Individual investors flee, while companies go on a buyback spree? That’s the story line of this market, per Bloomberg.
Market Roundup
A few days ago, the news service noted that individual investors have yanked a whopping $140 billion from equity mutual funds and ETFs in the last 12 months.
That’s more than twice the amount of money everyday investors were pulling out of the markets during the worst of the 2007-09 credit crisis and Great Recession. As a matter of fact, individuals have been pulling money out of stock funds consistently for the last eight years, with the exception of one stretch of time between mid-2013 and early 2015.
But companies continue to step into the breach. This just-published Bloomberg piece estimates that S&P 500 companies are on track to buy back $165 billion of their own shares this quarter. That would be the highest in any quarter ever, save for the quarter that coincided with the 2007 stock market peak.
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| Individual investors have been pulling out of the markets, but companies are stepping up corporate buybacks. |
Bottom line: We have never seen a greater gap between the investing behavior of individuals, and the behavior of corporations. Average Joes and Janes want nothing to do with stocks, while powerful CEOs and CFOs can’t get enough of their own shares.
So is that bullish or bearish? Is the ongoing fear and conservatism among smaller investors a contrarian “buy” signal? Or is the over-confidence from Corporate America … and the fact these buybacks are being fueled with massive sales of new debt … a clear “sell” warning?
I’d have to lean toward the latter. It’s not like we’re talking about a month or two of panicky outflows from Main Street. We’re talking about consistent withdrawals lasting for several quarters. I believe inflows from a confident investing public are essential to healthy, long-term bull markets.
| Â “Companies are buying shares hand over fist … and using borrowed money to do it.” |
As for buybacks, it’s not like companies are taking advantage of huge bargains. They’re buying shares hand over fist seven years after the stock market run began, and using borrowed money to do it.
Shouldn’t they put more of that money to actual productive use, by building factories, funding R&D, marketing their products, or even paying workers more? The fact they aren’t doing so tells me they lack confidence in the underlying economy and growth outlook.
What about you? Do you think the divergence between what individuals and corporations are doing with their money is a troublesome sign? Or a bullish indicator for the future? What are you doing personally with your money? Committing more to stocks? Bonds? Cash? Let me know below.
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Before the weekend, I noted the increased volatility we’re seeing in all capital markets and asked for your thoughts on it.
Reader Eric said: “What would you think if your central bank drug dealer said here’s a nice, big hit of money to keep you high for a while — but it is the last you are going to get. If you believe him, you get this last party. But you know withdrawal is coming.”
Reader Carl said: “I suspect that volatility is driven by speed — speed of change, speed of information, speed of trading. The faster the market operates, the larger the swings can become before the reaction. In a slower-paced environment, common sense has time to calm those knee-jerk responses.”
Reader Ken also suggested hair-trigger trading strategies are behind the increasing market chaos: “The volatility is in large part due to hedge and other large funds using computer trading. They are using formulas which are based on momentum and other non-fundamentals. Most small investors such as myself cannot compete.”
On the other hand, Reader Howard believes politics should take some of the blame. His take: “One of the reasons you see confidence building, then collapsing, can be seen in the current campaign shenanigans. The struggle is watching the building of hope over fear by so many ordinary fellow countrymen.
“People are fed up with elitist, rich politicians wanting to dominate and control their lives, promise them stuff, and then leave them disappointed yet again. We are all better than this and can unite for change away from politics to get our country moving again. People want genuine jobs and real hope.”
Thanks for weighing in. I agree with the comments that computerized trading, high-frequency trading, and frequent meddling by central bankers have all combined to create a more-volatile environment. There are ways to capitalize on that if you’re a more aggressive investor, and ways to minimize the impact from it if you’re more conservative.
I’ll continue to share my ideas about how to do so here, as well as more specific tactics and recommendations in my Safe Money Report. In the meantime, feel free to continue the conversation in the discussion section below.
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 China’s Anbang Insurance Group, with a group of investors, is trying to derail the merger of Starwood Hotels & Resorts Worldwide (HOT) and Marriott International (MAR). The Chinese-led group is offering $12.8 billion for HOT, topping the current $12.2 billion offer that’s on the table.
 Speaking of takeovers, specialty grocery chain The Fresh Market (TFM) agreed to sell itself to Apollo Global Management LLC for $1.4 billion, or $28.50 per share. That’s a premium of around 24% to where the stock closed on Friday.
 Turkey suffered another major attack, with a car bomb detonation in the capital of Ankara killing at least 34 and wounding 125. The bombing is the latest in a series of strikes tied to Islamic militants or Kurdish separatists.
 German Chancellor Angela Merkel is facing increased political pressure thanks to rising anti-immigrant sentiment in the heart of Europe. The upstart “Alternative fur Deutschland” party, which runs on an anti-immigration platform, gained significant ground in regional elections over the weekend. Other rightist groups in Europe are fighting against the tide of refugees arriving from the Middle East and Africa, while Merkel is continuing to push an open door/border policy.
Is the M&A wave back again? Or are today’s deals the exception, rather than the new rule? What do you think about the ongoing violence in Turkey? Or the rising tide of anti-immigration sentiment in Europe? Let me hear about it in the discussion section.
Until next time,
Mike Larson
P.S. FINAL NOTICE: Your $2,100 gift expires at midnight tonight! Don’t miss out on your opportunity to enroll in Global Currency Investor!
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Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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what they are doing is LOCO we have to build cash and bonds with some good companies that Pay us Back monthly or quarterly and seat tight expect more False Flags , more QEs and more BS “enemies / wars ” this Titanic is going DOWN …
and Pray for America to Return to GOD and have Christian leaders True ones NOT fake ones
que DIOS los Bendiga a todos uds.
The economy is in life support. At some point in time the FED will have to pull the plug. When that happens, you could imaging the situation. Game over!
Massive stock buybacks funded by borrowed money…think Radio Shack.
Are the buybacks supporting stock prices for massive stock option grants that have been awarded to executives and board members? An undercover way of passing borrowed money to those in control of the company without upsetting the stockholders?
Excellent analysis, JR, and very likely.
Then, there is
— Federal Reserve policy, that currently REWARDS Banks for NOT lending,
for normal business purposes; and
— Administration policy that has discouraged DEMAND for business loans–
except for such abnormal corporate buyback loans.
3-14-16
As baby boomers retire, the wealthiest (i.e. oldest) of the individual investors switch from buying to selling. Companies don’t retire, and see opportunities to buy back under good terms.
That doesn’t explain it all, but it’s one piece of the puzzle for why individuals are withdrawing and companies are buying.
As long as mutual funds hire lobbyists and buy congressional votes–we shall never have transparency in the mutual fund business–hedge funds have become real crap shoots and their managers reap a kings ransom and pay a 15% income tax on their loot. Volumes in daily trading is way down. The buybacks should be distributed to the stakeholders or used to expand business opportunities The elites in the inner circles already reap the worlds largest salaries and perks. They do not need more loot passed in secret to them..
Stock Buybacks are the latest form of M&A gutting from the inside. We will
find less corporations, less jobs, and more GM style taxpayer bailouts. As stock
holders we no longer have any say other than to walk. If Weiss wants a money
maker service, provide us with a list each month of these progressive “Dead” as
with the debt and stock buyback figures. Let us know?
Stock buybacks are RARELY a good idea. These companies need to be saving money and preparing for lean times.
I believe the powers to be have tried everything to keep this market at higher levels. Continuing higher debt doesn’t sustain growth. Market needs to correct to lower levels with reduction of debt a primary consideration.
We moved to the ‘sidelines today.
With Mario’s actions last week, and Janet’s upcoming announcement (no bump), and the markets having priced-in no ‘bump; the unlikely chance of a 25BP bump (and the resulting chaos) isn’t worth the price of admission. I’d rather lose a minuscule tick ‘upward than possibly a major ‘down. We’ll eventually get-back-in, but for now, we’ll just watch this Crazy game from the sidelines. For now, this would be like playing catch with a hand grenade – not my game.
PS: I thought your analysis of corp’s buying in the seventh years of a bull market, with borrowed money, was Brilliant. Thanks.
Aubrey McClendon had a debt strategy typical of many corporate players this cycle. We could be looking at the tip of the iceberg.
The condensed version of the explanation for the year long market flux is that nearly every option in today’s market is bad, hardly anything is good, and nothing significant will change until more people at the grass roots level have more money in their hands to drive true–and lasting–demand…ECON 101
Buy backs delay foreign(china) from taking over more companies plus buy backs by corporate leaders will create more wealth for them when dividends are paid. The small investor has no chance against the computer trading systems the “big” boys are using.
Long term investing no longer exists in this kind of trading for the small investor. Laws don’t work and regulators are watching their “buddies” and will become part of the problem. Since I am retired after 40+ years in the market I will look for more reasonable and predictable investments In start up companies, real estate or precious products.
Why wouldn’t they buy back their stock back? They get loans for 0% interest. Then they buy back their stock which causes it to sell for a lot more than the company is or ever will be worth. Then the CEO and those responsible for the buy back get padded salaries of vulgar amounts of money. The only losers are the buyers of that particular stock that are paying many times what it is actually worth. Enough incentive?
I have to agree with Mike about stock buybacks. Not only do companies buy stocks back with borrowed money, they usually do so at elevated prices. The mere fact of a buyback offer often causes prices to rise, since management may sweeten the offer. Even in a rising market, this could result in a drop in a stock’s price when the offer ends, because of the fall in demand. The smart owner will tender his/her stock, and perhaps repurchase after demand ebbs. If enough repurchase offers end at about the same time, could it push the entire market’s averages down? Just a thought. A buyback might allow a dividend rise though, if enough shares are tendered, of course. Management will make it all look good to justify more pay, bonuses and options to the higher ups, naturally.
That is how CEOs come to get paid hundreds of times what the hoi polloi make.
You are right Chuck. CEOs and CFOs take care of CEOs and CFOs.
Dear Mr. Mike Larson,
You said – “…Companies are buying shares hand over fist … and using borrowed money to do it…â€. You also asked – “…Shouldn’t they put more of that money to actual productive use, by building factories,…”.
Sir, I consider you to be one of the more brilliant investment “Analysis/Advisors” (if I may refer to you as such). However, what you and many other obviously brilliant people SEEM to not realize is this – the socio-economic issues you are observing in the US and world-wide are SYMPTOMS of a decadent world-wide socio-economic system – which has reached a “dead end”, and is now no longer able to generate long-term economic recovery – by economic means alone.
No Government, no political Leader (even Donald Trump – who I respect and admire a lot) is able to permanently fix the economic system in the USA and elsewhere. The likes of Donald Trump just MIGHT be able to TEMPORARILY improve the USA (even for a decade or so). However, a permanent solution to the economic and environmental issues facing the USA and the World begins with a FUNDAMENTAL shift away from the current socio-economic system.
The current world-wide economic system has reached a stage of general over-production. Hence, Capitalists corporations are finding it increasingly difficult to generate profits through growth (expansion) in a World with virtually LIMITED resources and virtually LIMITED markets. General over-production is the root cause for the relentless massive share-buybacks by many large Capitalists corporations (it is not prudent to invest in expansion, if you are having a very hard time selling your product – locally and/or on the international scale).
Again, I genuinely admire/respect Donald Trump (so much so, that several years ago, I even suggest to my Children that Donald Trump is one person that they can work for), and it would be interesting to see for how long and how much he (Trump) just MIGHT get to bring meaningful economic recovery to the USA (as he turns the USA “inwards†– based on a somewhat “Nationalist†policy – which virtually every other country has been (no so subtly) pursuing!!
However, the economic system in the USA and world-wide is ultimately UNSUSTAINABLE, and is “destined” to (eventually) bring about another world-war. The real solution is with a FUNDAMENTALLY new system, and alternative socio-economic system NOT based on production for profits. A NEW system in which, “profits” can only be a SECONDARY end-purpose of production (and probably with the “profit motive” to be eventually done away with altogether. Hopefully, at such time when the Human Race has sufficiently advanced morally and spiritually, to ensure the permanent change needed for the survival of the Human Race).
Thank you for reading.
Three thoughts come to mind:
1.) Where are individual investors putting the money they are taking out of stocks – gold, treasuries, under the mattress, someplace else? Wherever, it is a bearish signal that many have lost faith in the much ballyhooed “recovery”.
2.) Corporate executives have a short time horizon and a conflict of interest. Buybacks, especially when funded with borrowed money, plump-up their stock options at the expense of the corporation’s long term health. Of course, they may be able to activate their golden parachutes before TSHTF. That is why the money is used for buybacks rather than R&D, productivity increasing Cap Ex, etc.
3.) Another bearish factor is the rationalization that buybacks are the best use of the money in the face of dwindling demand (that phony “recovery” again). Why improve productivity when the inventory to sales ratio is already skyrocketing? Yes, there is little demand and growing deflation portending the metamorphosis of the “recovery” into a recession or even the D-word!
Remember, Trump is part of the Boomer generation (70 in June ’16), and one of the few, economically. Do you really think he gives a rat’s behind for you?
Chuck,
OK, I am willing to listen. How would Hillary be a better choice? She has always been a political parasite. Please explain how she will heal the nation and bring prosperity?
Chuck
Who knows what is in another’s heart. What appeals to me about The Donald is he knows how to dig us out of the rat hole we are sinking into. He can see the errors of our political ways and why folks don’t seem to vote much anymore. Trump doesn’t need the money or the office. He is self funded and supported by two former prominent contenders. Is he the best man for the job? I can’t see any, among the remaining politicians who can help us more. Some have good motives but not the experience this country now needs
hasn’t trump file bankruptcy a few times? he claims his worth is 13 billion, but forbes and others say it’s more like 3 billion. may trump claims 13 billion because that about how much he’d have if he just put his 3 billion in an index fund and left there. trump sounds like just the guy we need to bankrupt america like he did his company so americans will finally wake up to what guys like trump are really about.
The central banks are panicked to the extreme. A boj fix is priced in . If it disappoints look out below.
Short. Can’t wail for this mess to blow up.
I remember years back when companies like IBM, Johnson and Johnson, and GE bought back shares of their own stock due to legitimate reasons. IBM had a down quarter and got hammered for no apparent reason, Johnson and Johnson got caught up in a bio-pharmaceutical downturn although they are truly not a bio-pharmaceutical company, and G.E. was caught in a cyclical downturn although they were prospering nicely. Now, companies are buying their own stock to bolster their poor performance, and worst of all their CEO’s will probably take home seven figure bonuses for doing such a poor job and wasting shareholder’s equity. What ever happened to investing in corporate operations or increasing a dividend if they have “extra cash”?
Hi Mike
There is another reason for stock price changes that some may not have considered. During times of thin dividends, why not go for capital gains in choppy markets. If you have some knowledge of specific stocks, then in absence of a reasonable dividends, quick turnover of blue chip stocks will give a return. Of course there are risks.
Get out of the gold market the gold bears are taking over once again. They have suckered us once again leading up to a good run up in the price and then bang the bottom drops out. The shorts beat you every time on gold. Its all a matter of timing.
Stock buy-backs will warp the underlying financial ratio’s; overvaluing the book value per share and portraying higher earnings per share. This all sounds like a ploy to paint a picture of a healthy thriving market when indeed the underlying economic fundamentals are rotting away!! In my books the house of cards are still coming down.
soon every book will be re-written!
to repeat myself “dead things don’t grow” the only possibility for anything to grow again is a farmer called Trump. Let’s hope he takes Florida and Ohio.
Mike thanks for the excellent report.
It is very simple; purely a money game orchestrated by the cartels and Cartels with the support of the Fed. I am surprise with your intelligence and experience in money market you did not visualize what is happening.
The buyback afloat the stock market to give a false healthy impression. The cartels (elites) and Cartels (politicians) cash in using the free for all tax payer money. The CEO, CFO and the concern mafia did a beautiful job and are reworded with a handsome retirement program.
What’s next is waiting for the suckers to come in. Now, these suckers will not be you and me but the foreign cash coming into the market. When the time is ripe (very soon), wala, off the market goes.
So be patient gentlemen, the market is no longer an economic driven market but a political suckers game.
It’s time for all of us to sit back and think for a few moments. All of the basics are still in play, even when common sense seems to be at a premium. This is the time to be in cash and to keep your powder dry.
Also, we have VERY important elections coming up. Whatever you do please VOTE. You will never find a candidate you totally agree with so vote for the one who is closest to what you think. But do vote.
Everything today has high dollar presence but no real value as the dollar on the gold/silver. standard had redeemable value,you can divide by 10 or 20 todays dollar verses 1910 so big numbers no value .The printing press runs and the electronic movement of numbers looks ok but there is no value any more.We follow the losers ideas as history will prove.WILLIAM
Perhaps another reason for the stock buybacks – “Dow to 31,000 in 2017”. Larry Edelson. Now, why wouldn’t you want to buy stock when the market will be nearly doubling in the next year?
Mike Larson – do you agree with Larry about the Dow in 2017? If so, why? If not, why not? Would appreciate your thoughts on this.
They are buying their own stock bec no one else want them. How can this be bullish. It’s like a FED who trade with self.
Mike
These companies continue to earn less revenue, so they buy back their company’s own stock to reduce shares outstanding to increase their EPS & PE
Funny Mike didn’t even mention this. Are you and I the only ones who seem to get this?
Why are corporations buying their own shares?
If they keep sizable amounts of cash in their accounts negative interest rates will cost them huge sums of money.
If they use that cash to buy back their own shares or buy another smaller company that cash cannot be taken by the banks, cannot be taxed by government, will not depreciate in the event that governments overdo the QE thus causing a high inflation rate.
In fact it makes perfect sense to those corporations.
Individuals, in order to protect themselves and their family, must do what’s right for them.
Corporations have to think along the same lines; they have to protect themselves.
Wrong, the only reason for buying back shares is to cancel the shares thereby having less outstanding shares, artificially inflating the EPS and PE. Like Joe said above.
Like Joe said: Joe Tuesday, March 15, 2016 at 12:07 pm
“Mike
These companies continue to earn less revenue, so they buy back their company’s own stock to reduce shares outstanding to increase their EPS & PE.”
This artificially increases the stocks value. Short term bullish, long term bearish. It seems like Joe and I are the only ones who get it!
When politicians have been borrowing from the future economic growth radically for more than 15 years to stimulate a failing economy it can force a lot of foolish maneuvers by CEOs. They are permanent optimists.
you asked what I am doing with the current situation. I live in New Zealand and fear that we are already over that financial cliff but are being kept in the dark.
My policy is to clear the debt on the most lucrative activities and load up the not so good.
Slowing economies, worldwide. Fed’s policies adopted by all CB’s . Goldmansachs has footprint everywhereie, Stock “protection”teams.. Conclusion, stocks will go up in synch (even China has “put” protection) as the monied people want stocks higher as if that is “wealth” and this wealth will pay everybodys pensions to 2030 when the last babyboomer generation “retires”. Or you throw out Clinton/Yellen and put in Trump/Volcker, yes bring him back to bring some sanity and reality.