Looking Through The Boardwalk Recontracting

Looking Through The Boardwalk Recontracting

Boardwalk Pipeline Partners (BWP) trades at a rock bottom valuation due to uncertainties surrounding contracts that are set to expire in the coming years (ie. recontracting). The goal of this write up is to put forth a conservative estimate of where EBITDA will be following the recontracting and establish a value for the shares.

Boardwalk operates natural gas pipelines and storage facilities. The vast majority of Boardwalk’s revenue is from long term contracts and as a result there is typically high visibility on revenue and EBITDA. When a pipeline is built customers typically sign 10 to 20 year contracts guaranteeing revenue for the pipeline regardless of usage.

History Of The Recontracting

Well over a decade ago Boardwalk started planning a pipeline system that would flow gas from the shale fields in the middle and southern part of the country to Southern Texas and Louisiana. After the pipeline system was built more economic shale gas was discovered in other parts of the country, primarily the Utica and Marcellus Shale. This led to less drilling in the areas which Boardwalk’s pipeline system served. Despite the decreased drilling, Boardwalk’s customers were locked in for 10 years and had to continue paying. These contracts will all be up for renewal over the next 3 years and revenue will decline.

In 2014 Boardwalk management recognized the fact that this recontracting was looming. To plan for the recontracting they slashed the dividend and used the vast majority of the cash flow for growth projects to offset the looming revenue losses. Boardwalk has been successful in increasing EBITDA over that period. The table below from Boardwalk’s latest investor presentation shows the growth in EBITDA that resulted from the growth projects

Boardwalk is fortunate that its pipeline system feeds into Southern Texas and Louisiana, the area of the country that is seeing the largest demand growth for natural gas. A large number of LNG export facilities are being built in this area and exports to Mexico leave from this area. In addition, a large number of electrical and petrochemical facilities are being built in this part of the country.

Boardwalk’s largest pipeline system coming up for recontracting is Gulf Crossing. Currently, 70% of the capacity is being utilized even as the vast majority of the pipeline’s capacity is under contract. Cheniere is building a large amount of LNG export capacity and needs natural gas to flow its facilities. In order to facilitate this they are planning a pipeline called Midship that will go from the SCOOP and STACK to Bennington. At Bennington, Midship can connect into Boardwalk’s Gulf Crossing and a competing pipeline. As a result it is likely that Gulf Crossing will be able to recontract close to 100% of its capacity, albeit at a lower price.

Putting A Number On The Recontracting Loss

Most analysts estimate that Boardwalk will lose around $200 million from recontracting from 2017 to 2021. For the purpose of getting a very conservative estimate of the earnings power of Boardwalk I am going to assume they lose $250 million in EBITDA to recontracting between 2017 and 2021. It assumes a poor outcome for all regions coming up for recontracting but also assumes Midship gets built (which seems very likely). My estimate of recontracting losses is far in excess of any analyst I have seen, including Goldman Sachs which has a sell rating on the stock.

Growth Projects

Boardwalk currently has $1.3 billion of growth projects in the pipeline. This should lead to roughly $160 million in EBITDA based on industry returns and past Boardwalk growth projects. Boardwalk has already paid for the majority of this through free cash flow and should earn enough free cash flow over the next year to pay for the rest. These projects will be put into service by 2020 with the majority of the revenue starting during 2019.


In 2017 Boardwalk earned $845.5 million in EBITDA adding back a recontracting loss of $7 million. Over the coming years I estimate they will gain $160 million from growth projects and lose as much as $250 million to recontracting. That leaves them with EBITDA of at least $755 million.
Steady, natural gas pipeline MLPs trade at roughly 12 times EBITDA. Post recontracting Boardwalk will be a high quality natural gas pipeline company, with the vast majority of revenue coming from predictable, long term contracts. Boardwalk’s recent growth projects have an average contract life of 17 years. After recontracting their problematic pipelines will represent a small amount of revenue and be at market rates. A dirty little secret of pipeline companies is that most of them have some recontracting issues but they are not as transparent as Boardwalk has been.

At 12 times $755 million in EBITDA Boardwalk would trade at $21.50. Since Boardwalk still needs another year of cash flow to pay for the growth projects the price target should also be for a year out. Discounting that back to today for a 10% return (including the dividend) works out to roughly $20 of value today.

So how is it possible that I have lower estimates than every analyst and a higher price target? Quite frankly my only major insight is that once the recontracting is resolved there will be no more uncertainty and the stock should be valued like its peers. Even in an adverse outcome that is worse than any analyst is expecting the stock should be higher. Over the next year we should find out the recontracting results for the majority of Boardwalk’s pipelines and the uncertainty should be lifted.

Distributable Cash Flow

At $755 million in EBITDA Boardwalk would have $475 million in distributable cash flow. If Boardwalk wanted to maintain 1.2 times dividend coverage they could pay a 14.3% dividend at today’s price. I believe they would first want to delever before paying out such a large percent of cash flow. Over time the dividend should go much higher although the timing is uncertain.

Boardwalk Management

Boardwalk management gets a bad rap because of the stock price and the dividend. When they planned the pipelines that are being recontracted over a decade there was no way to know that more productive shale fields would be discovered. As Forrest Gump says “Sh*t happens”. This is not the fault of management.

Boardwalk management was transparent and proactive when they realized the problem. They cut the dividend and planned ahead for the coming recontracting. Most MLP managements in a similar situation would just keep paying out a big dividend and drive off the cliff. With Boardwalk management I am comfortable because they are transparent about the problems. With other MLPs one doesn’t know what recontracting issues lie in the future.

Storage Upside

Boardwalk’s storage business has two types of customers, strategic and financial. A strategic customer might be an electrical plant that wants to have some natural gas in storage. A financial customer takes advantage of the natural gas futures curve. In recent years storage revenue has declined mainly because the natural gas curve has been unfavorable.

Management is bullish on strategic customers because of the location of their pipelines. Boardwalk has storage in areas where large amounts of facilities are being built that use natural gas such as LNG export facilities, petrochemical plants etc. These facilities may want to utilize some of Boardwalk’s storage. On the financial side they don’t think the natural gas futures curve could get any worse. This valuation doesn’t include any potential storage upside.

My clients and I are long shares of Boardwalk Pipeline Partners (BWP) at the time of this writing. Positions may change at any time

Yahoo For Sale

Company For Sale
The Fiasco At Yahoo
To say that the Yahoo's core business is being mismanaged is an understatement. To say Yahoo has been taking piles of cash and lighting in on fire would be a better description. Here are some examples of how Yahoo has incinerated shareholder money:
  • Yahoo paid $20 million for rights to stream an NFL game. In addition, there were production and streaming costs. The result was $3 million of ad revenue
  • Yahoo pays Katie Couric over $10 million a year for a streaming show with low viewership
  • Yahoo also created two original series that resulted in low viewership
  • Yahoo has spent hundreds of millions of dollars buying zombie companies in order to hire programmers
  • Yahoo top management pays itself handsomely for the amazing feat of lighting cash on fire
Yahoo Core Value In A Sale
I could make a page long list of how Yahoo wastes money but I believe I have made my point. Any half competent, non arsonist should be able to at least double Yahoo's EBITDA and cash flow. I am assuming that in a sale Yahoo would be able to fetch at least 8 times its very depressed EBITDA, which would be $6.4 billion or $6.81 per share. 
Some large Yahoo shareholders believe that Yahoo can fetch a price 50% higher but I want to be conservative in my assumptions. Despite complete mismanagement Yahoo is still one of the top visited sites on the internet with nearly $5 billion in revenue expected for 2016. Yahoo owns real estate that Starboard had appraised for a value of $1.5 billion (the crown jewel is a nearly 1 million square foot campus in Silicon Valley). Yahoo also owns $700 million worth of intellectual property and patents. I assigned no value to either the real estate or the IP in my estimate of the value of Yahoo. It is very possible that my assessment of Yahoo core's value is too low.
Cash, Yahoo Japan and Alibaba Holdings Value (all values as of the close of December 16, 2015)
The value of the remainder of Yahoo's assets are as follows: Yahoo has $5.8 billion in cash or $6.16 a share in cash. Yahoo owns $32.5 billion worth of Alibaba shares at yesterday's closing price of $84.63. I am assuming that once the core business is sold and the company is simplified into essentially a holding company that the discount on Alibaba shares will narrow to 20%, which I believe is conservative. At a 20% discount Alibaba is worth $27.66 per share. Yahoo's stake in yahoo Japan is worth $8.4 billion. I am assuming that Yahoo Japan will trade at a 40% discount as it currently is not clear to me how Yahoo will dispose of Yahoo Japan without paying taxes. If they find a way to do this than there is additional upside in the shares. At a 40% discount Yahoo's stake in Yahoo Japan is worth $5.35 per share.
Yahoo Total Value (all values as of the close of December 16, 2015)
Yahoo core                $6.81 per share (at 8 X depressed EBITDA)
Cash                          $6.16 per share
Alibaba Holdings     $27.66 per share (at 20% discount)
Yahoo Japan             $5.35 per share (at 40% discount)
Total value                $45.98 per share
Recent Price             $33.78
Total upside              36.1%

Yahoo Current Valuation
I believe the market is currently pricing in a worst case scenario for the value of Yahoo (assuming that one hedges the value of Alibaba and Yahoo Japan). At the current valuation both Yahoo Japan and Alibaba Holdings are being valued at a 40% discount to their market value, which is lower than their fully taxed value. The core business is being valued at four times depressed EBITDA and receiving no credit for real estate and IP. In a worst case scenario where Yahoo core could not be sold a decent operator should be able to increase EBITDA by getting rid of the obvious waste and by monetizing some of the assets. Yahoo has roughly 11,000 employees and one can make the argument they can operate with a significantly smaller amount.
Yahoo Shareholder Revolt
Yahoo has an array of activist shareholders that are all fed up with the performance of management and the board. I would encourage you to read the letters from Canyon Capital and Starboard to the board of directors among others. The writing is on the wall that  a nasty proxy fight is in store if Yahoo does not sell the core business. The only way for management and the board of directors to gracefully exit the situation is to sell the core business. The alternative is being humiliated as it is clear that Marissa Mayer is not the right leader for this company. I believe the board will take the logical route and sell the core business or it will be done for them once the board is ousted in a few months.
The Reason For This Opportunity
There are a number of reasons I believe such an attractive opportunity exists. I believe there are currently non economic sellers in the stock. Yahoo is likely most appropriate for event driven investors because of the many moving parts. A year ago event driven was the hottest category of hedge funds and was seeing inflows. After a year of poor performance the strategy is now seeing outflows, creating the equivalent of forced sellers.  In addition, there are likely a number selling for tax loss purposes and because they are fed up in general.
Yahoo is a difficult stock for a plain vanilla fund to hold because one must have an opinion on all the parts. Alibaba Holdings and Yahoo Japan cannot be hedged out because of short selling restrictions for these funds.  Once the core is sold and Yahoo Japan is sold or separated the remaining stock will be much simpler, essentially an Alibaba tracking stock.
After years of stumbling around the Yahoo board is finally doing the right thing by putting up the core business for sale. While investors are fatigued there is finally a light at the end of the tunnel.

Qualcomm's CEO Sad Admission

"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." -Warren Buffett

In evaluating Qualcomm I came to the conclusion that expenses were out of control. Despite knowing this I was shocked by the admission of the CEO of how little thought has gone into Qualcomm's spending. The following is a quote from Qualcomm's CEO, Steve Mollenkopf, at the Merrill Lynch Global Technology Conference a few weeks ago:

"But now we are in a position where you know looking at things like how much we are spending in R&D, are we getting the right return for R&D, are people in the right place, are we getting leverage in our supply chain" -transcript from Seeking Alpha

Steve Mollenkopf and his management team are one of the highest paid in the world and they were not looking at how much they were spending? They were not analyzing their return on R&D spending? They were not maximizing their supply chain? They don't even know if people are in the right place (whatever that means)?. What were they doing? This same management team wants to do acquisitions before they get their house in order?

Luckily, Qualcomm's business is so "wonderful" that even with a free spending management team that pays itself very handsomely the business generates loads of cash. Qualcomm's licensing business alone is expected to generate about $7 billion in EBIT next year. Qualcomm's entire enterprise value is roughly $70 billion.

Qualcomm owns many of the patents related to 3G, 4G & 4G LTE technology among others. Money manager Andy Macken of Montgomery Funds makes the following analogy to Qualcomm's licensing business  "It's a bit like owning the English language and then charging anyone that learns to speak English."  To which I would add, I believe more people use 3G or 4G technology than speak English.

The Qualcomm licensing business is a business that an idiot can run, to paraphrase Warren Buffett. This business is expected to generate the vast majority of profits at Qualcomm. The semiconductor business, which requires some management skill, has performed miserably. Even though Qualcomm is the market leader in its space with limited competition, Qualcomm has one of the worst profit margins in its industry. Qualcomm's profit margins are less than half of what they should be. With Qualcomm's scale there is simply no excuse for this.

Despite mismanagement Qualcomm is one the cheapest large cap tech stocks with an expected free cash flow yield of greater than 11% (to enterprise value). With the admission of the CEO that they weren't really paying attention to their spending it likely means that there are easy changes that could further boost profits. If they can get their margins to the industry norm for a market leader the boost would be tremendous.

Activist, Jana Partners, has taken note of Qualcomm's missteps and has been trying to prod management in the right direction. Some positive steps are being taken including returning over 20% of the market cap to shareholders over 2 years and a cost review by outside consultants. Qualcomm management is going along with these suggestions but it seems to be doing so in a  half hearted manner. Qualcomm waited months before beginning its accelerated repurchase program and then only announced a $5 billion program. Expense reductions have not yet begun in earnest even though management admits they are necessary. Further activist pressure on management will likely be necessary.

Even in its current state Qualcomm is undervalued. With a management team that finds religion (or is forcefully converted) the return potential is tremendous.  

Qualcomm : The Biggest Bargain In Large Cap Tech

Qualcomm Business
Qualcomm (QCOM) owns patents related to 3G, 4G & 4G LTE technologies (among others) that power smartphones. As a result Qualcomm receives a roughly 3% royalty on most smartphones sold in the world. Getting 3% of every smartphone sold seems like a pretty good business to be in but the market does not value Qualcomm that way.
Qualcomm trades at a roughly 10% free cash flow yield or 10 times earnings once one adjusts for the roughly $30 billion in cash they are hoarding. The reason for this valuation is that Qualcomm owns a second, less attractive business. Qualcomm makes chips for smartphones and this business has recently encountered more difficult competition. While semiconductors account for a smaller part of Qualcomm's profits they attract almost all the attention of analysts and investors.
If one were to put a market multiple on Qualcomm's attractive, licensing business and add back cash Qualcomm would trade at $85 versus the roughly $69 Qualcomm trades at today. However, this valuation assigns no value to Qualcomm's "terrible" semiconductor business that produces roughly $2 billion a year in profit. Even putting a ten multiple on that business would raise Qualcomm's valuation to $95.
Reasons For Undervaluation
I believe there are a number of reasons for Qualcomm's undervaluation. Qualcomm's licensing business is simple and predictable. As a result this business generates few headlines, little news and as a result receives little attention. The semiconductor business generates constant news of design wins & losses, more recently losses. As a result it seems Qualcomm's business is constantly under siege, even though its main profit engine has been chugging along. Additionally, Qualcomm is mainly followed by semiconductor analysts and investors who tend to focus solely on design wins & losses instead of keeping their eye on the main profit engine.
Qualcomm has grown its revenue nearly nine fold since 2002, attracting a number of growth investors. More recently growth has slowed due to the slowdown in the semiconductor business (even as earnings for the licensing business are growing at a double digit pace). As a result Qualcomm's investor base is transitioning from growth investors to value investors.
Catalyst For Change
An activist has recently accumulated shares of Qualcomm and nudged management to make positive changes. Instead of hoarding cash management will repurchase over 10% of the outstanding shares of Qualcomm this year in addition to paying a nearly 3% dividend. Moreover, Qualcomm has hired outside consultants to review their cost structure.
Almost every large cap technology company has had a period of transition after their explosive growth phase passed. Microsoft, Intel, Cisco, Oracle and even Apple's stock sputtered when growth slowed. In all these cases it was not until the stock became cheap and management began to return cash to shareholders in earnest that the stocks rebounded nicely. Qualcomm's stock has spent the past three years going nowhere while the market has exploded to the upside. As a result Qualcomm is now the cheapest large cap tech stock. Additionally, Qualcomm will likely return over $25 billion to investors over the next two years or greater than 22% of its market cap. If Qualcomm follows the script of any of these large cap tech stocks the stock price should rise by over 50%.
Qualcomm has always been a fast growing business that did not focus on expenses in the same manner that a mature company would. As a result there is a good chance that there are significant savings to be had by cutting expenses, resulting in improved margins. Qualcomm's margins are well below their peers even though Qualcomm has the scale necessary to have industry leading margins. Qualcomm has never undergone a major restructuring and has now hired outside advisors to review their cost structure. If Qualcomm can improve margins they can greatly improve the profitability of their semiconductor unit even if revenue declines.
Qualcomm Ventures
Qualcomm Ventures is likely the canary in the coalmine for the amount of waste and pet projects there are at Qualcomm. Qualcomm has a venture capital subsidiary that has somehow managed to lose money during the largest venture capital bubble ever. Qualcomm has no business being in the venture capital business and should instead return this cash to shareholders. If I was able to find this huge waste of money by reading through the 10-K, I can only imagine what the consultants will find once they thoroughly investigate the business.
Qualcomm is currently undergoing a process that almost every large cap tech stock has been through. Qualcomm is now a cheap stock, with a steady business, that is returning cash to shareholders by the boatload. The Qualcomm saga feels like a movie I have seen a hundred times before and the ending is a much higher stock price.

Amdocs: A Cash Machine On Sale

Amdocs (NASDAQ:DOX) has the type of strong, recurring cash flow stream that is normally highly valued by Wall Street. However, by looking at the valuation of Amdocs one would never know this. Excluding net cash (Amdocs has over $9 a share in cash), Amdocs trades at a roughly 10% trailing free cash flow yield and a little over 10 times forward earnings estimates.

Read the rest on Seeking Alpha

Higher One's High Potential Reward

*this was originally published on September 29 on SeekingAlpha and share price was ~$2.50. All figures are based on a ~$2.50 share price

  • Higher One generates roughly $40 million a year in free cash flow & trades at 3 times FCF.
  • Higher One has issues than can be worked through.
  • If Higher One can work through these issues it could be a $10 stock again.

Higher One's Business

Higher One (NYSE:ONE) operates in two related lines of business. Higher One's first line of business is providing software to universities. One of their software tools facilitates the transmission of financial aid to students. Financial aid is paid directly to the university from the government & private lenders. The universities take out tuition, room & board and then give the remaining amount to the student. Higher One's software facilitates these transfers and the processes associated with them. Roughly 35% of revenue comes from their software.

Higher One's second line of business is related to the software they provide for the transmission of financial aid. A student can choose to get their financial aid money in an ACH transfer to their bank account or receive a check. A third option is to open a Higher One account, mainly for students that do not have bank accounts. Higher One partners with banks to provide students with a debit/ATM card so that they could access their financial aid money. Roughly 65% of revenue comes from the Higher One account.

There are numerous ways Higher One earns money through their Higher One account. 45% of Higher One account revenue comes from interchange fees, which is the money merchants are charged when somebody uses their Higher One card to buy something. The other 55% of revenue is earned on fees charged to the student. These are typical fees banks charge such as a $2.50 fee for using the ATM of other banks rather than the ATMs provided by Higher One.

Higher One's Profitability

Higher One has an extremely profitable business. Over the past few years Higher One has generated roughly $40 million a year in free cash flow excluding the construction costs of their headquarters, which is completed, and similar onetime costs. Higher One is on track to produce a similar amount of cash this year excluding a onetime $15 million payment to settle a lawsuit.

So why does a company generating $40 million a year in cash trade at a market cap of less than $120 million. Higher One has two major overhangs:

The Federal Reserve

The Federal Reserve has told Higher One that they will seek up to $35 million from Higher One for misstatements & omissions related to the marketing of the Higher One account. Higher One believes they will be responsible to pay the FDIC an equal amount so the potential liability is $70 million. Currently the two parties are in negotiations. Higher One has taken a charge of $8.75 million relating to this matter but it will likely cost them more.

Higher One has ample free cash flow to cover a $70 million fine over time, even though the ultimate fine is unlikely to be that high. The issue is that Higher One has $16 million in cash and owes $94 million on their credit line. Paying a large fine would put Higher One in breach of one of their debt covenants. Additionally, they may need to borrow more money to cover the fine. Higher One's management says that their lenders want to work with them but want to know the amount of the fine first.

I believe the fine by the Federal Reserve is the biggest risk to Higher One as their destiny is not in their own hands. With that said, the most likely outcome is that Higher One's lenders work with them. It does not make any sense for Higher One's lenders to force a default. Higher One is not highly levered and is producing a lot of cash. I believe Higher One will have close to $40 million in cash by year end.

The Department of Education

The Department of Education (DOE) is attempting to make new rules concerning student bank accounts. The earliest these rules will come into effect is July 2016 if they are passed by November 2015. This year's rule making session ended without a vote as banks don't believe the Department of Education has the right to govern them. They believe any rules should come from their regulators. It is possible that this fight ends up in court and it takes years, if ever, for the new rules to come into effect. The good news for Higher One is that for the next 2 years their ability to continue to generate cash is unlikely to be impeded.

The original rule changes proposed by the DOE were draconian and would have been a tremendous hit for Higher One. The DOE proposed forcing banks to give students two free ATM withdrawals a month at other bank ATMs and curbing debit card fees. By the time the rule making session was over the DOE was open to allowing Higher One to charge ATM fees as long as they joined a larger ATM network. This would cost some money but ultimately is unlikely to hurt profitability much. Higher One may have to remove debit card fees but is seeking offsets to the debit card fees.

The bank lobby is fighting tooth & nail against the DOE regulating them and the bank lobby doesn't want to make any concessions. I would be surprised if anything passed but in the investing community I seem to be in the minority. The bank lobby also has the tools to punt this issue to the next administration by suing the DOE. The private colleges have delayed regulations by the DOE with lawsuits.

The Hyperbole

There is a lot of hyperbole directed at Higher One as an evil company that profits at the expense of students. In reality Higher One largely charges fees similar to their competitors. The two fees that critics are loudest about is the ATM fee & the debit card fee. Higher One charges $2.50 for using a competitor's ATM. Bank of America and Wells Fargo both charge $2.50, while Chase charges $2. Why this makes Higher One evil is beyond me.

Higher One charges 50 cents when using the debit card. However, the fee can be avoided by simply selecting credit when the cashier asks "debit or credit". I used to use a Chase debit card. But once the Fed limited debit card interchange fees Chase started charging me $15 a month to use my debit card. Their intention was to make me switch to credit so they can collect a higher interchange fee from the merchant, so I switched. All the student needs to do is to say credit to avoid the 50 cent fee and Higher One will earn their money from the merchant instead. And 50 cents is a lot better than $15 a month.

Cost Cutting

Higher One should be able to cut at least $10 million in costs. General & administrative costs as a percent of revenue have risen from 21% a few years ago to 28% today. This is partially due to merger integration costs and partly due to increased professional fees in related to the outstanding regulatory issues. The merger integration should be completed some time in 2015. Eventually the regulatory issues will be settled as well. Higher One management says that all costs are on the table. I suspect there are many costs to cut as Higher One was once a hot "payments" company that built themselves a fancy headquarters. I see no reason G&A can't go back down to its historical level which would save over $15 million a year. This would likely more than offset any revenue hit from new rules by the DOE.


Higher One is not without risk. It is possible their lenders or the government will put them out of business. This outcome is unlikely as it does not make sense for lenders to bankrupt a company that is able to pay. Debt covenant waivers are granted all the time and that is the most likely outcome here as well. The government doesn't generally put real companies providing a real service out of business. Despite the hyperbole Higher One provides a needed service for a similar price to its competitors. If Higher One can get through this mess at their current earnings level the company can one day trade at $10 again and be a multi-bagger.

Updated Market Thoughts

I have not written a post in over a year about the overall market. For nearly two years the market climbed higher despite extreme sentiment readings, with only minor blips along the way. Historically, Investors Intelligence bears readings below 20% were a warning sign.  Yet for the better part of two years Investors Intelligence bears were under 20% with no repercussions. There are numerous such examples. After a while I decided to stop pissing in the wind and stopped writing posts about the extremes in sentiment. With all the nervousness out there (myself included) I thought this would be a good time to update my market thoughts.

I believe the reason sentiment stopped working was that corporations have been providing a steady bid in the market through share repurchases and cash M&A. In the past couple of years corporations finally started to use the nearly free money in the bond market to lever up in earnest. I believe this steady bid from corporations combined with a positive feedback loop from investors has led to this steady grind higher. I would note that the S&P 500 has outperformed both small caps and international equities, as the bulk of share repurchase and cash M&A occurred in larger cap US stocks.

The good news is that the backdrop of corporations using cheap money to purchase stock is still in full force. Corporations are still able to borrow cheaply and are doing so.  In a recent three week period about $60 billion of cash M&A was announced, while the steady repurchases largely continue. The economic backdrop of steady yet uninspiring growth continues as well.

The bad news is that investors have grown complacent after two years of relatively little pain. Individual investors have historically high allocations to stocks, margin debt is at a record and I have heard endless stories of institutional allocators in search of more beta.  It appears that this positive sentiment is being unwound and given the aggressive positioning of the investment community there could be more to come.

If the unwind of excessive sentiment continues it is likely to trump corporate buying in the near term and the sharp, painful correction is likely to continue. However, over the medium term the steady bid from corporations is likely to assert itself again. Corporate buying combined with positive seasonality starting in November, make it likely that near term losses would be recuperated over the next few months. But in the interim it could get ugly and a few more sleepless nights may be ahead for investors.