Back in May, when the world was still wondering who would step in and bid up US stocks now that the Fed has, if only for the time being, stepped away from indirectly monetizing $1 trillion in US risk every year courtesy of a POMO a day (keeping the short sellers away), we revealed that mysterious buyer's identity: the stock-issuing companies themselves by way of record amounts of stock buybacks, which - funded with new debt issuance - have resulted in net corporate debt levels rising to fresh all time highs. In fact, as Goldman clarified further in November "buybacks have been the largest source of overall US equity demand in recent years."
So as we look at 2015, and with the Fed still on the sidelines and in fact many anticipating the Fed to begin hiking rates in the summary despite Charlie Evans' warning last night that such an action would be "catastrophic", the question once again emerges: who will be the biggest buyer of stocks in 2015?
The answer, courtesy of Goldman Sachs and largely predictable to anyone who realizes that in this macabre Chuck Princian game of musical debt chairs management must buy stock back to boost their compensation to record levels before everything crashes, is the same: corporations.
According to Goldman, the stealth LBO of the S&P 500 will not only continue in 2015 but accelerate, with another 2% of the entire market cap converted into debt, thanks to a whopping $450 billion in net corporate inflows, $35 billion more than the $415 billion in corporate inflows in 2014.
And while ETFs, foreign investors, mutual funds and life insurance companies will also be net buyers of stocks, who will, in addition to Pension Funds - expected to sell a record $175 billion in stock in 2015 - be, for the 10th year, the largest seller of US equities? Households.
We expect corporations will continue to be the largest source of demand for stocks, and we expect net purchases by corporations will total $450 billion or about 2% of public equity cap. We forecast equity inflows from equity-related ETFs ($170 billion), mutual funds ($125 billion), foreign investors ($125 billion), and life insurance ($50 billion). We forecast net outflows from households ($245 billion) and pensions ($175 billion). Our report An equity investor’s guide to the Flow of Funds Accounts (March 11, 2013) provides more information on the Financial Accounts of the United States.
Some more details on how courtesy of ZIRP, the Fed can let go of the Primary Dealer POMO pathway steering wheel and let corporate management teams issue trillions in debt to yield-starved investors, and use the proceeds to slowly take themselves private while boosting their equity-linked compensation to unprecedented levels.
We expect corporations to purchase $450 billion of US equity through buybacks and cash M&A (net of share issuance). We expect spending on share buybacks and M&A to have a direct, positive impact on the US equity market.
We forecast a net outflow of $245 billion in 2015 from the Households category. Flows from the Household sector equal the remainder of net issuance less net purchases from all other categories, so Household outflows are essentially corporate repurchases that cannot be allocated to other holders. Inflows through indirect equity ownership can reduce the market impact of direct equity outflows. Although households own 33% of the corporate equities directly, total effective ownership is closer to 73% when combined with 40% indirect ownership through mutual funds, pensions, and insurance policy holdings.
We forecast net equity inflows of $170 billion from mutual funds, ETFs, retirement funds, and life insurance companies. In recent years, retirement fund assets have shifted out of direct equity allocations into indirect equity ownership through mutual funds.
Global diversification of equity holdings to continue in 2015. We forecast $125 billion of inflows from international investors in 2015, with US investors allocating half of total equity inflows, $250 billion, to foreign equity.
The good news for America's households, many of which are approaching or in retirement age and whose selling of stocks will surge to the highest since 2011, is that there will be eager management teams, pardon, yield-chasing bondholders - investing other people's money of course - willing to buy it all up.
The only problem is that these same bondholders are ultimately the same entities that took buybacks to the previous record high back in 2007:
... when just like today, companies scrambled to raise debt and use all the proceeds to buy back their own stock..
And yes, the current stock buyback frenzy was visible, and predictable, from a mile away, or at least in November 2012 when we wrote "Where The Levered Corporate "Cash On The Sidelines" Is Truly Going." This is what Albert Edwards said more than two years ago:
We know that buybacks are contrarian indicators, occurring at the top (and not the bottom) of the market. Why, we ask, are companies leveraging up now and not 12 months ago, when equity prices were much lower? We conclude that (contrary to what we read), US dividend payments are not enjoying a revival relative to cash flows and that buybacks remain the distribution channel of choice for corporates wishing to boost EPS and limit the effects of option dilution. Indeed, some of the biggest US names have issued debt to pay for buybacks... In the current economic climate, you may find this surprising -we do too. A buyback in this form is not a return to shareholders - it's called gearing or balance sheet risk and will come to haunt some firms when the economy enters a downswing.
But what's risk when the Fed will step in now with a verbal bailout of the S&P literally every time that there is a 5% downtick?
The irony of course, is that households were massive sellers to corporations just before the last bubble burst too, and what "profits" they booked would quickly be turned around in the biggest implicit and explicit bailout of the financial system in history.
This time will never be different either, and in the end, when all comes crashing down, it is those sames "households" that will again bail out the creditors of uber-rich management teams spending like drunken sailors to buy their stocks at all time highs, but until then the Fed is blasting loud music, and that friendly corner-store CEO, is not only dancing but is perfectly happy to buy back all the stock of his company that is currently available in the "market."