The Only Buyers Of Stock In The First Half Were Buybacks: BofA

While it is well known that stock buybacks have been among the primary contributors for the solid stock performance in the US in 2018, largely thanks to Trump's tax reform which allowed companies to use repatriated cash to repurchase stock, the following "chart of the week" from Bank of America one week ago shows just how pervasive the buyback wave had been so far in 2018, as the bank's clients deployed record amounts of cash to repurchase their own stock.

One week later, BofA's Client Flow monitor provides an update and finds that ahead of the earnings season blackout, buybacks by corporate clients have slowed down modestly to a six-month - in line with seasonal patterns - but YTD still remain +101% YoY and continue to suggest a record year for buybacks.

But while corporate buybacks may be fading into earnings, it is total buyback activity throughout the first half of 2018 that reveals a surprising picture. As shown in the most recent "Chart of the week" from BofA, which lays out first half sector flows, corporate clients’ buybacks were the largest buyers within Financials ($10.6bn), Tech ($10.5bn), Health Care ($6.5bn), Consumer Discretionary, and Industrials.

In fact, in a dramatic display of just who has been buying tech stocks, BofA reveals that "net buying of Tech in the 1H was entirely buyback-driven."

So much for speculation that hedge funds and institutions have been chasing after tech performance: it was just tech companies - at least the subset which operates via Bank of America's buyback desk - repurchasing their own stock. And not just tech companies but financials, industrials and discretionary. Meanwhile, single stocks have been uniformly sold across all sectors with the sole exception of industrials, which is the one sector with 1H flows into single stocks by both corporate and non-corporate clients along with sector ETFs.

So if BofA's corporate clients were the overwhelming buyers of stock in the first half, that would mean that all other clients were selling.  And sure enough, as BofA writes, while private clients - or ultra high net worth individuals  - were the sole net buyers of US equities in a token amount (in addition to corporates) in the 1H, institutional clients were the biggest sellers, while hedge funds were also net sellers for the duration of the quarter.

To summarize:

This means that as many have suspected without buybacks, there will be little buying pressure on stocks. Which is a problem because with just days left until buyback blackout period, the buyer of last resort for US stocks is about to go on a month-long vacation, just as the trade war between the US and China begins.


Ouagadoudou BocceBaal Thu, 07/05/2018 - 01:08 Permalink

Disagree. Buybacks are fundamentally wrong as they appauvrish the company (ie add debt) while favourishing the insiders. They mandate manipulated interest rate based on moral hazard (if u raise rates u kill us ....). They also create a feedback loop where new shares are emitted as staff compensations distorting wage markets between companies. 

And they create stock bubbles as the purchase is price insensitive.

there are many reasons why buybacks were outlawed.

The fact that they exist is just another symptom of the degree of financializatiin and political corruption of our society.

In reply to by BocceBaal

Cash Is King Wed, 07/04/2018 - 17:14 Permalink

I have yet to find a viable legal argument to support the legailty of corporate buybacks. They should be outlawed and any cash the mgt. wants to give back to the owners should be in the form of a cash dividend. Any experts out there with a solid argument disproving my opinion?

Let it Go Wed, 07/04/2018 - 17:38 Permalink

A slew of stories and articles have hit the news recently about how companies buying back their own stock are driving the market higher. The new recently passed tax law which lowers corporate taxes and encourages repatriation of cash that has been stored overseas is feeding fuel into the share buyback frenzy.

To be perfectly clear, buybacks are a tool corporate boards and CEOs use to manipulate the prices of their own shares higher. This means insiders can get out or hedge their positions before reality sets in and prices fall back to earth. Call it a well constructed exit strategy if you like. More om this issue in the article below;

. . . _ _ _ . . . Wed, 07/04/2018 - 18:16 Permalink

With a goal of corporate fascism, you'd want all the big companies to own themselves outright without any pesky morally-minded investors to tell them what to do in order that the transition to government control comes seamlessly... and quietly.

Endgame Napoleon . . . _ _ _ . . . Wed, 07/04/2018 - 18:31 Permalink

I know you meant something else, but when you said that, it reminded me of how the Japanese keep everything in-house, with the BOJ at the helm, borrowing from themselves somehow. Probably wouldn’t work in the USA, where Constitutional liberty is undermined enough by the current corporate / government collusion, brokered by our lobbyist-bought congress. But the Japanese manage to do this centralized, insular lending / borrowing without descending into dictatorship. Maybe, it is because of their homogeneity and social consensus. Maybe, the Fed’s secretiveness is due to fears of public outrage among the competing interests that now often look more like the warring factions, feared by the Founders.  

In reply to by . . . _ _ _ . . .

Chaotix Wed, 07/04/2018 - 23:07 Permalink

I check this link a few times a week to see how well the actual corporate decline and PPT is going. Every week there are literally billions of $ spent on buybacks. Either billions of dollars, or millions of outstanding shares. But yeah, they are refunding themselves out of the problem they created. We'll eventually get the bill for these too.

katagorikal Thu, 07/05/2018 - 03:01 Permalink

Interest on debt should not be a tax deductible expense:
not for corporations; not for individuals. 
Issuing bonds should always be more expensive, 
and more risky, than issuing more equity.

Then buybacks would make a lot less sense.
Mortgage multiples would come down,
grounding the property market in the reality
of what people can really afford.