Don’t worry, you can always lean on the price-insensitive corporate bid.
For years, share repurchases have been the main source of demand for U.S. equities, as corporate management teams took advantage of artificially suppressed borrowing costs to lever up and plow the proceeds from new debt into EPS-inflating buybacks.
Never forget the following chart from Goldman (and they update this pretty regularly) that shows you just how much the market depends on buybacks:
Of course this works out great for management’s equity-linked compensation – funny how that works.
Is financial engineering a solid foundation on which to build a sustainable business model? Why fuck, no. And does it say anything about the extent to which the equity rally is built on a solid foundation when it rests so heavily on an indiscriminate bid that by definition doesn’t contribute to price discovery? Well if it does say something about the rally’s foundation, it doesn’t say anything good.
Anyway, you’ll recall that that during the week when the bottom fell out for stocks earlier this month, Goldman’s buyback desk was jumpin’ off the hinges (so to speak).
“The Desk observed that Monday’s notional value of repurchases on behalf of corporate clients surged to the highest level since the correction in August 2015,” the bank’s David Kostin wrote, referencing the Monday when the Dow fell by more than 1,000 points and the VIX ETPs blew up. By the time the week was all said and done, it was apparently a bonanza:
That was notable as it came amid the blackout period for share repurchases, suggesting that if the bid was that voracious when management was constrained, things might pick up even further once the blackout periods rolled off.
Well that’s what’s happening according to Canaccord. Here’s Bloomberg’s Luke Kawa:
Canaccord Genuity asset strategist Brian Reynolds, who tracks repurchasing plans among companies in the S&P 500 Index, notes that the firm’s “buyback authorization chart has gone nearly vertical this month.” Such a move suggests that American businesses are more ready than ever to step in and cauterize any market wounds.
So if you’re selling, corporate management is buying – probably with money you loaned them on the cheap. How fun is that?
You should note that some folks attribute the viability of the short vol. trade to buybacks. After all, it helps to have a source of price indiscriminate demand for risk when you’re short vol.
But as we learned earlier this month, management can’t save you from yourself when you panic and decide to immediately sell some $30 billion out of the $40 billion you plowed into U.S. equity funds during the previous month via your brand new E*Trade account.
Incidentally, never forget the following from SocGen’s Andrew Lapthorne when you think about all of the above:
As we have long pointed out, the reason for [the] increase in debt is largely down to financial engineering – aka share buybacks. Borrowing money to buy back your elevated shares is clearly nonsense.