Your eyes are not deceiving you – during the final 30 minutes of every trading day, the stocks are, indeed, getting weaker. It’s also the point in time when many buyers walk away.
J.C. O’Hara is a market technician with FBN Securities, and he was perplexed by the apparent weakness. Therefore, he decided to run the number and learned that the S&P 500 Index was actually a little higher. If people were to purchase in just the last 30 minutes of the day, the percent would be down by two.
Talking with the “Closing Bell” on CNBC, the reason it’s odd is because it’s a bull market, he said. This means stocks tend to do much better near the closing bell and a bit weaker at the open. He said the time to trade is 30 minutes after the bell starts and 30 minutes before it rings.
However, something is different this time around.
While there are many reasons for this, there’s one that speaks volumes in to the stock market’s six-plus year march. The listed companies have a deadline that begins at 3:30 p.m.; 30 minutes before the 4 p.m. closing bell.
The leading, most liquid names have until 10 minutes to 4 p.m. (3:50 p.m.). A floor governor with the New York Stock Exchange said he doesn’t see it.
Corporate issuers are the reason behind the rally
Now, it’s been noted that the rally is being caused by, none other than, corporate America – macro hedge funds, pension funds, individual investors, etc. In April, stock buybacks totaled $141 billion. Based on information from Birinyi Associates, this was a new record. Should this rally continue, there were be a record number of $1.2 trillion in buybacks, which would certainly outdo 2007’s $863 billion.
There’s no doubt how commonplace share buybacks have become. After all funds such as PowerShares Buyback Achievers Portfolio and TrimTabs Float Shrink track them as use them as an investment strategy. The less shares there are outstanding, the better the earnings per share for the company and the higher the value for each one. Of course, this is under the assumption that market value doesn’t change and executive can demonstrate more profitable stock options.
The key question for investors is whether or not the appetite of corporate America will decrease as the prices of stocks continues moving higher.
According to New Albion Partner Chief Market Strategist Brian Reynolds, there’s nothing that indicates this is going to happen. He said never has there been a time where the value level is too high that causes a group of CEOs to stop making purchases altogether.
Reynolds said the only time CEOs stopped buying was when there was a credit crisis – 2000 and 2007. He said during market peaks, the companies were still making purchases with price-to-earnings ratios on the S&P 500 being 29 and 25. With today’s “multiple” market, that number is just under 19. This is using Reynolds’ formula of two quarters of anticipated future earnings and two past quarter.
In all sense and purposes, it means today’s stocks are nowhere clear to being “excessively high” for companies to quit making purchases.
Now, the pressure may come from other places – shareholders worried how best to use the corporate money in the long-range scheme of things or policymakers frantic for investment. At the moment, this kind of pressure is rather low.
Other investors could make their presence known, either coming back into the market or invest in larger funds.
It’s the reluctance of pension funds getting involved in the stock market that’s partially fueling the buyback-led rally. It’s also the reason some are worried about the increase of debt-fueled buybacks.
Reynolds said public pension funds don’t want to be subjected to the risk that are associated with stocks but need to make 7.5 percent, which is why they need to keep pouring money into prized credit funds. This, he said, is the reason there’s such a powerful credit boom.
This flow of credit is giving companies with the money to do buybacks the ability to lift the price of shares.
Why it’s crazy to pile on the debt
Stanley Druckenmiller is one of the country’s most successful investors and a billionaire. During a New York event, he said he believes it is nuts to pile on the debt. Druckenmiller said business owners who are in it for the long haul should not be borrowing money in order to buy back stock.
He spoke with CNBC back in March about his concerns with the U.S. doubling its corporate debt to nearly $7 trillion. In 2007, the debt was just $3.5 trillion.
Druckenmiller said a majority of the mix is from the highly leveraged material. And, if people were to looking at what companies have used it for, it all boils down to financial engineering.
Montreal-based brokerage firm Pavilion Global Markets said the buyback yield with American stocks is much higher than Japan, which uses the Nikkei 225 and Europe, which uses the STOXX Europe 600 index.
There is a 2.82 percent buyback yield on the S&P 500 whereas Japan a 0.95 percent and Europe has a 0.87 percent.
The problem stems from the growth of bond assurance such as debt issues that pertain to finance share buybacks. Much of the growth has occurred in the U.S., which is hurting the rewards of shareholders.
Basically, this makes European stocks much more attractive to invest in then American stocks… at least for now.
When it comes to the U.S. market, the best development would be an array of investors paying the stocks while companies take a bit of a breather, especially when it comes to debt-fueled buybacks.
Will this take place? Investors need to look at the last 30 minutes of any given trading day to guide them.
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