Here Is The Mystery, And Completely Indiscriminate, Buyer Of Stocks In The First Quarter

Tyler Durden's picture




 

With the Fed having tapered its liquidity injections into the stock market from $85 billion to "only" $45 billion per month, retail investors getting burned by the recent high beta and momentum stock flame out and "greatly unrotating" into the renewed safety of bonds, not to mention a churning market that until last week was unchanged for the year, and hedge funds ever shorter into this latest ramp, many are asking themselves: who is buying?

Here is the answer.

According to the most recent CapitalIQ data, the single biggest buyer of stocks in the first quarter were none other than the companies of the S&P500 itself, which cumulatively repurchased a whopping $160 billion of their own stock in the first quarter!

Should the Q1 pace of buybacks persist into Q2 which has just one month left before it too enters the history books, the LTM period as of June 30, 2014 will be the greatest annual buyback tally in market history.

And now for the twist.

Unlike traditional investors who at least pretend to try to buy low and sell high, companies, who are simply buying back their own stock to reduce their outstanding stock float, have virtually zero cost considerations: if the corner office knows sales and Net Income (not EPS) will be weak in the quarter, they will tell their favorite broker to purchase $X billion of their shares with no regard for price: the only prerogative is to reduce the amount of shares outstanding and make the S in EPS lower, thus boosting the overall fraction in order to beat estimates for one more quarter.

Compounding this indiscriminate buying frenzy is that ever more companies (coughaaplecough... and IBM of course) are forced to issue debt in order to fund their repurchases. So since the cash flow statement merely acts as a pass-through vehicle and under ZIRP companies with Crap balance sheets are in fact rewarded (as even Bloomberg noted earlier) the actual risk of the company mispricing its stock buyback entry point is borne by the bond buyer who in chasing yield (with other people's money) serves as the funding source for these buybacks.

In short, corporate CEOs and CFOs couldn't care less if your friendly Wall Street broker uses the repurchase allocation to buyback the stock at all time highs.

In fact, since a vast majority of executive compensation agreements are tied to company stock "performance" C-suites are perversely happy if their own corporate cash is used to buy the stock near or at all time highs: after all management year end bonus will simply benefit that much more, while keeping activist investors delighted (and away from the embarrassing public spotlight).

So the next time someone asks who keeps on buying stock despite all the negative newsflow, despite the bond yield sliding ever lower despite relentless broken-record pleas that a "recovery is just around the corner", and with vol near all time lows confirming peak complacency... now you know.

* * *

Want more data? Here is buyback activity by year. While the 2007 S&P500 buyback record of just over $560 billion is safe for a few more weeks, should companies buyback as much stock in Q2 as they did in Q1 2014, then the Q2 2014 LTM buyback total will rise an all time high:

 

Don't forget: there is no such thing as a free lunch, bought with stock buybacks or otherwise. Contrary to all the lies you may have heard, corporate debt - both total and net - is now at an all time high!

 

 

Finally, these are the companies that are the most aggressive repurchasers of their own stock, or said otherwise, the companies that have no organic use for the cash and have zero ideas how to grow their top and bottom line or what capital projects to invest their excess capital, they only have stock buybacks as an option to give the impression of "growth."

Source: CapIQ

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Tue, 05/27/2014 - 14:23 | 4799049 DoChenRollingBearing
DoChenRollingBearing's picture

Well, that explains that, I guess.  I'm just hanging on for the ride, waiting for the time to bail...

Tue, 05/27/2014 - 14:26 | 4799055 TheRideNeverEnds
TheRideNeverEnds's picture

[spoiler] It never ends [spoiler]

Tue, 05/27/2014 - 14:29 | 4799068 NoDebt
NoDebt's picture

Must be working.  10 more S&P points today.  Only 40 off of Goldman's NEW 1-year-from-now target number.  If we hit 1950 by next week who wants to be me they won't raise the target again?

Tue, 05/27/2014 - 14:34 | 4799078 eclectic syncretist
eclectic syncretist's picture

It worked in Japan in the late 1980's and in the US in the late 1990's too, all they way up until it didn't work any more.

Tue, 05/27/2014 - 14:51 | 4799122 nope-1004
nope-1004's picture

So.... is the "money on the sidelines" meme a thing of the past now?  Like "green chutes"?  That didn't take long.

 

Tue, 05/27/2014 - 14:51 | 4799126 Pladizow
Pladizow's picture

Soon....very soon....Skynet will own all.

Tue, 05/27/2014 - 14:57 | 4799151 dontgoforit
dontgoforit's picture

Isn't this like Green Giant buying it's own corn?

Tue, 05/27/2014 - 16:24 | 4799405 Ham-bone
Ham-bone's picture

Ok - crazy stuff...since '09, the the difference between the budget and trade deficits has very closely correlated w/ the "foreign Treasury demand"...which is to say as their was less excess dollars to be recycled by Foreigners into Treasury's, "foreigners" somehow increased their buying to soak up the excess debt  and @ progressively lower rates.  See (in bold) Foreign Treasury yoy increase in demand on left and  (in bold) Treasury debt yoy in excess of trade deficit on right...

This is in stark contrast w/ pre-crisis...

Is this the most blatant evidence the Fed is truly running a shadow QE through "foreign" locations???  If not, please explain...

Data Below....

Yr. - Foreign - Fed (y o y) = total /   Bud  /   Trade  / GDP / (Fed action)

        T buy       T buy                    Deficit / Deficit

     $6.1 T      $2.4 T (total holdings as of '13)

14. $250 B   $300 B   = $550 B / $-150  (-550) (-400) (-0.5%) est.

13.  $219 B    $542 B   = $760 B / $-205  (-680) (-475)  (1.9%) + tax hike (QE3)

12. $619       $21   = $640 / $-565  (-1100) (-535) (2.8%) (Twist)

11. $733      642   = $1375 / $-742  (-1299) (-557) (1.8%) (QE2)

10. $631      $245   = $876 / $-795  (-1294) (-499) (2.5%)

09. $672      $301   = $973 / $-1029  (-1413) (-384) (-2.8%) + tax reduction (QE1)

Post Crisis

08. $1147 $(-265)  = $880 / $243 B (-459) (-702)   (-0.3%) (FFR 0%) + TARP

07. $279    $(-39)   = $240 / $539 B (-161) (-700)   (1.8%)

06. $75         $35    = $105 / $504 B (-248)  (-752)  (2.7%)  (FFR 6.75%) 

Tue, 05/27/2014 - 16:26 | 4799483 dontgoforit
dontgoforit's picture

Ahso!  They are actually increasing QE while lying about it?  Hang the bastards!  They are taking the world to the precipice of destruction.

Tue, 05/27/2014 - 16:35 | 4799519 Bay of Pigs
Bay of Pigs's picture

You know the William Dudley is getting this all done via the BIS. All Central Banks are involved.

Tue, 05/27/2014 - 18:41 | 4799896 El Oregonian
El Oregonian's picture

This must be the prelude to the guy who held his breath going through a tunnel but failed to reach the otherside before he passed out and caused a 3-car accident in the tunnel.

The banksters are holding their collective breath.

http://www.npr.org/blogs/thetwo-way/2014/05/27/316317506/teen-causes-3-c...

Tue, 05/27/2014 - 20:10 | 4800148 SumTing Wong
SumTing Wong's picture

A Ponzi by any other name...

Wed, 05/28/2014 - 07:23 | 4801213 GetZeeGold
GetZeeGold's picture

 

 

 

 

But wait....there's MOAR!!!

 

Act now and get free shipping.

Tue, 05/27/2014 - 16:37 | 4799526 SafelyGraze
SafelyGraze's picture

buying back your stock is like drinking your pee

sure, it may seem creepy to other people

but in the desert you gotta do what you gotta do

don't forget your stillsuit 

Tue, 05/27/2014 - 16:44 | 4799564 ATM
ATM's picture

No it isn't. If a company can borrow money for nothing why wouldn't it buy back almost all it's stock? Hell, they should all be going private! 

That's not creepy. That plain old good sense in the world of insane centralized planning.

Tue, 05/27/2014 - 17:46 | 4799748 nope-1004
nope-1004's picture

 

 

"why wouldn't it buy back almost all it's stock?"

Because buying inflated phantom assets is risky, especially since the only evaluator (elevator) is (has been since 2000) the Fed.

If you rob Peter to pay Paul, who does Paul sell to?

 

Tue, 05/27/2014 - 18:18 | 4799839 Budd aka Sidewinder
Budd aka Sidewinder's picture

Jesus

Wed, 05/28/2014 - 09:07 | 4801434 BobPaulson
BobPaulson's picture

I think this is robbing Peter to buy Peter crack, or Rob Ford.

Why worry about paying back money. Another bail out will come, right? ...Right?! 

Tue, 05/27/2014 - 23:22 | 4800742 Funny Money
Funny Money's picture

...especially if that company (Apple) is chosing between borrowing for next to nothing vs repatriating it's zillions at a far higher rate.

Tue, 05/27/2014 - 19:50 | 4800090 free_lunch
free_lunch's picture

But.. but.. "I can't eat an iPad".

Tue, 05/27/2014 - 16:58 | 4799539 Ham-bone
Ham-bone's picture

in '13 - the US generated $205 B more in debt than trade deficit to be recycled to buy it...but magically the "foreign" demand increased by $219 B to buy up that debt

in '12 - $565 B more in debt than trade deficit...and magically "foreign" demand increased $619 B

in '11 - $742 B more in debt than trade deficit vs. $733 new "foreign" demand

'10 - $795 B vs. $631

quite a coincidence that "foreigners" would want to recycle more net dollars than the US is creating via it's trade deficit...and funny they'd want to do it at ever lower yields...and despite global trade being done progressively lless in dollars...

Tue, 05/27/2014 - 17:06 | 4799636 buyingsterling
buyingsterling's picture

I'd love to bookmark the original source if you can post it.

Tue, 05/27/2014 - 16:54 | 4799596 SAT 800
SAT 800's picture

Look behind you, the precipice is that end of the road there hanging out in space about fifty yards back.

Tue, 05/27/2014 - 18:10 | 4799810 OldPhart
Tue, 05/27/2014 - 20:55 | 4800334 Radical Marijuana
Radical Marijuana's picture

That link says "Forbidden."

Of the many Wile E. Coyote Moments, I like the one at the 1:25 mark of this:

https://www.youtube.com/watch?v=8VvQY2pMaEM

The Solid Tin Coyote

Coyote steps around the back of a bizarre mirror, only to then discover he has walked off the cliff ...

Tue, 05/27/2014 - 20:04 | 4799790 free_lunch
free_lunch's picture

Not destructing, more like buying the world..

Tue, 05/27/2014 - 16:34 | 4799513 gdpetti
gdpetti's picture

That's what the currency swaps were for and continue so today... said to be over 30 trillion years ago, who knows about today... James Rickards was talking about this the other day. It seems the EU is fronting for the Fed these days, thus the whole Belgium scenario.

Tue, 05/27/2014 - 17:19 | 4799621 Ham-bone
Ham-bone's picture

you mean this...

GLOBAL BANKING CENTERS (treasury holdings)

  • ————- Jan ’00—> ’07 ——> Mar ’14
  • “Carribean banking centers”
  • —————$35 B —> $68 B -—> $312 B
  • UK — ——-$50 B —> $100 B —> $176 B
  • Switzerland $18 B —> $34 B —-> $176 B
  • HK ———– $39 B —> $52 B —> $156 B
  • Singapore —$30 B —> $30 B —–> $91 B
  • Ireland ———$5 B -—> $19 B —> $113 B
  • Belgium ——$28 B ––> $13 B —> $381 B
  • Luxemburg —-$5 B ––> $60 B —> $145 B
  • TOTAL —– $210 B –> $376 B —> $1,550 T (410% increase from ’07)

In the same period ('07-'14), Japan and China (combined) increased their Treasury holdings by net $1.4 T on a trade surplus w/ the US of $3 T over the period...Amazingly these banking nations similarly had a $1.2 T increase w/ relatively no trade surplus w/ the US???  Hello Treasury demand well in excess of trade deficits!!!

Tue, 05/27/2014 - 17:25 | 4799703 Tinky
Tinky's picture

Keep hammering this home, Ham! It won't be too long before sober economic pundits point it out after doing forensic accounting in the wake of the impending crash.

Tue, 05/27/2014 - 20:05 | 4800071 free_lunch
free_lunch's picture

Seems half the west has it's eggs in the US basket..

 

Where have I seen this before? http://www.youtube.com/watch?v=I5QwKEwo4Bc

 

Tue, 05/27/2014 - 20:08 | 4800144 El Vaquero
El Vaquero's picture

 

Isn't this like Green Giant buying it's own corn?

More like eating its own seed corn.  

 

Actually, that's not such a bad idea.  We could sick the Green Giant on Monsanto to wreak havoc.

Wed, 05/28/2014 - 07:28 | 4801227 Antifaschistische
Antifaschistische's picture

There's 'money on the sidelines' because there's a mountain of debt on the field.

There's a mountain of debt on the field because of the give away intrest rate supression at the Fed.

conclusion:  The Fed IS, and will probably continue to be, the shadow buyer keeping all bubles inflated....of course, until it isnt.

Tue, 05/27/2014 - 14:56 | 4799147 Headbanger
Headbanger's picture

This means there is virtually no market participation of buyers but only a few CFOs propping up the """market""" now.

Me thinks their primary motivation is to reduce the number of shares outstanding to boost EPS maybe in seeing the economy falling fast.

 

Tue, 05/27/2014 - 15:31 | 4799302 TheReplacement
TheReplacement's picture

Dear So-n-So CEO person,

The NSA informs us that you have been looking at naughty pictures of little kids.  Well, even if you haven't been, the pictures are on your computer now.  Let's just keep this between us.  Nobody, not you, me, your company, nor our country needs this scandal now. 

So if you know what is good for you, you will take the the money we are offering to loan you and buy back your company's stock.  Just think, if you do a good enough job your EPS will look great and you'll get a big fat bonus.

Sincerely,

TPTB

PS - Don't leave town.

Tue, 05/27/2014 - 15:00 | 4799160 t0mmyBerg
t0mmyBerg's picture

This meme has been building for awhile.  I wrote to my guys a few months ago about buybacks as the ultimate reason stocks are at all time highs.  And why not?  If your borrowing costs are close to 0, then you can keep the bonuses flowing by borrowing and reducing the float.  You get rich for essentially doing nothing of any value at all.  Thanks Fed!  So when does it end?  When there is actually a cost to borrowing money (you mean money has a time value? What?).  When will that happen?  If you believe the talking heads, any day now.  Realistically, it may be quite a while.  Although Kyle Bass seems to think that the Fed will THINK their econ forecasts are spot on (they aren't) and raise rates just as the nex recession starts.  Nice work if you can get it.  What a fucking bunch of brass asshats.

Tue, 05/27/2014 - 15:26 | 4799270 Jstanley011
Jstanley011's picture

So, you're saying that artificially holding down interest rates wasn't such a good idea after all? Whooda thunk?...

Tue, 05/27/2014 - 16:14 | 4799449 SAT 800
SAT 800's picture

just think of it as a new wonder medication; that has a few "side effects".

Wed, 05/28/2014 - 16:21 | 4802920 mkkby
mkkby's picture

They are actually hurting the company, going from zero cost of capital to paying interest on it.  Cash flow down, yet execs get a bonus.  That shows how stupid investors are.  Easily hoodwinked.

Tue, 05/27/2014 - 21:54 | 4800539 Sambo
Sambo's picture

All this can end only when the Fed and its disasterous fractional reserve banking system is dismantled. 100 years is enough already.

Wed, 05/28/2014 - 04:17 | 4801111 therearetoomany...
therearetoomanyidiots's picture

So when does it end?

When Chalky the White House Clown is out of office. 

Wed, 05/28/2014 - 07:21 | 4801218 overmedicatedun...
overmedicatedundersexed's picture

this is the market, retirement money via 401k plans IRA's keep pouring into markets, stock buy backs, hedge funds & banks, Insurance co's,  small investors, nothing new there, but now we have zirp, QE, no regulatory oversight of TBTF..debt funded buy backs with o interest money..the economy is the stock market per our FED.

many see this ending with big sell off...I see it as a perpetual motion engine..it can't end until some major (outside of finance) black swan cuts the legs out of TBTF system..oil becomes too expensive and in short supply? pandemic? world war III?

not too smart to bet it fails for the last 5 years and counting...PS i am all in cash and some PM's but that is because I refuse to aid corrupt people, so I can retain some self respect. perhaps not all that smart on my part. ZH pulled the curtain back from the wizards of wall street, and so it goes..

Wed, 05/28/2014 - 09:34 | 4801501 exi1ed0ne
exi1ed0ne's picture

The future isn't that hard to see.  We end up Argentina in the next phase.

Tue, 05/27/2014 - 14:37 | 4799083 ArkansasAngie
ArkansasAngie's picture

I'm guessing they don't mind being front run either?  

Wed, 05/28/2014 - 05:48 | 4801156 cdntrader
cdntrader's picture

Exactly, they WANT to be front runned !

If your market cap is 538B$ and you "lose" 5% of 16B$ to algos by using dummy buying strategies (like not-too-discreet icebergs or VWAP), you just "created" 26B$...

Easiest money on earth !

Tue, 05/27/2014 - 14:27 | 4799060 Badabing
Badabing's picture

i just pulled $100 out of my left pocket and put it into my right!

easy money

Tue, 05/27/2014 - 14:28 | 4799066 LawsofPhysics
LawsofPhysics's picture

What's your fee?

Tue, 05/27/2014 - 14:58 | 4799130 nope-1004
nope-1004's picture

New accounting rules stipulate he can mark to mystery, so really he took out $100 and gave the right hand $50, losing $50.  The Fed will cover the loss of $50, PLUS he gets a bonus at year end for "having 100% return on his capital".  lmfao...  and prolly zero days of trading losses.

 

Wed, 05/28/2014 - 07:49 | 4801265 fallout11
fallout11's picture

...not to mention declaring a loss on his tax filing, and thus receiving a tax credit for it.

Tue, 05/27/2014 - 14:29 | 4799069 Dr. Richard Head
Dr. Richard Head's picture

You are now qualified to be a Professor at an Ivy League School!!!  Congratulations are in order.

Do NOT follow this link or you will be banned from the site!