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.