over the entrepreneur. The triumph of the manager over the founder. The triumph of the manager over ALL.


If TXN is the poster child of financialization, where are the owners? Who should be voting against all this bullshit? Where’s the corporate raider coming in to unlock shareholder value.

Here’s a quick google search.

Mutual fund holders 51.33%
Other institutional 37.52%
Individual stakeholders 0.55%

The finance industry is having it’s own “god is dead and we have killed him” moment.

Many speculate what the end game of “passive” investing looks like.

This is a preview.

But that’s what everyone in finance does. Don’t look at individual investments, build a portfolio. Hurray indexing. Hurray diversification. Hurray diversified portfolio across asset classes because you can’t make alpha without private information.

Are you investing in a way that supports more of this shit? Then going to your favorite forum “let’s ban buybacks”.

open eyes
clear hearts

Don’t buy TXN stock(directly or indirectly).

Question for Ben: Is there any TXN under your management?

Michael Burry Interview – Are We In An Index Bubble?

Money has flooded into the cheapest, largest passive index funds. In an interview with Bloomberg, Michael Burry, who successfully predicted the Dot Com Bubble and US Housing Bubble, says this has created an Index Bubble. In this video, we explore some of his comments from the interview and see whether it describes an investment opportunity.

One Cause of Market Turbulence: Computer-Driven Index Funds

In many ways, this stampede toward passive investing — in which people put their money into funds that track indexes and broader market themes as opposed to relying on human stock pickers — is uncharted territory.

.. the key question is how this transformed market holds up during a financial storm that lasts more than a few days.

.. Cheaply priced exchange-traded and index funds .. They now own close to 40 percent of stocks in the United States

.. BlackRock..  is the leading issuer of exchange-traded funds, with $1.3 trillion under management

.. The popularity of E.T.F.s has concentrated unparalleled financial power in BlackRock and Vanguard, the two biggest providers of index funds and E.T.F.s. Together, they sit on $10.5 trillion in assets and control 65 percent of the 1,700 exchange-traded funds that exist.

.. As the flows have grown in volume, much of these funds have gone toward index heavyweights like Amazon, Apple and Facebook, pushing their valuations ever higher.

.. Active fund managers — human stock pickers  .. because they are the ones who buy when others sell.

Opinion: The secret sauce for investing isn’t much of a secret

Honeycrisp apples are sweet but crunchy, a neat genetic trick developed by growers that creates its own demand. People love them and will pay more for them.

I don’t know much about the apple growing business of course, and supermarket pricing is a science these days. But it seems clear that the price is driven by demand for a superior product in limited supply. Gala apples are just fine, very crunchy, but not as sweet.

The problem in the investment world is that, increasingly, there are essentially no “Honeycrisp” investment managers. More than 90% of large-cap funds lag the S&P 500 index SPX, +0.76%  over a 15-year period, according to S&P Indices research.