There’s Good News On Buybacks! Just Don’t Read The Fine Print…

Now that…

  • the likes of Howard Marks have thrown cold water on the notion that a handful of high-flying tech names can continue to shoulder the lion’s share of the burden when it comes to levitating benchmarks;

…and now that…

  • the central bank “put” has been thrown into question with Jackson Hole fast approaching (recent dovish leans and the incorrigible Kuroda notwithstanding)

… the question is…

  • are all the technical tailwinds that have held up markets for the better part of a decade starting to fade?

Astute market observers are aware that perhaps second only to the central bank liquidity tsunami, the most powerful technical for equities over the past several years as been the corporate bid or, more colloquially, the buyback bonanza.

On that score, bulls will be happy to know that although management seems to be becoming more opportunistic on buybacks (i.e. they are becoming less indiscriminate in their propensity to repurchase shares at elevated levels), “companies have reiterated a desire to return capital to shareholders,” Deutsche writes, in a new note.

Buybacks1

Of course some of the newfound zeal for repurchase announcements is the direct result of CCAR:

Buybacks2

If you are determined to be bullish, you can stop reading here. Below is the fine print and as is usually the case, the fine print is never good news.

First, consider this when you think about the financials:

curve

And if the specs are right (and assuming we can take the positioning at face value, which we probably can’t, but let’s leave that for another discussion), that’s going to get materially worse:

Postioning

Second, and more importantly, the buyback bid has been driven by the central-bank-inspired hunt for yield which has created voracious demand for corporate issuance and incentivized management teams to employ financial engineering:

Buybacks

(SocGen)

Which raises this question: what happens when central banks are no longer facilitating this dynamic?

Really though, we needn’t think too hard about this. Because at the end of the day, it all comes down to what SocGen’s Andrew Lapthorne said months ago:

Borrowing money to buy back your elevated shares is clearly nonsense.

Yes, “clearly”.

******

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