Buybacks and Tradebots

September 16, 2014

25

Buybacks and Tradebots

Courtesy of Joshua M Brown, The Reformed Broker

Is anyone trading? Not really. Except HFT players and corporate CFOs executing the buybacks that generate their compensation packages.

You got a 7%+ gain in the S&P this year on basically nothing and for no reason other than float-shrink initiatives that have zero to do with fundamentals. For every Disney, a company that is truly killing it right now, there are a dozen stagnant names masking slowing growth with a smaller overall pie to spread profits across.

If IBM and McDonalds were trading on the actual condition of their respective businesses, the Dow would be 500 to 1000 points lower.

But they’re not, and this is why short-term price predictions based on fundamental research are moronic, generally speaking. Because this is not at all unusual. Distortions based on non-fundamental factors are a permanent feature of both bull and bear markets. 1 +1 doesn’t equal 2 in the short run.

Back to Buybackpalooza…

Wall Street Journal (emphasis mine):

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.

The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of nonelectronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market,involved companies buying back shares.

According to Barclays, companies in the second quarter spent 31% of their cash flow on buybacks, the most since 2008 and up from 14% at the end of 2009. At the end of the second quarter, nonfinancial companies in the S&P 500 index held $1.35 trillion of cash, down from a record of $1.41 trillion at the end of last year, according to FactSet.

LOL.

If no one’s involved with the market directly – apart from buybacks and tradebots – then theoretically whatever sell-off may come should do very little damage to the real economy.