$165 billion of stock this quarter, translates into $660 billion per year. That's a boatload of money and enough to drive the market higher unless retail investors call it a day and bail out.
Well, guess what? It looks like retail investors are calling it "quits" and cashing in. Here's the scoop:
"Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent...While past deviations haven't spelled doom for equities, the impact has rarely been as stark as in the last two months, when American shares lurched to the worst start to a year on record as companies stepped away from the market while reporting earnings. Those results raise another question about the sustainability of repurchases, as profits declined for a third straight quarter, the longest streak in six years." (Bloomberg)
So even though US corporations are allegedly flush with cash, "other trading clients have been net sellers, with hedge funds leading the pack, dumping $3.5 billion."
"'Corporate buybacks are the sole demand for corporate equities in this market,' David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said in a Feb. 23 Bloomberg Television interview." (Bloomberg)
"The sole demand"? You mean the only one buying stocks is the companies buying their own lousy shares?
Indeed, and here's something else that's worth considering: "In a market where everyone else is selling, the ebb and flow of corporate actions have amplified volatility. The S&P 500 slumped 11 percent in the first six weeks of the year before staging a rebound that has since trimmed the drop to about 1 percent."
So, there you have it. The reason stocks have been bouncing around like crazy is because investors are bailing out while corporations are loading up. Those competing forces have triggered unprecedented volatility that will probably intensify as uncertainty grows.
Obviously, CEOs believe they can force the market higher by issuing more debt and buying more shares, (Otherwise, they wouldn't have spent another $165 billion this quarter) but retail investors are not as sanguine.
Why?
Two reasons:
1--Because the Fed is indicating that it wants to hike rates.
2--Because "profits are poised for a fourth quarter of declines."
Profits and rates. Rates and profits. That's what drives the markets, not China, not emerging markets, not oil, not demand, not employment, not anything. Money and the price of money, that's it.
Bottom line: "During the last two decades, there have been two times when earnings contractions lasted longer than now. Both led companies to slash buybacks, with the peak-to-trough drop reaching an average 62 percent." (Bloomberg)
So it doesn't matter how determined these greedy CEOs are to manipulate their stock prices higher. When profits fall, stocks follow. End of story.
One last thing: Negative rates (the likes of which Draghi increased on Thursday) are a real headache for the banks who end up having to pay a small fee on excess reserves (that they can't pass on to their customers). What most people don't know, however, is that Draghi's new targeted lending program, known as TLTRO II, is going to provide another 700 billion of four-year funding to back up their loans to companies and consumers. According to the Wall Street Journal:
"At most this will cost banks nothing. But if they have grown lending by 2.5% by the end of January 2018, the interest rate they pay could drop to the ECB's deposit rate at the time the funding was taken. That was cut to minus 0.4% on Thursday...
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