Friday, March 8, 2013

Demand from Stock Buybacks

This year's stock market emphasizes the importance of supply and demand in the stock market.  Sure, earnings are important, in the very long run, but in the short and intermediate term, supply and demand dictates price movement. 

There is a lot of demand coming from this low interest rate environment and Fed liquidity.  Corporations are leveraging up, selling as much corporate bonds as they can, because they can.  The demand for bonds is insatiable, even with the big rally in stocks, retail has stayed with bonds because of the desire for safe returns.  With this demand, corporations have been able to issue corporate bonds at low interest rates, and in size, allowing them to use that cash for whatever they desire.  Since insiders receive stock options, the best way to boost their own personal wealth is to use their balance sheet cash to goose the stock price via stock buybacks.  That has been a big driver for equity demand. 

With the low number of IPOs and lack of big secondaries, and leveraged buyouts and companies going private, supply hasn't been able to keep up with this demand.  So despite retail not embracing this stock market, companies have been using the proceeds from the sale of bonds to buy back stock. 

So despite flat year on year earnings growth, you have had stocks up over 20% since the beginning of 2012.  It is a bubble that is being blown, but I don't see it popping anytime soon until the corporations can no longer access the corporate bond window at favorable rates, or there is too much stock issuance.

It is a buyer's market, we are back to the gentle uptrend which doesn't dip.  We should finish near the highs today. 

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