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And The Biggest "Source Of Equity Demand In Recent Years", According To Goldman Sachs, Is...

Tyler Durden's picture




 

Spoiler alert: it's not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed's own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both).

The answer, according to Goldman's David Kostin is the following: "From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years."

In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing "advisors" managing other people's money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the "Pull the S&P up by the Bootstaps" market, in which the only relevant question is which company can buyback the most of its own stock.

Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:

Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.

And sure enough, with the market once again rewarding stock buybacks...

... companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012):

We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.

Putting this number in the context of the recent "fire and brimstone" announcement by the BOJ:

We estimate the incremental demand for US equities from the combined re-allocation of Japan pension assets will total $70 billion. For context, we forecast share buybacks by S&P 500 firms will total $707 billion in 2015, or 10x as much as the overall Japan pension fund re-balancing.

In other words, what the BOJ does to the market will be a tiny fraction of the impact the latest and greatest cost-indescriminate buyer - corporations buying back their own stock - will impart on equities.

And here is what happens to CapEx as a result:

... capex growth will decelerate by 200 bp to 6% as global growth concerns and a 25% plunge in crude oil prices since June have brought investment plans under review. The Energy sector accounts for roughly onethird of aggregate S&P 500 capex.

We have said it for years, and finally even Goldman admits it: the days of Capex growth are over:

There is more bad news: because whil stock buybacks mean even more artificial growth for risk assets, the collapse in CapEx, especially among energy companies, means that GDP in 2015 is about to drop off a ledge, polar vortex 2.0 notwithstanding.

Behold: 0% (or negative) growth in Real Private Fixed Investment Oil & Gas Structures & Machinery, a direct - and quite substantial - input factor into the GDP calculation.

But who needs growth when the Chief Executives of America's largest corporations are about to trickle down their record, stock-buybacks driven bonuses for yet another year.

 

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Sun, 11/09/2014 - 19:18 | 5430554 kowalli
kowalli's picture

fed can buy back from buybacks companies

Sun, 11/09/2014 - 22:29 | 5431060 motor_angel
motor_angel's picture

my roomate's sister makes $80 hourly on the internet . She has been fired from work for 6 months but last month her paycheck was $14750 just working on the internet for a few hours. check it out... www.yelptrade.com

Sun, 11/09/2014 - 19:17 | 5430556 Freedumb
Freedumb's picture

The best part is, when they default on all the loans used to finance the buybacks, the Fed will step in and bail out all the banks who lost money on those loans, and we can start over again.

Sun, 11/09/2014 - 20:08 | 5430675 XqWretch
XqWretch's picture

Circle jerk... the question is... how long will people keep buying treasuries? The government is running trillion dollar deficits every single fucking year. At some point even kids with down syndrome will see that the US government can never, ever actually pay back all the money it owes.

Sun, 11/09/2014 - 21:01 | 5430794 ParkAveFlasher
ParkAveFlasher's picture

 "People" "buy" "Treasuries"...lmao

Mon, 11/10/2014 - 00:07 | 5431309 sun tzu
sun tzu's picture

Who's been buying JGB's all these years? Of the $10 trillion outstanding, the BOJ only owns $2 trillion. Some idiots will be left holding the bag on $8 trillion of worthless JGB's

Mon, 11/10/2014 - 00:10 | 5431314 daveO
daveO's picture

5 years and counting, thanks to QE counterfeiting. If they were truly finished w/ counterfeiting, then they'd need to raise taxes or seize pensions to cover the difference. In the meantime, rates would skyrocket.

Sun, 11/09/2014 - 19:24 | 5430570 TheSecondLaw
TheSecondLaw's picture

May as well bowwo some more and go out and buy up all their own products to push sales while they're at it.

Sun, 11/09/2014 - 19:34 | 5430588 bugsmashers
bugsmashers's picture

Can corporations buy back all of the baby boomer's stocks?

Mon, 11/10/2014 - 00:13 | 5431317 daveO
daveO's picture

No, the FED has dibs on that. At least, until currency collapse.

Sun, 11/09/2014 - 19:49 | 5430590 Philo Beddoe
Philo Beddoe's picture

OT. 

Anybody else watching the Apmex inventory dwindle. Probably means fuck all for price discovery in this fucked up world...but it is interesting. 

I watch Libertads for their low mintage. Over the course of 2 weeks Apmex has sold out of most of their Silver Libertads. At time of writing they only have about 650 random year ounces with a hefty premium I might add. 

 

http://www.apmex.com/search?q=1%20ounce%20silver%20libertad%20%20

Apmex is for small fuckers like me. I wonder what the demand is from guys with deep pockets. Again, all of this probably bearish!! No sarc. What a fucked up world. 

Same story for gold. Except they have fuck all now. 

http://www.apmex.com/search?q=1%20ounce%20gold%20libertad%20%20

 

 

Sun, 11/09/2014 - 19:41 | 5430603 Bangalore Equit...
Bangalore Equity Trader's picture

Listen.

Who the fuck is running this place on the weekends?

Sun, 11/09/2014 - 20:20 | 5430702 Spastica Rex
Spastica Rex's picture

Baron von Münchhausen

Sun, 11/09/2014 - 21:02 | 5430798 ParkAveFlasher
ParkAveFlasher's picture

Seriously, at times like these, I find a modicum of snuff to be most efficacious.

Sun, 11/09/2014 - 20:04 | 5430666 assistedliving
assistedliving's picture

Bangalore equities?  who the f$#k are you to ask?

You probably think the stock market has a fence around it

Sun, 11/09/2014 - 20:13 | 5430686 AdvancingTime
AdvancingTime's picture

It is hard to understand how badly this is distorting the markets. Money has become so cheap to borrow that many people are now arguing that you must take it even if you don't know what to do with it. It is hard to imagine how much this is distorting the economy, markets, and reality in general. A total disconnect between life on main street and the financial world is occurring and it is putting the economy in a very dangerous place.

It is often hard to determine what is true, but a report on Bloomberg that 32 Trillion dollars in funds were held in offshore accounts around the world made me shutter. How safe is this money, and what exactly is it doing? Can you say Cyprus? More concerning the toxic consequences of cheap money in the article below.

http://brucewilds.blogspot.com/2013/05/cheap-money-more-and-more-and-more.html

Sun, 11/09/2014 - 20:27 | 5430722 sidiji
sidiji's picture

If corporations continue to buy back stocks, then they would appear to be very profitable still, and thus undervalued.  Your data point doesnt fit your thesis, just fyi

Sun, 11/09/2014 - 20:36 | 5430744 Philo Beddoe
Philo Beddoe's picture

Where do they get all this money to buy back stock? Where? Where? Where? 

Sun, 11/09/2014 - 21:03 | 5430801 ParkAveFlasher
ParkAveFlasher's picture

How many legs does a centipede have? 

Mon, 11/10/2014 - 00:12 | 5431316 sun tzu
sun tzu's picture

Except most of them are borrowing money to buy back their own stocks

Sun, 11/09/2014 - 20:46 | 5430766 nakki
nakki's picture

Its a ponzi world.

Sun, 11/09/2014 - 21:08 | 5430817 PaiMai
PaiMai's picture

Lowering WACC increases NPV. Can anyone argue with that?. If there are idiots willing to lend you money at no cost, you have a duty to take the cash. Carl Icahn wants to take this to a whole new level with Apple. See the world for what it is not what you wish

Sun, 11/09/2014 - 21:12 | 5430828 Bangalore Equit...
Bangalore Equity Trader's picture

Listen.

Do you think Ican wants to control Apple so he can see all the "SECRET" iPhone photos of young boys?

Sun, 11/09/2014 - 21:14 | 5430835 PaiMai
PaiMai's picture

You are the dark side of freedom of expression

Sun, 11/09/2014 - 21:17 | 5430839 Bangalore Equit...
Bangalore Equity Trader's picture

Listen.

Go watch your American TeeVee and learn how "IMPORTANT" you are.

Mon, 11/10/2014 - 00:14 | 5431319 sun tzu
sun tzu's picture

While the rates are still at 1% that's fine. What happened when they need to roll that $5 billion debt and the rates are at 6% or even worse the credit markets seize up?

 

Sun, 11/09/2014 - 21:54 | 5430946 scubapro
scubapro's picture

 

 

strong dollar lowers income from foreign sales.   40% of spx revenues are not in  US$.   total revenues of sp500 is right about 10T.   thats 4T in non-dollar sales.   if US$ has appreciated 7% (DXY)  this is 280billion in lower US$ profits....they will need to borrow this plus all the increases to really keep the ball rolling.   about 1.2T in total debt issuance in 2014.  so total corp debt issuance will need to climb by 50% to keep the buyback game going....post QE. 

"weve got 5 miles to the next town, but only 3 miles of track infront of us"

"then push on the accelerator"

Sun, 11/09/2014 - 22:50 | 5431128 Ned Zeppelin
Ned Zeppelin's picture

Goldman scum.

Thank you.

Sun, 11/09/2014 - 23:20 | 5431209 Billy Shears
Billy Shears's picture

Can you guess who represents the Fed in this clip:

 

https://www.youtube.com/watch?v=mWq15lDh8yM

Mon, 11/10/2014 - 02:12 | 5431470 polo007
polo007's picture

http://www.safehaven.com/article/35742/the-financial-repression-authority-with-chris-martenson

Dr. Chris Martenson Talks FINANCIAL REPRESSION in clear and simple language that we can all follow. A professional educator, he makes the complex easy to grasp. Elements of Financial Repression require this skill to make clear the stealth game governments are taking against its citizens in the name of preserving the financial stability of the state.

Financial Repression

"When governments get into too much debt there are only so many ways to get themselves out from under the debt." There is:

1. Austerity,

2. Default on the Debt or

3. Financial Repression

In reality, the third is the only politically viable solution. Financial Repression " the cornerstone involves taking a little from everybody and giving it to a couple of favored parties". To do this involves three basic elements:

1. Negative Real Interest Rates,

2. Ring Fencing via Regulatory Controls,

3. Elimination of warning signals such as gold appreciation.

Japan as an Example

Let's consider Japan as an example. The Yen is down 33% over the last year as a stated policy direction of the government's Financial Repression implementation. As a direct consequence, imports are higher therefore making consumption items like energy more expensive for the average person in Japan.

Real wages and savings for the middle class in Japan are falling. However, if you are a corporation like Toyota it is better for business. Chris argues that Financial Repression is nothing more than a transfer from the people to companies such as Toyota . The government effectively believes it knows better through central control and planning where the public's money will be most effectively utilized.

Central planning never worked in Russia and after more than 20 years the proof can once again be confirmed in Japan. This is the stealth game being played against the public, not only in Japan but by countries practicing policies of Financial Repression around the world.

The Coming Crisis

True wealth NEVER gets destroyed, it only gets transferred!"

Chris points out that wealth is never destroyed. but rather it is the claims on wealth which are destroyed during a crisis. "A profound currency accident is coming" according to Chris where he "would not be surprised to see the Yen be completely obliterated just like the the Zimbabwe dollar." His strong recommendations are:

1. Understand the problem,

2. To importantly, take action,

3. Be in Productive Assets,

4. Make sure your money is managed by those who understand the new reality and today's true risks.

Wealth can no longer be stored in paper currency or "paper" claims in a Fiat Currency System.

Price and Value are separating and people forget that price is what you pay, but value is what you get. We soon will see an event where it will be perceived that great wealth is again destroyed. However, what investors MUST fully comprehend is that wealth is not destroyed but rather only transferred.

True wealth is the land, the property, plant & equipment, productive enterprises, raw resources and the people who fashion it all. That is the real wealth. Everything else is nothing more than paper claims on the true wealth. These claims can be made worthless overnight but wealth never is.

http://www.youtube.com/watch?v=V0eSCECnqrw

Mon, 11/10/2014 - 07:17 | 5431679 justsayin2u
justsayin2u's picture

Thinly traded markets can be supported by corporate share buybacks plus pension/401K automatic purchases.  Find the sector that's going to crack and that will start the next correction.  Oil maybe?  Autos? Bonds?

Mon, 11/10/2014 - 10:21 | 5432017 undercover brother
undercover brother's picture

if you play this forward a few years and rates rise, all these corporations who financed stock repurchases will be looking to raise money to pay down or pay off that debt through secondary offerings which further perpetuate the business of wall street.  Or, rates rise precipitously, more and more revenues are used to pay interest on these bonds to the point where markets are tanking and the corporations are beginning to default......and just in the nick of time in steps the fed to bail out the defaulting corporations, which expands its balance sheet to $27 Trillion.   

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