Has financial engineering run its course? If so, what are the implications for the rally? Investing 101 says companies reward shareholders in two ways: dividend payments and/or stock buybacks.
Dividends are checks one receives inthe mail, while buybacks make your slice of the pie bigger by reducing shares and in the process, it bolsters the earnings per share; for many, this is the key driver of share prices.
In 2013, American companies bought back $500 billion of their own stock. In the first half of this year, $275 billion worth of stock was repurchased by companies; these levels were last seen in 2007. This year, corporate insiders are selling a lot more than they are buying. Through September 12th, there were 7,181 purchases and 23,313 sells. This is the lowest ratio of buys to sells since 2000. Corporate buybacks have never been known for perfect timing, but insiders have a canny knack for buying and selling near market bottoms and tops.
However, as I discussed on my show last night, I understand why investors are becoming antsy. Therefore, I do not think buybacks, or a lack of buybacks, should be at the top of the list for concern… or even on the list for that matter. Yes, they have helped the bottom line, but the fact is that businesses are not putting more money into investments, and that is problematic.
This is an indictment of the economy and its current fiscal policies. Meanwhile, I advise you to watch insider selling. While this is not as important as insider buying when it comes to decision-making, if it becomes a Tsunami of sells, I would raise a yellow flag.
Interestingly, Bed Bath and Beyond (BBBY) posted a strong number last night, in part, because the company bought back $1.0 billion of its own stock during the quarter. Speaking of yesterday, despite that sloppy close, I saw solid efforts to get the market into the black, especially the NASDAQ. Big names like Facebook and Apple closed strong in the plus column. Yes, we need the top line to be the main driver of the bottom line, and valuations of 18 times forward earnings that worry some institutional investors. We are not at the point where the market takes a massive hit, but a small hit would feel massive in this climate. Be prepared to buy and not to sell.