Dow futures are up over 1250 points from the opening plunge lows on Monday as a sudden risk-unaware buyer has jumped in (during US cash market open hours) to buy the f**king dip. The consensus narrative is that China has stabilized its yuan (based on the fact that it hasn't drastically shifted the fix lower - which it has), but there is another far more important driver of this rebound.
We know the PPT is in chaos currently as they seek new leadership but what we hear from Goldman Sachs is that, perhaps someone whispered in various CEOs ears as Bloomberg reports that Corporate America bought back shares at a furious pace as the S&P 500 plunged 3%.
“On Monday when the market dropped, the Goldman Sachs buyback desk saw executions increase dramatically,” David Kostin, the firm’s chief U.S. equity strategist, said on Bloomberg TV with Alix Steel and David Westin.
“Companies are sensitive to the level of stock prices.”
A similar surge in buybacks during May’s rout helped establish a market bottom.
This makes some sense as the following chart shows, whether due to earnings blackouts or anxiety, buybacks as a percentage of firm EBIT (i.e. affordability of share repurchases) slid recently, providing plenty of ammo for the average share-price-judged CEO to jump in with both hands and feet...
Which is what it appears Tim Cook did...
As Bloomberg's Benjamin Dow details, it's becoming clearer that The Fed's wealth-creation channel is now via the corporate boardroom. The answer to the Question of the Day is one of simple, Fed-based arithmetic that has buybacks as the linchpin -- easing will spur borrowing to buy back enough to make 3,200 a swift reality.
Whether Fed easing will reverse the slowdown in an economy held hostage by a trade war is irrelevant. Cheaper corporate borrowing is the end result, and the entire market knows to which ends that cash will go, as laid out by colleagues Liz McCormick and Ben Holland.
Most economists, blinded by faith in financial markets as the most efficient allocators of resources, have missed the whole problem, according to Lazonick.
“They just say, ‘Oh, the investment ends up somewhere,’ ” he says.
“That’s an argument with no evidence.” Lazonick says the label favored by corporate bosses to describe their buybacks—“capital return program”—is misleading. “Capital is something that gets invested,” he says. “It’s not capital. It’s just money.”
It's too enticing of an option for the boards of SPX Index member companies to pass up in the late cycle U.S. economy. Spending to invest in expansion or retooling business lines in this era of lackluster earnings growth won't cut it.
It's far more lucrative to just take part in the Pavlovian experiment now playing out in markets -- the White House rings the trade-war bell, the salivating Fed presses the button, and the buyback morsel is delivered to equity investors on the S&P 500's path to new highs (repeat as necessary.)
He is spot on but missing one key aspect - Buybacks ignite the momentum, Gamma extends it.
Bonds ain't buying it completely...
The willingness to buy the dip contrasts with hedge funds, who according to Morgan Stanley have cut their equity exposure to the lowest level since 2016. Will it be different this time? (well for one, as a share of gross domestic product, corporate debt has climbed to a record.)