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The Buyback Beat Goes on
, Harder Than Ever


The S&P 500 is being held up by corporations' willingness to repurchase stock at a breakneck pace.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

I updated the Flow of Funds data in and out of stocks from the Fed's newest data release.

The latest series is from of 6/5/14 and covers through Q1 of 2014. Please note that the Fed makes significant historical revisions to these data every quarter. In addition, quarterly data is seasonally adjusted and annualized. 

The latest numbers show that between 2007 and Q1 2014, in the aggregate, Households, Hedge Funds, Private Pensions, State & Local Gov., Broker/Dealers, P&C/Life Ins. Companies, and Mutual Funds/Closed-End Funds and ETFs, were net sellers of stocks to the tune of $687B.  

On the other side of the ledger, Non-Financial Corp. Businesses were net buyers of $3.16 trillion of their own stocks though share repurchases. 

Click to enlarge

So, if you wonder why and how stocks keep going up despite flat revenue growth, higher PEs, a lousy economy, Ebola, Obama, Ukraine, another EU recession, China, the risk of soaring interest rates, the warning flag of plunging interest rates, a $4.3 trillion Fed balance sheet, high-margin balances, falling high-yield bond ETFs, and whatever other worry du jour is conjured up -- there is your answer.

If companies have the money to buy back their own stocks, they will. They could not care less about any of the above problems. Their sources of funds are in part cash flows, but overwhelmingly consist of sales of corporate bonds to pension funds, insurance companies, and other large bond buyers, all of which are desperate for yield. 

As long as the bond buyers keep showing up (and rising rates would be a good thing because it means higher yields) companies will continue selling bonds to buy back stock, and they will continue to overwhelm all those who sell stocks for whatever reason. The bond buyers will stop showing up only when they run out of money, which by all indications, is not for years (you can track the tone of fresh allocations to debt in Pension & Investment Magazine).

Does it mean that there can't be deep and fast corrections? Of course not.  There have been many of them since 2009, including the one in the summer of 2011 which felt like the end of the world. But as long as the underpinnings of the corporate bond market remain intact, the chances that we will experience another financial meltdown are rather slim, and it sets up the shifts between "buying the dips" and "selling the rips".

Will this "Flows vs. Fundamentals" process ultimately end badly? Absolutely. In fact it will likely be far worse than in 2008, perhaps exponentially so. But it probably won't be until 2017/2018, (if the bond maturities keep getting rolled out, maybe into the next decade) and just as was the case in 2007, the bond market is likely to signal the impending disaster ahead of time. 

So if one wants to short the S&P 500 (SPX) into "the buyback flows" for the next 3-5 years, chances are he/she will be wiped out well before that day of reckoning.

I will never argue that it is sensible or healthy, only that "it is what it is" and the data bears that out.

I'd like to once again think Rosenblatt's Brian Reynolds for teaching me the importance of this stuff through the years, despite my often obstinant macro/fundamental bent. I recommend watching his most recent appearance on CNBC.

For more on this (crazy) financial dynamic - here are more articles I have written on the topic through the last few years, including some suggestions on how to navigate it in shorter time frames:

Corporate Bonds Derivatives and How They Wag The Equity Markets

Alphabet Soup Monsters

Margin Debt Balances: Where Equity, Credit Markets Stand Today

Corporate Bonds, Derivatives, and Stocks: Is Relationship One of Coincidence, Correlation, or Causality?

The Pundits are Wrong - the Bull Market is Not Over Yet 4/14/2014

Twitter: @FZucchi

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No positions in stocks mentioned.
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