Memories of 2006

There was an article in the Wall Street Journal yesterday showing that there were nearly $100 billion in buybacks during the third quarter. While the dollar amount was not as high as before the credit bubble burst, as a percentage of market cap of the S&P 500 buyback activity was at similar levels. Buyback activity is much more bullish than investor buying because corporations don't turn around and take profits (at least not until there is trouble).

I have been thinking for weeks about how much the current rally reminded me of the rally from late 2006. But  did not realize how similar the situation actually was. The bad news for the bears is that there was no real pullback of greater than 2%-3% until there were rumblings from the subprime market.

There are some differences between the current market and 2006. Back then we would get $10 billion - $20 billion a week in LBO announcements. While M&A has picked up it is nowhere near that type of activity. Additionally, in the past few months we have seen a lot more supply with the largest deals being GM, Citigroup and Blackrock. Next year the government will be selling AIG and the remainder of GM. Private equity firms are also trying to unload the LBOs of yesteryear.

I believe we will see corrections of greater than 2%-3% because buyback and M&A activity are not quite as strong as they were in the comparable period before the credit bubble burst. However, in order to see a larger move lower something will need to go wrong. A move up in borrowing costs would likely be the catalyst whether it be because of a move up in interest rates as a result of inflation or spreads widening because of a sovereign or municipal crisis.


Anonymous said...

when bullish sentiment is high while public outflows out of mutual funds is also high markets tend to drift higher.

think about it, the street is bullish, not the public. the public is pulling out. so are ceo's engaging in insider selling. sentiment data is skewed

PJ said...

The contrast between corporate executives as individuals selling stocks, and as managers having their companies buy the stocks, suggests a negative assessment of the long-term outlook: They don't see any useful purpose for corporate cash other than enriching shareholders.

It may also be a kind of corruption: using corporate money to raise their personal accounts before getting out of Dodge.

This may be a positive short-term but I doubt it's a positive long-term.

Tsachy Mishal said...


I believe stock mutual funds are in secular decline and don't believe that the data means much.

Tsachy Mishal said...


Most of the large buybacks we have seen have been in companies where the shares were not grossly overpriced ie MSFT, IBM, HPQ, GILD etc.

I only believe it is egregious when a company does a buyback at a high valuation while insiders are selling. That always exists but is not prevalent, at least not yet.

The Hook said...

AMG/Lipper data shows traditional mutual fund inflows since mid Sept are the highest since March 2009.

ETF inflows are also very high.