Ryan Krueger of Minyanville offers a nice reminder that both supply and demand are variable forces.
When IBM (IBM) recently borrowed money for three years at 1%, temporarily setting a record low interest rate at that maturity, it turned right around and bought back more of its own shares from the public, which was stuck wondering when stock prices would ever go up again. No different than any other asset, the price of a stock will go up only when there’s demand for one more unit than there is supply available. Consider the following chart and overwhelmingly bullish facts for share prices that most investors never even glance at before considering a purchase or sale.
We aren’t looking at speculative buying here with its last nickel either. IBM had $3.6 billion in cash in 2000. Ten years later it has $12.2 billion in cash after buying back all those shares with many more buybacks to come, already authorized by the board. Ten years ago IBM’s operating profit was $9 billion and the stock was at $140. This year it will make close to $20 billion and yet almost half as many shares are trading at $140.
Krueger’s point bears repeating: the price of a stock will go up only when there’s demand for one more unit than there is supply available. Furthermore, price can still rise with demand falling if supply is falling even more.
