* 10 Facts that May Rock Your World: Has the Last Year Been an Artificially Driven Stock Rally?

Tweet

Note the original publish date: Wednesday, June 25, 2014

This is a short note with a bunch of data simply to inform. I will try to stick to facts only (when my opinion creeps in, I'll note it).

Inspired by two articles from Zero Hedge (below), an article from The Fiscal Times (also below) and a Factset research publication (cited in the body):
--------------

1. The Most Stunning Chart From Oracle's Earnings Report
2. Here Is The Mystery, And Completely Indiscriminate, Buyer Of Stocks In The First Quarter
3. Janet Yellen's Choice: Market Bubbles or More Jobs?

--------------

Conclusion
There are a lot of reasons for the stock market to be substantially higher than the lows of 2008. But there may be just one reason for the market to be higher in the last year... and it may not be sustainable.

On 6-26-2014, I just was shown this article:

Q2 Buyback Announcements on Track to Be Lowest in 7 Quarters.


Fact #1: Stock volume in the S&P 500 has been falling dramatically since 2009.

Provided by Yahoo! Finance

That is a chart of monthly volume. You can get that same data yourself by simply going to Yahoo! Finance, entering symbol ^GSPC (S&P 500), go to historical quotes, and viola... the volume numbers are in the pricing history.

Fact #2: The S&P 500 has been breaking all-time highs basically daily. Here's a chart of the index back to the mid 1980's.

Provided by Charles Schwab optionsXpress

So, yeah, all-time highs.

But, those two pieces of data (charts) are missing the connecting data.  And this is fascinating.

Fact #3: "Aggregate share buybacks grew 50% in Q1 to $154.2 billion, and amounted to the third largest quarterly total since 2005." (Source: Factset)

Fact #4: "The Information Technology sector spent the most on quarterly repurchases ($47.4 billion) in Q1, and also showed the highest year-over-year growth in spending (+175.5%)." (Source: Factset)

Fact #5: Stock Buybacks for firms in the S&P 500 have risen more than 10x since 2009.

Fact #6: The number of companies in the S&P 500 buying back stock are right at a decade high.

Provided by Factset

• The red curve is the S&P 500 (all-time highs)
• The green curve are the number of companies in the S&P 500 buying back stock (all-time highs)
• The blue bars are the $ amount of the buybacks (just below peak levels in to 2007 bubble)

Fact #7:  Since the peak of 2007, the quarterly stock buybacks $ are currently at new highs.


Provided by Zero Hedge

Fact #8: Interest rates are at all-time lows, and some companies are borrowing at artificially ("artificial" is an opinion) low rates to buyback their own stock.

Two huge examples are AAPL and ORCL.  I posted an article centered around ORCL here:
Oracle (ORCL) - Earnings News Isn't the News; But a "Propaganda" Driven Stock Rise Might Be. Did You Know This?

Fact #9: "The increase in buybacks has outpaced free cash inflows for the highest growth sectors." (Source: Factset)

Fact #10: From 2005 - present: "[C]ompanies repurchasing shares actually outperformed both the S&P 500 and those companies that did not make repurchases on an equal-weighted basis. (Source: Factset)

Opinion #1: "Going forward, however, it seems unlikely that aggregate buyback activity will match that of Q1." (Source: Factset)

Conclusion
So we have lower overall and dropping  volume in the SPX, but higher overall and rising volume in stock buybacks.  That means company buybacks are having a significantly greater impact on SPX returns than before.

This is artificial demand (opinion).

We know that companies with buybacks are outperforming the index and all other firms without buybacks.

Companies are borrowing money to buyback stock and in the sectors showing the largest buybacks, the firms are exceeding cash flow to buy stock.

Two things can happen from here:

1. Companies continue to borrow for essentially free and buy more stock.
2. Companies stop buying back more stock.

If rates stay low, buybacks could re-accelerate after the Q2 dip we are about to see... or not...

This is trade analysis, not a recommendation.

Follow @OphirGottlieb

Tweet


Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.