Here’s the question of the day: are corporate stock buybacks fueling the stock market?
Let’s look at a couple of charts and a news report to help determine the answer.
Quarterly Stock Buybacks
Stock buybacks are at a nine-quarter low according to an Email TrimTabs press announcement.
“Buybacks have been trending lower for the past two years, which is a cautionary longer-term signal for U.S. equities,” said Winston Chua, analyst at TrimTabs. “Along with central bank asset purchases, buybacks have been a key pillar of support for the bull market.”
“The U.S. stock market isn’t likely to get as much of a boost from buybacks as it did in recent years,” noted Chua. “Apart from big tech firms and the too-big-to-fails, fewer companies seem willing to use lots of cash to support share prices.”
There are numerous references to that announcement, but until now, nobody checked to see if the relationship was in fact true.
S&P 500 vs. Volume Lows in Share Buybacks
If there is a relationship, I fail to see what it is, at least by looking at the chart.
That does not mean there is no relationship. Rather, it does not show up.
Logic would dictate that share buybacks lower P/E ratios thereby boosting earnings, making stocks look more reasonably priced.
But if reasonable P/E logic was in play, P/E’s would not be as ridiculous as they are. Then again, Wall Street charlatans point buybacks and forward P/Es as evidence the stock market is cheap.
Competing Theories
- Stock buybacks are still sufficient to fuel the stock market
- Something else is happening, such as another Fed-sponsored mania
#2 is a given. #1 certainly doesn’t hurt. But market sentiment is so strong now, stock buybacks just may not matter much at all.
When stock market sentiment turns, I strongly suspect buyback announcements will be meaningless.
Mike “Mish” Shedlock
With the dollar surging, stock buybacks will prove to be untimely….which may be why they are declining.
There are lots of things that can affect share buybacks. One is that companies buy back shares when they have no better investments. Thus, when growth prospects are low, they tend to buy their own shares. If buybacks drop, that might indicate that they see other uses for their money. At the other extreme, when a company is entering a period of uncertainly, they will be reluctant to buy shares, preferring to hold larger cash balances.
Thus a reduction in buybacks might be positive, indicating they have good prospects for internal growth, or negative, indicating uncertainty about the future. I don’t see this as a very useful indicator.
is it fair for market leading cos (the few who account for most of movement in the index) who buyback their shares, to raise the cost of equity in valuation on those cos who don’t buy back their shares?
The majority will once again be wrong, which includes those using fundamental metrics, and especially those with a US-centric view. Buy backs, like the Fed’s QE, can only impact the margins in a world of trillions of dollars worth of capital flows. The flows out of euros, yen, lira, rubles, real’s, riyal’s, and other trouble spots into dollar-based assets, especially stocks when the govt bond bubble pops, will dwarf everything else. In the transition from public to private, stocks become the new safe haven, and fundamentals are useless. Besides sentiment is low and retail participation low. Don’t worry, the average Joe will jump into bonds during the next scare, just in time for the popping of the bond bubble, and then bail into stocks at the top in a couple of years.
http://edegrootinsights.blogspot.com/2016/10/timing-is-function-of-direction-and.html
Mish,
What about mergers and acquisitions? There are a lot of these going on right now at nose bleed prices. That must feed into the equation somehow. Like Microsoft and Linkedin or Tesla and Solar city.
On that note…Any thoughts on the Twitter deal falling through?
Perhaps a sign or symptom that this trend of, let’s say, …adventuresome… M&A’s is putting on the breaks?
Latest:
Here’s how deep Twitter’s slide could get if Google, other bidders are out,
http://www.marketwatch.com/story/heres-how-deep-twitters-share-slide-could-get-with-reported-loss-of-google-other-big-bidders-2016-10-06
I would like to know just who is “painting the tape”. Most days the stock market pops up in the last 1/2 hour or less. I have seen recent days when the dow popped 50 points in the final 15 min. There is no question about manipulation, the only question is: who is doing it?
Covering short positions maybe.
I wish we had an edit option here, i actually meant options settling. I don’t know if the rule is still in effect, but corporte buy back orders must be cancelled by 3:50 pm.
How much of this market propping is because of soveriegn funds and foreign banks and funds investing in the US market as a hedge against their own domestic problems/markets/currencies?
Regardless of the amount of currency they threw at this crisis, nothing seems to have put the stock market into actual growth. Money flys around from place to place and new debt gets added month after month to prop all sorts o things up. In the end, they are never ever going to admit there is too much debt put into thing that don’t produce a return.
a question is just when have their been enough recent buybacks that it just does not make sense to do more unless you want to take a company private.
Trimtabs numbers differ from factset … trimtabs $174 billion for Q2:
“Quarterly Buybacks Decline 6.8% Year-Over-Year in Q2: S&P 500 share buybacks amounted to $125.1 billionin the second quarter (May-July), which represented a 6.8% decrease year-over-year. The Q2 amount marked the smallest quarterly buyback total since Q3 2013”
http://www.factset.com/websitefiles/PDFs/buyback/buyback_9.20.16
Over the first six months of the year, S&P 500 companies paid out 112% of their earnings in the form of either dividends or share buybacks. That, Damodaran argues, is the kind of figure you might expect to see when a recession had suddenly crimped company cashflows, not during a very long-running, if tepid, expansion.
The last time companies were paying out this much more than they are taking in was in 2008, when the financial crisis hammered revenues faster than companies could cut buybacks and dividends.
“Unless earnings show a dramatic growth (and there is no reason to believe that they will), companies will start revving down (or be forced to) their buyback engines and that will put the market under pressure,” according to Damodaran.
http://fortune.com/2016/08/30/us-stock-buybacks/
Trim Tabs chart is useless?
Is that the actual $’s spent on buybacks or it it the announced number of buybacks and approved amounts?
Big diff ya see ‘cappy
You need a chart that shows that actual “flows” not announcements
You are absolutely correct, TJ.
As I’ve said before every time the market tries to sell off really hard the mysterious magic wand appears with whatever it takes to hammer the VIX back down to rally the market usually n the last half hour of trading. So I don’t it matters that much at this time with more buybacks. At some point with all this corporate debt buildup with along with govt. debt, credit card debt, student loan debt, housing debt, auto debt, state and municipal debt will matter when some kind of event that causes confidence to b lost-a disasterious terriorist attack for example, well then the preppers I guess will b prepared to take care of themselves.
The Italian Constitutional Referendum scheduled for Dec. 4 is going to be real interesting. It could be the next Eurexit domino to fall, which will pretty much guarantee the demise of the ECM.
Actually – I hope the referendum succeeds!
Under the new rules, if the five star movement wins the next election – quite likely IMO – there will be a referendum on Italy leaving the Eurozone
The bigger issue with all the stock buybacks over the past decade is all the debt that was incurred to accomplish them. If a recession lowers revenues and profits, or the dollar goes up and revenues/profits decline, many “blue chip” companies will be in trouble. Also watch out for interest rates going up, bond values going down, and companies declaring huge but phantom “earnings” based on the bond value decline.