After 9 years of artificial liquidity drenching markets the same game continues in 2018: It’s raining money. Again. Still.
Last week we saw the standard script of the last 9 years unfold: Dovish talk by central bankers and artificial liquidity taking over markets. The latest avalanche of free money entering markets are of course buybacks courtesy of tax cuts which now are expected to reach $650B in 2018 announcements coming to $50B a month.
In many cases companies don’t know what to do with all that free cash, but to buy back their own shares. Warren Buffet pretty much spelled it out this weekend and today:
“A large portion of our gain did not come from anything we accomplished at Berkshire,” Buffett wrote.
The firm’s most recent annual letter revealed the investment conglomerate’s net worth surged $65 billion in 2017, with $29 billion of that stemming from tax proceeds. That gain was realized in December, after the passage of the tax plan.
So he has a problem, knowing that stocks are expensive he’s having a hard time investing the cash so he’s opening the door to buy back his own shares over issuing more dividends. None of this creates jobs, jobs, jobs of course, but is a refection of the absurdity of the ill devised tax cuts that will continue to expand wealth inequality but will continue to produce a bid underneath markets until the bitter end.
Lest also not forget that the ECB keeps running QE at 30B Euro a month and overnight the BOJ’s Kuroda announced persistent monetary easing is needed while China injected 150b yuan in overnight liquidity as well and voila a sea of global green:
This has been the standard script over the past few years and no change to the program so far.
All the while retail keeps loading up leverage with over $642B in margin debt:
Retail money quote: “I was so bullish that I went all in,” said Mr. Diaz. he deposited $2,500 into his account to satisfy a margin call on Feb. 8″
Sounds prudent.
Right.
Cue record deficits for a non recession environment coming and you have the perfect recipe for a free money shower:
So party on while yields are retreating off of last week’s highs of 2.95% with the dollar dropping again. That is the correlation game in play right now.
Markets showed last week that higher yields are not necessarily good for stocks despite all the public meme to the contrary. Even Goldman came out and suggested a 25% drop in markets coming if the 10 year gets to 4.5%. Nobody can know the real trigger point, but the debt/interest equation is pretty obvious and hence all this remains a concerning construct:
The cost of carry has already been rising significantly with the prime rate barely above the 2004 lows.
But hey, free money everywhere, consequence free. Or it is?
Know that accelerating buybacks are not necessarily indicative of positive future returns. After all we last saw an acceleration of buybacks right into the financial crisis:
All this reminds me of an old saying of mine: Just because they’re buying doesn’t mean they know what they’re doing.
But for now it’s raining money.
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Categories: Test 1
1) Stock buybacks basically track the market, rising and falling accordingly. I doubt the stock buyback projections for 2018 will come to pass. Lower share prices reduce stock buybacks in a positive feedback loop. Also, stock buybacks are largely funded by (cheap, thanks Fed) corp. debt, which is already at extremely high levels and may have peaked (cov. light loans); interest rates are rising as well. Stock buybacks have been largely driving the markets on the way up. The opposite is also true as air pocket develops.
https://twitter.com/hussmanjp/status/964145238469238787
6:31 AM – 15 Feb 2018
Though buybacks are primarily debt-financed, they are also highest at market peaks, and contract sharply at major market troughs. Corporations are still borrowing to buy the dip at peak valuations, within a few percent of extremes associated with prospective 10-12yr market losses
https://twitter.com/jessefelder/status/968134517440569344
6:43 AM – 26 Feb 2018
‘Share buybacks proliferate when the market is rising but evaporate when the market collapses.’ https://latest.13d.com/end-of-the-low-volatility-regime-buybacks-clear-and-present-danger-to-the-markets-4a1f142cfc98 … by @WhatILearnedTW
2) Traders are following the herd, as conditioned by the Fed’s easy $, jawboning, Fed put. It’s still BTFD until it isn’t. Once trader psychology turns, there will be some selling. 🙂
“All this reminds me of an old saying of mine: ‘Just because they’re buying doesn’t mean they know what they’re doing.'” – I agree. It’s FOMO, until it isn’t.
3) The Fed’s QE is (allegedly) turning into QT. The S&P 500 index has been highly correlated w/ the Fed’s balance sheet. If this correlation continues (I think it will), then expect lower share prices.
4) At some point, valuations matter. Stein’s Law: “If something cannot go on forever, it will stop.” – Herbert Stein (1916-1999), Economist
More Fed jawboning the markets (up) today. Pavlovian trader response as per usual. Either the Fed is going to raise (Fed funds) rate, or it’s not. What really matters is long-term rates, which now that the Fed is in QT mode, will be rising due to ginormous Federal debt and deficit spending.
https://www.reuters.com/article/us-usa-fed-bullard/feds-bullard-says-substantially-higher-rates-risk-overly-tight-policy-idUSKCN1GA1UW
Business News
February 26, 2018 / 7:40 AM / Updated 5 hours ago
Fed’s Bullard says ‘substantially’ higher rates risk overly tight policy
Reuters Staff
Mr. Dove’s comments:
“The current federal funds target of between 1.25 and 1.5 percentage points is “within the range” of policy rule recommendations that account for a neutral rate of interest held down by several slow-to-change factors, he said.”
”I have been a little bit concerned that the committee goes too far too fast,“ Bullard said. ”If we are going to do a lot of rate hikes we have to have data that supports that.”
This is Fedspeak for “we’re really scared that pensions and retirees can’t handle even a minor market correction, not to mention we’ll have zero credibility if the markets crash from all of our stimulus.” Savers, pensions and retirees would normally be mostly invested in conservative, safe time deposits, but since the Fed dropped interest rates to near zero on these, they’re forced into the stock markets and other “fluctuating assets”.
“Oh what a tangled web we weave,
When first we practise to deceive!”
Sir Walter Scott, Marmion, Canto vi. Stanza 17.
Scottish author & novelist (1771 – 1832)