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AAM Viewpoints – The Scarcest Resource

In a world of abundance, the scarcest resource is assigned an inflated value. The mention of “resource” often gets misconstrued with a commodity, material good or mineral. However, it also applies to intangibles, emotions and sentiments as well. We often can’t ascertain where we might be lacking in these characteristics as the measurement of one’s situation requires the removal of subjective biases that alter the sense of reality. To account for this in investments we take a look at investment flows, surveys of sentiment and a multitude of coincidental indicators that we add together to put our mind at ease…which only seems to affirm our biggest hindrance, confirmation bias. This is popular among the Reflexive theorists that Soros explained in great detail (one book I would recommend is the first few chapters of the Alchemy of Finance written in 1987) but was inferred far earlier in psychology by the Hawthorne Effect, Blind Spot Bias, and the Availability Heuristic.

Simply trying to determine the scarcity of these tangible and intangibles is very important for potentially huge returns, it often leads to a paradox. So if I take the opposite of common perspective that at least gets us part way there.

First, we are lacking in positivity in forward thinking. The old adage “ignorance is bliss” often subconsciously gets construed as only cynics are intellectuals and understand the gravity of risks and downsides to any situation. The positive are seen as naive. This is hard wired into us by the negativity bias which says you need five positive messages to overcome one negative post. A study done last year said headlines with negative language had a 63% higher click rate than those containing positive verbiage. So at a time when we need more positive perspectives than ever, the economics of it will only promote the opposite. It is Gresham’s economic law were bad money pushes out good. We have seen doomsday prepping increase after the market crash following the tech boom, but especially after the Great Recession. Total Household and nonprofit deposits now surged to over $11.1 trillion, for the first time ever. However, consider how this relates to nominal GDP.

One other area that should be getting more detailed investigation is the largest one-month surge in Small Business Optimism as measured in December 2016. This is also coinciding with positive economic surprise indicators from Citigroup.

How about patience? With society’s short attention spans, Twitter, Facebook and Snapchat keep everyone driving for the next new “gotcha” moment. This trend has been clearly in place in the investing world for some time. The “Patient Prophet,” aka Warren Buffett, not only preaches this but exemplifies it to a degree that most can’t comprehend. Luckily, we have metrics to help quantify it for investors who may not be able to grasp the concept.

At his current net worth of $73 billion and is 86 years old, consider the benchmarks of his age and net wealth. Buffett was worth $6,000 when he was age 15. He became a millionaire by the age of 30 and it took him another 26 years to become a billionaire. At the age of 59 he was worth $3.8 billion. That means 95% of his current net worth occurred when he was 60 years and older, patience pays off…of course there was more to it than just this.

One pattern that most everyone senses but the data has some controversy is the average holding period of stocks. One was about the average holding period of stocks that stood at eight years in the 1960s but was 14 months as of the last full decade ending 2009. Estimates are that it is below 12 months for this decade.

An interesting note on this as the holding period has come down: (annualized returns per decade): For the six decades (after the last negative decade (1930s), the annualized return from 1940-1999 was 8.61%.


Average Annualized Return
S&P 500

















2010 to current


Source: Bloomberg Data | Past performance is not indicative of future results.

To draw a more important scarcity impacting the market that has a multitude of side effects, consider the asset supply conundrum. We have been discussing this for several years and now it is starting to show effects of a lack of liquid assets available to investors. Recall that in the second quarter of 2016 that stock buybacks on a rolling four-quarter basis crossed the 3% of the amount of outstanding supply, the first time since measuring it.

With the announcement of the Snapchat IPO (Initial Public Offering), consider how benign the IPO market has been. Since 2007 there has been a net reduction of stock supply when you take cumulative stock buybacks and IPO issuance. This doesn’t include secondary which would reduce this, but not to the point where this reduction is not extremely important.

Source: Insider Score, Renaissance Capital

Stock supply continues to decline especially when you consider that new Issue IPOs had just under $19 billion in 2016 and in the last decade have only seen IPOs tally just over $400 billion; less than what we have bought back in the last year on the S&P 500 and only three quarters’ worth of our average over the last three years. And while secondary offerings have risen, they are still not enough to offset the decline from stock buyback (2015 had secondary offerings totaling $100 billion issued and 2016 was on pace for about the same).

This has been increasingly a global challenge as well. JP Morgan wrote, that if we were to get $100 billion in equity fund purchases this year, it would only be half of the dividends reinvested. Because of the flightiness of the fund flights, this has occurred three times in the last eight years (08/11/2012).

I know there is quite a bit of math involved, and I am constantly reminded of the great Chevy Chase in his 1976 Saturday Night Live skit, “It was my understanding there would be no math.” With the large potential repatriation boosting an already inflated buyback herd mentality, the underlying impact to earnings per share (EPS) could increase this synthetically by nearly 4%.

One final note of positivity, consider what is going on with earnings in the United States, Japan and Europe according to JP Morgan. As of Friday, February 3, we had 76% of U.S. companies in the S&P 500 beating estimates, with 52% beating sales estimates. This follows a very benign economic growth in their economy dragged down a bit by a lack of inventory builds. We would expect a rebound in growth from this quarter for Japan as manufacturing increases. Japan has seen tremendous outperformance in earnings with a growth rate of 10% year over year, though only 48% of companies beat estimates. Europe, however, had earnings per share growth of 7% with 64% of companies beating sales estimates. The biggest increase in the percentage of European companies beating sales estimates actually triggers a potential significant bullish sign. Accordingly, earnings and sales revisions for Europe have been on an upward trend, with JP Morgan’s upward revision ratio being at its strongest since 2010. 

When the European percentage of companies have beaten their long-term average (hair over 55%), the next 12 months have proven very effective. Since 2010, the Euro STOXX has averaged an annualized total return of 4.49%; if you purchased the Euro STOXX on those periods when 55% or greater of the companies beat sales estimates, you would have averaged 9.78% for the next four quarters, or 118% better than the average return over the entire period.

So it seems that patience and positivity are in scarce supply, but earnings are not.

CRN: 2017-0206-5794R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.