Good news. Stock buybacks are not propping up the entire stock market.
For months now we have been told by various media outlets and the BSHS (Black Swan Hunter Society) that one of the very few reasons left to “prop up” the stock market is stock buybacks.
It’s as if the masses have bought into the idea that stock prices would collapse to zero if there were no buybacks. But would that be at all rational? No, and there’s a logical explanation for why this is currently wrong.
Corporations are buying back shares because their profits are near record levels, and their resulting cash flows are high.
Equity prices are high because future profit expectations are accordingly high.
On the contrary, as a percentage of total profits, buybacks are a long distance from the territory we saw before the Great Financial Crisis. The charts below show two perspectives of measuring same: one as a percentage of total liquid assets and one as a percentage of profits.
Note where we are now compared to where we were at the beginning of this century. – and consider this: Were we being told then that the only reason the market was not zero was because of stock buybacks?
Wrong Measuring Stick?
As we all know by now, we are being inundated by “lackluster” economic reports. I find that rather comical given the data being overlooked. For example, if all was so terrible why are jobs looking much better and unemployment claims stats so low?
Further – a little review might be necessary using simple math. When I started in this business in 1982, a 4% GDP growth rate meant about $240B in new economic output each year. Today, a 2% GDP growth rate means about $350B in new economic output each year. The fuss?
Blame the law of large numbers.
But also ask yourself how much of today’s economy, production channels, industry and output can be measured using the same tools and process for measurement we used in the 50’s and 60’s.
I mean if you went to your doctor for a brain scan and he rolled out a machine from the 60’s to do it – what would you say?
Slow for longer is not a bad deal. Steady as she goes is boring but it works as we await the real upside surprises dead ahead from the powerhouse demographic shift too many are overlooking – or ignoring.
Sure–I get it, “we threw all that money at the problem and have nothing to show for it?” That’s the mantra of those who have missed the 10,000 point rally since 2009. For the rest of us – maybe a better view is required again.
“All that money” did two things:
a) it slowly brought confidence back into a nearly frozen system, allowing some trust to seep back in as well. Think of being on the operating table with IV’s on a slow drip and a machine keeping your heart beating. Are you going to pretend you are not really alive when you recover just because something else helped you come back?
b) it ended up in the bank as covered last week in your notes. The $4 Trillion added to already bloated bank accounts that you see on this chart below from 2009 levels has an uncanny resemblance to the amount of money “thrown at the system” in QE programs.
Alas, the world’s central bankers are puzzled that their ultra-easy monetary policies since the financial crisis of 2008 haven’t stimulated more global economic growth.
Early this month, IMF Managing Director Christine Lagarde worried out loud about this problem and dubbed it the “new mediocre.” One week later, her staff issued the IMF’s latest World Economic Outlook titled “Too Slow for Too Long.”
We might want to agree it could be better – as long as we don’t move toward a too-slow scenario. Keep in mind, there was some good news in the latest retail sales report. February’s preliminary number was revised up from -0.1% to 0.0%, and the Q1 average rose 4.9% (q/q, saar) adjusted for inflation.
I suspect in time we will find retail sales were interrupted by the “worst start to the year in 80 years” stories that were blaring from every media outlet at the time about the stock market.
The latest data from manufacturing managed to eke out a 0.6% gain during the quarter. Dr. Ed tells us that is “consistent with the M-PMI, which rose last month to 51.8, the first reading above 50.0 since last August.”
The Citigroup Economic Surprise Index rebounded from the recent low of -55.7% on February 5 to a reading of -12.2% on Friday.
Mind you, Citi also just released a report suggesting they are downgrading GDP growth to just 1.7 percent this year – or $306B of new economic output.
Not bad really. If we don’t get lost in all the noise, between us and China, we add the rough equivalent of two Greece economies to the globe in the next 12 months alone.
Any Good News?
The latest batch of economic indicators should continue to curb the Fed’s enthusiasm for proceeding with monetary normalization. The manufacturing sector hasn’t fully recovered from the oil price shock, which depressed demand for capital equipment by energy producers.
In addition, while the trade-weighted dollar may have peaked earlier this year, it is still 17% higher than it was in mid-2014. So it is continuing to weigh on US exports, as is the slow pace of global economic growth. Auto production edged down during March.
Of course, if they don’t raise rates, a whole new flock of Black Swans will be discussed.
The Tough Trade
As tough as this is to swallow – much like it was in the late 70’s/early ’80 time period – explosive growth is smoldering under the surface.
Industry is shifting – energy was just the first signal.
Generation Y is slowly taking the reins and will surprise most as their synergies begin to mix with many industries.
We will cover more on the quarterly review call this week.
Until then, imagine for a moment you were investing back at the last demographic shift of this magnitude. Imagine further that you became equally concerned with all the near-term economic mess present in the late 70’s and early 80’s.
Lastly imagine how foolish it would appear now if you had thought then,
“I am not going to invest at DOW 1400 because it has never been this high before…and the future looks dark.”
Yes, I agree – it is very uncomfortable given all the terrible indications out there flashing in front of our eyes. But history tells us this is how major shifts are hidden from the naked eye.
They tend to only become “clear” much later – at surprisingly higher stock price levels.