Morning Report – Buybacks are levitating the market 9/16/14

Markets are lower on no real news. Bonds and MBS are up small. Today starts the FOMC meeting.

Inflation at the wholesale level remains under control, with the Producer Price Index coming in flat for the month of August. Ex food and energy, it was up .1% (or 1.8% annualized). Inflation is still below the Fed’s target.

Wells Fargo conducted a survey about homebuying attitudes, and there are some major misconceptions out there. 30% believe only individuals with high incomes can obtain a mortgage. 64% believe they must have a “very good” credit score to buy a home. 44% believe a 20% down payment is a requirement. People really do not know about FHA lending.

CALPERS (the California Public Employees Retirement System) – the biggest US pension fund, is redeeming its hedge fund investments. High costs and low transparency are the stated reason, but another reason is underperformance. Average public pension gains from hedge funds were 3.6% over the past 3 years, vs 10.6% in stocks and 5.7% from bonds.

What is holding up the stock market these days? Buybacks. Interesting stat: companies in Q2 spent 31% of their cash flow on buybacks. This is having an outsized effect as volumes dry up. In Q2, stock market volume averaged just over 6 billion shares a day, the lowest level in 7 years.

8 Responses

  1. KDW channels his inner Oedipus and manages to tie together Sons of Anarchy, abortion, T.S.Elliot and naked selfies taken in front of kids.

    http://m.nationalreview.com/article/388056/mothers-anarchy-kevin-d-williamson

    R.I.P. Opie.

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    • Brent, if others know that buybacks are pushing the market it seems that they would be wary and skittish about companies that were not buying back.

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  2. “Brent, if others know that buybacks are pushing the market it seems that they would be wary and skittish about companies that were not buying back.”

    Could read a company not buying back stock 2 ways:

    1) Sees good investment opportunities on the horizon so is going to use cash to expand (good)

    2) Doesn’t see good investment opportunities on the horizon but is holding on to cash anyway in case something good pops up (bad)

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  3. Care to venture a guess as to how long the levitating can last?

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  4. “Care to venture a guess as to how long the levitating can last?”

    The market is assigning a 100% probability to the idea that the Fed can raise rates and no one will blow up. Historically, that has been a bad bet (1994, 2000, 2005). Of course everything could go fine, but I don’t think it is a foregone conclusion and I suspect the market will begin to re-calibrate their probabilities as we approach the first rate hike.

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