Tuesday, May 27, 2014

Here Is The Mystery, And Completely Indiscriminate, Buyer Of Stocks In The First Quarter

With the Fed having tapered its liquidity injections into the stock market from $85 billion to "only" $45 billion per month, retail investors getting burned by the recent high beta and momentum stock flame out and "greatly unrotating" into the renewed safety of bonds, not to mention a churning market that until last week was unchanged for the year, and hedge funds ever shorter into this latest ramp, many are asking themselves: who is buying?
Here is the answer.
According to the most recent CapitalIQ data, the single biggest buyer of stocks in the first quarter were none other than the companies of the S&P500 itself,which cumulatively repurchased a whopping $160 billion of their own stock in the first quarter!
Should the Q1 pace of buybacks persist into Q2 which has just one month left before it too enters the history books, the LTM period as of June 30, 2014 will be the greatest annual buyback tally in market history.
And now for the twist.
Unlike traditional investors who at least pretend to try to buy low and sell high, companies, who are simply buying back their own stock to reduce their outstanding stock float, have virtually zero cost considerations: if the corner office knows sales and Net Income (not EPS) will be weak in the quarter, they will tell their favorite broker to purchase $X billion of their shares with no regard for price: the only prerogative is to reduce the amount of shares outstanding and make the S in EPS lower, thus boosting the overall fraction in order to beat estimates for one more quarter.
Compounding this indiscriminate buying frenzy is that ever more companies (coughaaplecough... and IBM of course) are forced to issue debt in order to fund their repurchases. So since the cash flow statement merely acts as a pass-through vehicle and under ZIRP companies with Crap balance sheets are in fact rewarded (as even Bloomberg noted earlier) the actual risk of the company mispricing its stock buyback entry point is borne by the bond buyer who in chasing yield (with other people's money) serves as the funding source for these buybacks.
In short, corporate CEOs and CFOs couldn't care less if your friendly Wall Street broker uses the repurchase allocation to buyback the stock at all time highs.
In fact, since a vast majority of executive compensation agreements are tied to company stock "performance" C-suites are perversely happy if their own corporate cash is used to buy the stock near or at all time highs: after all management year end bonus will simply benefit that much more, while keeping activist investors delighted (and away from the embarrassing public spotlight).
So the next time someone asks who keeps on buying stock despite all the negative newsflow, despite the bond yield sliding ever lower despite relentless broken-record pleas that a "recovery is just around the corner", and with vol near all time lows confirming peak complacency... now you know.
* * *
Want more data? Here is buyback activity by year. While the 2007 S&P500 buyback record of just over $560 billion is safe for a few more weeks, should companies buyback as much stock in Q2 as they did in Q1 2014, then the Q2 2014 LTM buyback total will rise an all time high:

Don't forget: there is no such thing as a free lunch, bought with stock buybacks or otherwise. Contrary to all the lies you may have heard, corporate debt - both total and net - is now at an all time high!

Finally, these are the companies that are the most aggressive repurchasers of their own stock, or said otherwise, the companies that have no organic use for the cash and have zero ideas how to grow their top and bottom line or what capital projects to invest their excess capital, they only have stock buybacks as an option to give the impression of "growth."
Source: CapIQ
Your rating: None Average: 5 (51 votes)
Tue, 05/27/2014 - 14:23 | 4799049DoChenRollingBearing
DoChenRollingBearing's picture
Well, that explains that, I guess.  I'm just hanging on for the ride, waiting for the time to bail...
Tue, 05/27/2014 - 14:26 | 4799055TheRideNeverEnds
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[spoiler] It never ends [spoiler]
Tue, 05/27/2014 - 14:29 | 4799068NoDebt
NoDebt's picture
Must be working.  10 more S&P points today.  Only 40 off of Goldman's NEW 1-year-from-now target number.  If we hit 1950 by next week who wants to be me they won't raise the target again?
Tue, 05/27/2014 - 14:34 | 4799078eclectic syncretist
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It worked in Japan in the late 1980's and in the US in the late 1990's too, all they way up until it didn't work any more.
Tue, 05/27/2014 - 14:51 | 4799122nope-1004
nope-1004's picture
So.... is the "money on the sidelines" meme a thing of the past now?  Like "green chutes"?  That didn't take long.

Tue, 05/27/2014 - 14:51 |4799126Pladizow
Pladizow's picture
Soon....very soon....Skynet will own all.
Tue, 05/27/2014 - 14:57 |4799151dontgoforit
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Isn't this like Green Giant buying it's own corn?
Tue, 05/27/2014 - 16:24 |4799405Ham-bone
Ham-bone's picture
Ok - crazy stuff...since '09, the the difference between the budget and trade deficits has very closely correlated w/ the "foreign Treasury demand"...which is to say as their was less excess dollars to be recycled by Foreigners into Treasury's, "foreigners" somehow increased their buying to soak up the excess debt  and @ progressively lower rates.  See (in bold) Foreign Treasury yoy increase in demand on left and  (in bold) Treasury debt yoy in excess of trade deficit on right...
This is in stark contrast w/ pre-crisis...
Is this the most blatant evidence the Fed is truly running a shadow QE through "foreign" locations???  If not, please explain...
Data Below....
Yr. - Foreign - Fed (y o y) = total /   Bud  /   Trade  / GDP / (Fed action)
        T buy       T buy                    Deficit / Deficit
     $6.1 T      $2.4 T (total holdings as of '13)
14. $250 B   $300 B   = $550 B / $-150  (-550) (-400) (-0.5%) est.
13.  $219 B    $542 B   = $760 B /$-205  (-680) (-475)  (1.9%) + tax hike (QE3)
12. $619       $21   = $640 / $-565  (-1100) (-535) (2.8%) (Twist)
11. $733      642   = $1375 / $-742  (-1299) (-557) (1.8%) (QE2)
10. $631      $245   = $876 / $-795  (-1294) (-499) (2.5%)
09. $672      $301   = $973 / $-1029  (-1413) (-384) (-2.8%) + tax reduction (QE1)
Post Crisis
08. $1147 $(-265)  = $880 / $243 B (-459) (-702)   (-0.3%) (FFR 0%) + TARP
07. $279    $(-39)   = $240 / $539 B (-161) (-700)   (1.8%)
06. $75         $35    = $105 / $504 B (-248)  (-752)  (2.7%)  (FFR 6.75%) 
Tue, 05/27/2014 - 16:26 | 4799483dontgoforit
dontgoforit's picture
Ahso!  They are actually increasing QE while lying about it?  Hang the bastards!  They are taking the world to the precipice of destruction.
Tue, 05/27/2014 - 16:35 | 4799519Bay of Pigs
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You know the William Dudley is getting this all done via the BIS. All Central Banks are involved.
Tue, 05/27/2014 - 18:41 |4799896El Oregonian
El Oregonian's picture
This must be the prelude to the guy who held his breath going through a tunnel but failed to reach the otherside before he passed out and caused a 3-car accident in the tunnel.
The banksters are holding their collective breath.
Tue, 05/27/2014 - 16:37 | 4799526SafelyGraze
SafelyGraze's picture
buying back your stock is like drinking your pee
sure, it may seem creepy to other people
but in the desert you gotta do what you gotta do
don't forget your stillsuit 
Tue, 05/27/2014 - 16:44 |4799564ATM
ATM's picture
No it isn't. If a company can borrow money for nothing why wouldn't it buy back almost all it's stock? Hell, they should all be going private! 
That's not creepy. That plain old good sense in the world of insane centralized planning.
Tue, 05/27/2014 - 17:46 |4799748nope-1004
nope-1004's picture

"why wouldn't it buy back almost all it's stock?"
Because buying inflated phantom assets is risky, especially since the only evaluator (elevator) is (has been since 2000) the Fed.
If you rob Peter to pay Paul, who does Paul sell to?

Tue, 05/27/2014 - 18:18 |4799839Budd aka Sidewinder
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Tue, 05/27/2014 - 19:50 |4800090free_lunch
free_lunch's picture
But.. but.. "I can't eat an iPad".
Tue, 05/27/2014 - 16:58 | 4799539Ham-bone
Ham-bone's picture
in '13 - the US generated $205 B more in debt than trade deficit to be recycled to buy it...but magically the "foreign" demand increased by $219 B to buy up that debt
in '12 - $565 B more in debt than trade deficit...and magically "foreign" demand increased $619 B
in '11 - $742 B more in debt than trade deficit vs. $733 new "foreign" demand
'10 - $795 B vs. $631
quite a coincidence that "foreigners" would want to recycle more net dollars than the US is creating via it's trade deficit...and funny they'd want to do it at ever lower yields...and despite global trade being done progressively lless in dollars...
Tue, 05/27/2014 - 17:06 |4799636buyingsterling
buyingsterling's picture
I'd love to bookmark the original source if you can post it.
Tue, 05/27/2014 - 16:54 | 4799596SAT 800
SAT 800's picture
Look behind you, the precipice is that end of the road there hanging out in space about fifty yards back.
Tue, 05/27/2014 - 18:10 |4799810OldPhart
Tue, 05/27/2014 - 18:01 | 4799790free_lunch
free_lunch's picture
Not destructing, more like buying the world.. Keep the profits in the family kind-a-thing?
Tue, 05/27/2014 - 16:34 | 4799513gdpetti
gdpetti's picture
That's what the currency swaps were for and continue so today... said to be over 30 trillion years ago, who knows about today... James Rickards was talking about this the other day. It seems the EU is fronting for the Fed these days, thus the whole Belgium scenario.
Tue, 05/27/2014 - 17:19 | 4799621Ham-bone
Ham-bone's picture
you mean this...
GLOBAL BANKING CENTERS (treasury holdings)
  • ————- Jan ’00—> ’07 ——> Mar ’14
  • “Carribean banking centers”
  • —————$35 B —> $68 B -—> $312 B
  • UK — ——-$50 B —> $100 B —> $176 B
  • Switzerland $18 B —> $34 B —-> $176 B
  • HK ———– $39 B —> $52 B —> $156 B
  • Singapore —$30 B —> $30 B —–> $91 B
  • Ireland ———$5 B -—> $19 B —> $113 B
  • Belgium ——$28 B ––> $13 B —> $381 B
  • Luxemburg —-$5 B ––> $60 B —> $145 B
  • TOTAL —– $210 B –> $376 B —> $1,550 T (410% increase from ’07)
In the same period ('07-'14), Japan and China (combined) increased their Treasury holdings by net $1.4 T on a trade surplus w/ the US of $3 T over the period...Amazingly these banking nations similarly had a $1.2 T increase w/ relatively no trade surplus w/ the US???  Hello Treasury demand well in excess of trade deficits!!!
Tue, 05/27/2014 - 17:25 |4799703Tinky
Tinky's picture
Keep hammering this home, Ham! It won't be too long before sober economic pundits point it out after doing forensic accounting in the wake of the impending crash.
Tue, 05/27/2014 - 19:44 |4800071free_lunch
free_lunch's picture
Seems half the west has it's eggs in the US basket..

"And we would all go down together":http://www.youtube.com/watch?v=qKFEfR_Q16I
Tue, 05/27/2014 - 14:56 | 4799147Headbanger
Headbanger's picture
This means there is virtually no market participation of buyers but only a few CFOs propping up the """market""" now.
Me thinks their primary motivation is to reduce the number of shares outstanding to boost EPS maybe in seeing the economy falling fast.

Tue, 05/27/2014 - 15:31 |4799302TheReplacement
TheReplacement's picture
Dear So-n-So CEO person,
The NSA informs us that you have been looking at naughty pictures of little kids.  Well, even if you haven't been, the pictures are on your computer now.  Let's just keep this between us.  Nobody, not you, me, your company, nor our country needs this scandal now. 
So if you know what is good for you, you will take the the money we are offering to loan you and buy back your company's stock.  Just think, if you do a good enough job your EPS will look great and you'll get a big fat bonus.
PS - Don't leave town.
Tue, 05/27/2014 - 15:00 | 4799160t0mmyBerg
t0mmyBerg's picture
This meme has been building for awhile.  I wrote to my guys a few months ago about buybacks as the ultimate reason stocks are at all time highs.  And why not?  If your borrowing costs are close to 0, then you can keep the bonuses flowing by borrowing and reducing the float.  You get rich for essentially doing nothing of any value at all.  Thanks Fed!  So when does it end?  When there is actually a cost to borrowing money (you mean money has a time value? What?).  When will that happen?  If you believe the talking heads, any day now.  Realistically, it may be quite a while.  Although Kyle Bass seems to think that the Fed will THINK their econ forecasts are spot on (they aren't) and raise rates just as the nex recession starts.  Nice work if you can get it.  What a fucking bunch of brass asshats.
Tue, 05/27/2014 - 15:26 |4799270Jstanley011
Jstanley011's picture
So, you're saying that artificially holding down interest rates wasn't such a good idea after all? Whooda thunk?...
Tue, 05/27/2014 - 16:14 |4799449SAT 800
SAT 800's picture
just think of it as a new wonder medication; that has a few "side effects".
Tue, 05/27/2014 - 14:37 | 4799083ArkansasAngie
ArkansasAngie's picture
I'm guessing they don't mind being front run either?  
Tue, 05/27/2014 - 14:27 | 4799060Badabing
Badabing's picture
i just pulled $100 out of my left pocket and put it into my right!
easy money
Tue, 05/27/2014 - 14:28 | 4799066LawsofPhysics
LawsofPhysics's picture
What's your fee?
Tue, 05/27/2014 - 14:58 | 4799130nope-1004
nope-1004's picture
New accounting rules stipulate he can mark to mystery, so really he took out $100 and gave the right hand $50, losing $50.  The Fed will cover the loss of $50, PLUS he gets a bonus at year end for "having 100% return on his capital".  lmfao...  and prolly zero days of trading losses.

Tue, 05/27/2014 - 14:29 | 4799069Dr. Richard Head
Dr. Richard Head's picture
You are now qualified to be a Professor at an Ivy League School!!!  Congratulations are in order.
Tue, 05/27/2014 - 14:36 | 4799082Pool Shark
Pool Shark's picture

Ivy League Professor???!!!
Hell, Krugman got a Nobel Prize utilizing that same logic...

Tue, 05/27/2014 - 14:42 | 4799102machineh
machineh's picture
Logic? He found it enclosed as a bonus, in an order of shrimp tacos.
Tue, 05/27/2014 - 14:58 |4799157dontgoforit
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Obama got a Nobel prize for...being born?
Tue, 05/27/2014 - 15:24 |4799264RealityCheque
RealityCheque's picture
No he got it for killing brown people in other countries.
Tue, 05/27/2014 - 17:01 |4799613SameAsItEverWas
SameAsItEverWas's picture
Obama got a Nobel prize for...being born?
Born in Kenya like his father was, per his Harvard Law Review bio?
We need a Canuck in the WH.  Ted Cruz in 2016!
Tue, 05/27/2014 - 14:55 | 4799124Chupacabra-322
Chupacabra-322's picture
Bilderburg attendee:
USA Feldstein, Martin S. Professor of Economics, Harvard University;
USA Summers, Lawrence H. Charles W. Eliot University Professor, Harvard University
Tue, 05/27/2014 - 16:13 | 4799445SAT 800
SAT 800's picture
But do they go to the same Synagogue?
Tue, 05/27/2014 - 16:36 | 4799521Kirk2NCC1701
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Moral:  You many not be able to pick your parents, but youcan choose where to study or worship, if getting to the Top matters to you.
Tue, 05/27/2014 - 15:19 | 4799241valley chick
valley chick's picture
Even this valley chick gets it.  Who needs a stinking degree nowadays!:-) 
Tue, 05/27/2014 - 15:44 | 4799349Miffed Microbio...
Miffed Microbiologist's picture
Even a microbiologist does too. Unfortunately, getting it in this case doesn't mean you can do any damn thing about it which frustrates the hell out of me at times. How long this scenario can be propelled by fumes is a never ending source of personal contemplation. Sometimes I feel like Bill Murray in Groundhog Day.
Tue, 05/27/2014 - 16:12 | 4799442SAT 800
SAT 800's picture
NO; as you were transferring the money, members of the public saw you doing it, and decided you must be a successful business man, so they offered to invest their money with you; and after you gave them little pieces of paper saying they had invested with you, you put $127, in your right hand pocket. The suckers provide Beta on t he actual.
Tue, 05/27/2014 - 14:27 | 4799064LawsofPhysics
LawsofPhysics's picture
Leverage is "free", so why not?  I wonder what happens should they decide to sell?  If these stocks go "bidless" what happens?
Tue, 05/27/2014 - 14:32 | 4799077NotApplicable
NotApplicable's picture
Wake up Kevin Henry?
Tue, 05/27/2014 - 15:33 | 4799310ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture
OH!  OH!!!  I KNOW!

They change the rules?

No comments:

Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.