Even Bloomberg gets it.
In a note issued yesterday, the news behemoth reported what our readers had known for years: that "There's Only One Buyer Keeping S&P 500's Bull Market Alive", namely corporate buybacks, the same "buyer" of stocks that the smart money has been selling to for the past 7 weeks.
Dispelling any confusion about who the relentless buyer into the "wall of worry" is, this is what Bloomberg wrote:
Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.
We got the latest confirmation of this earlier today when Bank of America said that "clients don’t believe the rally, continue to sell US stocks" to the only buyer left in town: "buybacks by corporate clients accelerated for the third consecutive week to their highest level in six months, which is also above levels at this time last year. This suggests that overall S&P 500 completed buybacks—which are reported with a lag—have likely picked up significantly as well."
This also explains why the ECB was so desperate to unclog, and explicitly backstop with its QE expansion, the suddenly slowing corporate bond market: without a fresh influx of new IG issuance, the buyback pipeline would be indefinitely halted, which in turn would have led to more stock selling without offsetting repurchases, further downside to credit, and so on in a feedback loop that would have required a forceful intervention by central banks.
However, while buybacks have been raging for the past three months, there is a very real and imminent danger to the market torpid bear market rally, when the first quarter earnings season begins over the next few days and brings with it the infamous buyback "blackout period."
Recall what we said almost exactly one year ago, citing Goldman:
"The closing of the buyback window ahead of earnings season has recently coincided with weaker S&P 500 performance. In half of the last eight quarters, the S&P 500 declined during the four weeks prior to earnings season. The S&P 500 rose an average of 0.3% in the month leading up to earnings season versus +1.6% both during earnings season and in the month following earnings season.
Indeed, over the past 4 quarters, the buyback blackout has without fail led to weakness across risky asset classes. So with the start imminent, how long is the lack of price indescriminate buying expected to persist? At least until the first week of May when the buybacks resume:
So while everyone's attention is on the Fed, the biggest danger to the S&P500 has little to do with what Janet Yellen may say tomorrow, and everything to do with the marginal buyer of stocks being put into a state of forced hibernation: after all, corporations would want nothing more than to continue the rally without pause, as a surging S&P 500 would make it even easier to issue more debt, which in turn would be used to fund even more buybacks, push their stocks even higher, and lead to even greater "equity-linked" bonuses and compensation.
What is curious, however, is that unlike a year ago, when Goldman was pitching its "basket of US stocks focused on returning cash to shareholders via buybacks and dividends", this time Kostin and Co. are far more reserved, and instead urging clients to shun these companies which are largely drowning in debt as per the chart below, showing the highest corporate leverage in over a decade...
... and instead to buy companies with "strong balance sheets" which by definition are those who dedicate far less debt to pushing their stock price higher via such artificial and unsustainable gimmicks such as buybacks.
Will this time Goldman be right, or will the trade once again be to buy the more beaten down names over the next month, those whose buybacks are "brutally" put on hold, only to return with a vengeance come May?
We'll find out in 6 weeks; in the meantime, beware the S&P 500 Ides of March starting today, and lasting until Q1 earnings season is over.