JPM's "flows and liquidity' expert Nikolaos Panigirtzoglou, who last week spotted the "most extreme ever excess liquidity [8]" bubble, has just noticed yet another indication that not even corporations believe in further equity upside.
While on one hand it has been well-known that during the entire Fed-driven equity bubble, corporate insiders have been aggressive sellers of equity, either through automatic selling programs or more recently, on a discretionary basis, and locking in profits, it was corporations that, under activist duress or otherwise, had opted to engage in shareholder friendly stock activities such as buybacks. In fact, netting equity withdrawal and injections, in the form of equity offerings, had resulted in a consistently negative print ever since the Lehman crisis meaning companies were net buyers of their own stock.
The simplest explanation is that flush with record amounts of cash, the best "investment" for the corporate world was not investing in long-term growth via CapEx spending or hiring (perhaps because said "growth" never appears to actually materialize, five years into the Fed's grandest of all monetary experiments), and certainly not raising equity to fund such projects, but through (mostly levered) buybacks and dividends, which provided the biggest bang for the near-term buck. Another implication of this is that corporate treasurers, not as investors but as fiduciaries, had perceived stocks as cheap in a low-rate environment, as otherwise they would not have been repurchasing their own equities hand over fist.
Said otherwise, this means that for the first time since the Lehman crisis, non-financial corporations within the entire developed, G-4 (US, Europe, Japan and UK) world, have shifted from net buyers of stock to net sellers, as net "equity withdrawal" have just turned positive.
This has now changed and as JPM summarizes, "The G4 non-financial corporate sector appears to have stopped withdrawing its own equity in Q2." JPM continues:
The latest release of Euro area Flow of Funds for the second quarter allows us to get a more complete picture about the behavior of non–financial corporations across the whole of the G4, i.e. the US, Euro area, UK and Japan. The big surprise in these data was a collapse of G4 net equity withdrawal to zero for the first time since the Lehman crisis (Figure 1). That is, at face value, Figure 1 suggests that for the first time since the Lehman crisis, the G4 non financial corporate sector stopped withdrawing its own equity on net.
This is shown visually below:
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JPM's explanation of the chart above:
1) The decline of the blue line in Figure 1 is driven by non-US net equity issuance, which reversed from negative (i.e. from net withdrawal) to positive (i.e. to net supply) in Q2, both in the raw data and our seasonally adjusted figures. The problem with non-US net equity issuance data is that they are typically a lot more volatile than their US counterparts and similar spikes in the blue line in the past were quickly reversed and not sustained.
2) Net equity withdrawal is almost exclusively a US phenomenon. Figure 1 shows that the blue (G4) and black lines (US) are very closely aligned (in $bn) suggesting that the non-US component, although volatile, is on average very small. And the net equity withdrawal by US non financials corporations (the black line in Figure 1) held up well in Q2. In fact it increased slightly in Q2.
Do other higher-frequency data substantiate the above observations? Yes:
- What evidence do we get from higher-frequency data on announced share buybacks? Figure 3 shows a sharp slowing in announced share buybacks outside the US, but in Q3 rather than Q2! And this is the caveat with announced share buybacks: they do not necessarily reflect actual buybacks as there is typically a lag between announcements and actual stock purchases. The other problem is that while share buybacks reduce the share count of a company, they do not capture the equity withdrawal impact of M&A (to the extent that the acquirer uses cash or debt) or LBO activities. Similarly share buybacks do not capture offsetting corporate activities such as share offerings, exchange of common stock for debentures, conversion of preferred stock or convertible securities, as well as stock options and employee stock programs.
- To address some of the above issues and better capture high-frequency corporate equity withdrawal trends, we augment the announced share buybacks with equity offerings and LBOs. Figure 4 augments announced share buybacks with LBOs, which also cause equity withdrawal, but deducts equity offerings, i.e. IPOs and secondary offerings, which increase the share count. The evolution of the red line in Figure 4 is effectively a higher-frequency proxy of the Flow of Funds equity issuance/withdrawal data of Figure 1.
- Consistent with Figure 1, Figure 4 shows that equity issuance turned a lot less supportive for equity markets (i.e. red line increased) in Q2 relative to Q1, and worsened even further in Q3. This is both because of a slowing in announced share buybacks but also an increase in IPO/secondary offering activity in Q2/Q3. Also consistent with the Flow of Funds data of Figure 1, Figure 4 suggests that equity withdrawal appears to have peaked in 2011 (red line bottomed) in terms of its pace across calendar years. This year’s pace is roughly equal on average with that of 2012. In addition, there appears to be still a long way for equity withdrawal to return to its 2007 historical peak.
- The implication of all the above evidence is that, sequentially, between 2012 and 2013, there appears to have been no improvement in the equity withdrawal/buying activity of corporates themselves. If anything, there has been a slight deterioration.
And in chart format:
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In other words, thank the Fed's lucky stars for the retail "great rotation" because not only are corporate insiders dumping their stock holdings at a historic pace, but now the very corporations themselves, record cash holdings notwithstanding, have for the first time in the past 5 years, shifted away from being a net buyer of stock to a net seller.
And who are they selling to?
Well, the vacuum tubes of course, and whoever has the misfortune of being suckered into the whole "recovery" myth (after how many years of "growth is just around the corner" will people learn?) and is the last carbon-based "retail" bagholder standing.
But don't worry: because at the end of the day what do companies really know about the potential upside (and thus attractiveness) of their own stock? Nothing that Joe Sixpack doesn't know from behind the comfort of the CNBC, and momentum-chasing, glow. So just ignore this latest telltale inflection point, and keep on ploughing in: after all Mr. Chairwoman's $4 trillion balance sheet has your back and nothing can ever go wrong in centrally-planned, manipulated markets.