Corporations were the biggest buyers of stock during the bull market, but now they’re selling# Stock
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https://www.cnbc.com/2019/05/29/corporations-were-the-biggest-buyers-of-
stock-during-the-bull-market-but-now-they-are-selling.html
Typically, the public is considered the “crowd” in stock markets, buying
the the most at the top and selling the least at the bottom.
But corporations are stepping into the role of so-called “dumb money.”
Corporate stock offerings have soared in the past 40 years. They’re slowing
down this year though, likely due to trade war jitters and global
uncertainty.
“Strong public selling should be bullish but perhaps the crowd this cycle
is corporations,” Ned Davis said.
Traders On The Floor Of Chicago Board Of Options Exchange 120125 1
A trader takes an order in the Standard & Poor’s 500 stock index options
pit at the Chicago Board Options Exchange following the Federal Open Market
Committee meeting on January 25, 2012 in Chicago, Illinois.
Scott Olson | Getty Images News | Getty Images
Corporations have been the biggest buyers of stock during the bull market.
But they’re slowing down, which could be a troubling indicator.
Typically, the public is considered the “crowd” in stock markets, or put
another way, “dumb money.” Retail investors tend to buy the most at the
top and sells the least at the bottom. Retail investors have not been
participating as much in the market, making it harder to use that crowd as
an indicator of sentiment. But Ned Davis, senior investment strategist at
Ned Davis Research, said there appears to be a new crowd to watch: companies.
“Strong public selling should be bullish but perhaps the crowd this cycle
is corporations,” Davis wrote in a note to clients Wednesday. “The non-
financial corporate crowd has piled into stocks with buybacks, mergers, and
acquisitions.”
Davis pointed out that recently, new corporate offerings have jumped to the
highest level in years. This includes big initial public offerings like Uber
and Lyft, as well as secondary offerings from companies such as Tesla.
Based on that, “maybe even the corporate crowd is starting to feel stocks
are overdone,” Davis said.
Investors believe it’s a basic supply and demand equation. Demand for stock
in the form of buybacks is declining, while supply of shares through IPOs
and other issuance is increasing. When supply outstrips demand for a product
, typically the price falls and stocks are no different, they argue.
That surge in buybacks is showing signs of weakness though — an indicator
that companies are less optimistic about the future. According to Larry
McDonald, editor of The Bear Traps Report, a sharp slowdown in capital
expenditures means companies are also going to buy fewer of their own shares
. The latest quarterly capital expenditures for the S&P 500 came in at the
lowest since the fourth quarter of 2017, which is “foreshadowing” of a
decline in stock buybacks.
“In our view, the prolonged trade-war (and the uncertainty it brings) has
paralyzed CFOs and their ability to invest for the future,” he said.
McDonald pointed to business confidence, earnings, and exports “all rolling
over significantly.” Buybacks are often fueled by corporate debt. In order
to buy back their own stock, companies borrow money as a funding strategy.
According to McDonald, more than 50% of the debt issuance in the past decade
has been used to buy back stocks.
“We’ve started to see cracks in terms of debt issuance. This pierces
company’s buyback ability,” McDonald said.
Instead of high-yielding, but riskier corporate debt or junk bonds,
investors are fleeing to safer options like U.S. Treasurys. Trade war
jitters sent the 10-year Treasury note yield, which moves in the opposite
direction of prices, to its lowest level since September 2017 Wednesday.
That triggered concerns about the economic outlook, sending stocks down as
much as 400 points. Increasing trade tensions in the China-U.S. trade fight
also weighed on markets.
“I’m confident that capital markets are going to shut down meaningfully
for an extended period,” McDonald said.
stock-during-the-bull-market-but-now-they-are-selling.html
Typically, the public is considered the “crowd” in stock markets, buying
the the most at the top and selling the least at the bottom.
But corporations are stepping into the role of so-called “dumb money.”
Corporate stock offerings have soared in the past 40 years. They’re slowing
down this year though, likely due to trade war jitters and global
uncertainty.
“Strong public selling should be bullish but perhaps the crowd this cycle
is corporations,” Ned Davis said.
Traders On The Floor Of Chicago Board Of Options Exchange 120125 1
A trader takes an order in the Standard & Poor’s 500 stock index options
pit at the Chicago Board Options Exchange following the Federal Open Market
Committee meeting on January 25, 2012 in Chicago, Illinois.
Scott Olson | Getty Images News | Getty Images
Corporations have been the biggest buyers of stock during the bull market.
But they’re slowing down, which could be a troubling indicator.
Typically, the public is considered the “crowd” in stock markets, or put
another way, “dumb money.” Retail investors tend to buy the most at the
top and sells the least at the bottom. Retail investors have not been
participating as much in the market, making it harder to use that crowd as
an indicator of sentiment. But Ned Davis, senior investment strategist at
Ned Davis Research, said there appears to be a new crowd to watch: companies.
“Strong public selling should be bullish but perhaps the crowd this cycle
is corporations,” Davis wrote in a note to clients Wednesday. “The non-
financial corporate crowd has piled into stocks with buybacks, mergers, and
acquisitions.”
Davis pointed out that recently, new corporate offerings have jumped to the
highest level in years. This includes big initial public offerings like Uber
and Lyft, as well as secondary offerings from companies such as Tesla.
Based on that, “maybe even the corporate crowd is starting to feel stocks
are overdone,” Davis said.
Investors believe it’s a basic supply and demand equation. Demand for stock
in the form of buybacks is declining, while supply of shares through IPOs
and other issuance is increasing. When supply outstrips demand for a product
, typically the price falls and stocks are no different, they argue.
That surge in buybacks is showing signs of weakness though — an indicator
that companies are less optimistic about the future. According to Larry
McDonald, editor of The Bear Traps Report, a sharp slowdown in capital
expenditures means companies are also going to buy fewer of their own shares
. The latest quarterly capital expenditures for the S&P 500 came in at the
lowest since the fourth quarter of 2017, which is “foreshadowing” of a
decline in stock buybacks.
“In our view, the prolonged trade-war (and the uncertainty it brings) has
paralyzed CFOs and their ability to invest for the future,” he said.
McDonald pointed to business confidence, earnings, and exports “all rolling
over significantly.” Buybacks are often fueled by corporate debt. In order
to buy back their own stock, companies borrow money as a funding strategy.
According to McDonald, more than 50% of the debt issuance in the past decade
has been used to buy back stocks.
“We’ve started to see cracks in terms of debt issuance. This pierces
company’s buyback ability,” McDonald said.
Instead of high-yielding, but riskier corporate debt or junk bonds,
investors are fleeing to safer options like U.S. Treasurys. Trade war
jitters sent the 10-year Treasury note yield, which moves in the opposite
direction of prices, to its lowest level since September 2017 Wednesday.
That triggered concerns about the economic outlook, sending stocks down as
much as 400 points. Increasing trade tensions in the China-U.S. trade fight
also weighed on markets.
“I’m confident that capital markets are going to shut down meaningfully
for an extended period,” McDonald said.