This chart from Laszlo Birinyi’s team at the Ticker Sense blog generated a lot of chatter in the blogosphere yesterday:
It shows that the monthly buyback authorization for Feb 2013 was the highest in history, surpassing the previous record in Dec 2007. Many were quick to point out that the majority of the prior record authorizations occurred in 2007, which just happened to be the top of the market. The counter argument from the bulls was that corporations are finally starting to deploy some of the excess cash, and the buybacks were just more fuel for the fire. (Worth noting here that a buyback “authorization” does not mean actual buying of the stock – simply that the company now has board authorization to engage in buybacks of that size going forward.)
Both sides are probably right, in that strong buybacks are a sign of euphoria – corporations have never been stellar market timers – but they also do add immediate buying power for equities. What interests me about the above chart is the volatility-reducing impact of buybacks overall.
During a period of strong buybacks, particularly when there is low volume, corporations are out there buying every day. In the absence of forceful selling, that’s part of what creates those slow, grinding low volatility moves higher. This creates a psychological expectation in the market that the low volatility is going to continue. So everyone ends up leaning one way (short volatility, long delta). It’s a virtuous cycle until external factors cause sufficient worry for large investors and traders about the future profit outlook. At that point, everyone leaning one way becomes a significant risk.
The current market is still in the midst of the virtuous cycle. But the growth outlook for 2013 is murkier than usual (with the payroll tax hike and sequester making projections difficult). Meanwhile, analysts are expecting 2013 earnings growth of almost 10% for the S&P 500, when it was flat in 2012. Will any missteps cause sufficient worry among the largest market participants? That’s the key question, and will trump any short-term impact from corporate buybacks.
Markets overnight:
- Asia was mixed, as China was lower, but Japan higher on little news.
- Europe has been green for most of the session, though tight range, now up about 0.25% on average. ECB just left rates unchanged at 0.75%, but key event is Draghi speaking at 8:30 am EST
- SPX futures close to flat. Treasuries flat, dollar a bit lower, and commodities slightly higher on the whole.
- Jobless Claims, Trade Balance, and Nonfarm Productivity Data released at 8:30 am.