The declining stock of US equities

Although Yellen wasn't as hawkish as she could have been (she didn't repeat the Rosengren/minutes line about the market underestimating the degree of possible tightening), she was also a damn sight less dovish than she could have been as well.  It was refreshing to hear her take a generally upbeat take on things, albeit couched with every caveat under the sun (and a few generally found under Alpha Centauri.)

Like the honey badger, however, Spooz don't give a damn, they just do what they want.  Recently, that has generally involved "going up".  The ongoing resilience of US equities in some ways seems to defy both fundamentals and common sense, though specious rationales can always be trotted out to justify anything.  As a sense check, Macro Man crafted a little model using just changes in the Citi economic surprise index and a measure of Fed pricing to see how well it fit with changes in the SPX.  Although the correlation isn't perfect- you'd hardly expect it to be- calculating coefficients using data back to 2006 still generates a decent fit over the last couple of years.   Notably, the model is in agreement with the recent strength of US equities.


Of course, this model is merely descriptive, not prescriptive- in other words, it's not trying to predict price action, merely explain it.  On a more macro basis, the real elephant in the room when it comes to US equities is, of course, buybacks.  Although one hears anecdotes of buyback programs or even statistics about the annual run rate of buybacks, sometimes it's hard to put those numbers into perspective.

Macro Man finally got around to calculating an index to illustrate the impact of buybacks, and it's pretty stunning.  The methodology was simply to divide the market capitalization of the SPX by the price to get a measure of "shares outstanding".   After rising steadily in the bull market of the 1990's, the index peaked in 2004 and has trended sideways to lower ever since.  It's currently a gnat's whisker from the low registered in April '09 and some 13% below the highs of 2004.

The irony is a delicious one.   After a crisis engendered by banks' financial engineering led to a regulatory crackdown on such practices, the entire modus vivendi of large American corporations over the past few years has been...financial engineering!  Over the last half-century, the only other episode of a steady decline in SPX shares outstanding was the second half of the 1980's, a period not generally renowned for either prudent business practices or financial stability.  At least back then savers could earn a decent return on their cash without being forced into equities....

In the meantime, the contrast with Europe remains stark.  Look no further than the banking sector, where the SX7E remains locked in a pennant formation that looks suspiciously like a continuation pattern...


Like the rest of the SPX, US banks continue to show signs of life, come hell or high water:

The longer the US danse macabre upwards continues, the more likely that it will end badly.  Of course, saying how something will end is a hell of a lot easier than saying when it will end; for the time being, the bear argument is clearly not in force in the US, though Macro Man (and, he suspects, others) are watching sundry canaries with a ready eye.

Finally, mea culpa for a bad call on USD/CAD yesterday.  At least your author got the stop level right...
Previous
Next Post »

26 comments

Click here for comments
Whammer
admin
June 7, 2016 at 7:25 AM ×

@MM, did you do the chart for the late '80s? Or am I missing something? Your general point about "lack of disciplined behavior" holds for the late '00s too....

Reply
avatar
Anonymous
admin
June 7, 2016 at 8:09 AM ×

"Sell EU equities" HAHAHAHAHA

Look Dax up nearly 100 points in first 5 mins of London session... will you bears never learn?

Reply
avatar
checkmate
admin
June 7, 2016 at 8:20 AM ×

"Look Dax up nearly 100 points in first 5 mins of London session... will you bears never learn?"
Perhaps more to the point is why would anyone care about 100 DAX points within the context of any Macro arguments? Now if you're a Day trader I get it, but what has Day Trading to do with Macro?
Go away and think about it.

Reply
avatar
checkmate
admin
June 7, 2016 at 8:30 AM ×

Having got bored with with all the chat about central banks what do we think about joining these dots. Saudi diversification very clear now. The future for Oil and the petrol engine and technological change. Vote in Holland I believe discussing the ale of new cars with petrol engines circa 2025. Is it also Paris discussing ta ban on petrol engines? VW investing 8 billion in a battery factory.
I could wish for more experience relative to the Automotive Industry because it appears to me we are either just in or approaching a major turning point for Auto's which will have major implications for all things Oil related.
It isn't lost on me that Saudi A choose this time to dilute their interest in Aramco and of course the underlying trend to reinvest and hold US debt that's long been associated with it.
I view this has a statement from Saudi has to the longer term future of Oil within the global markets need for Energy.
Not a tomorrow issue and nothing to do with 100 Dax points ,but an early door onto one of the next big macro themes? I think so.

Reply
avatar
Polemic
admin
June 7, 2016 at 9:06 AM ×

I'm not sure if stocks are worth buying or selling. Or more precisely never worth owning in the first place to ever need to sell. Just avoid. Non majority share holders are the last in the foodchain of reward in a company who, like traders in bank dealing rooms at bonus time, are paid just enough to keep them.

Private equity and venture capital? That a where the value is. The listing is the cash in, not the start, of fortunes for stock holders.



Reply
avatar
JB
admin
June 7, 2016 at 10:19 AM ×

Anon 8:09 Being as the Dax is down circa 5% this year and some 2200 points since its high last year (Shortly after the announcement of QE). Its hardly a screaming buy just because its rallied 100 ticks this morning. We are seeing a genuine bid in all things risk related but the smart money is trading with the path of least resistance ie US large cap equities/Commodities/HYG. Im frankly very very bored of every man and his dog who shouts from the roof top 'BTFD' at every 1% bounce in underperforming (They may as well be an EM asset) European equities.

MM - An interesting piece though.

On a different note, being as it will be the only topic in the news theses next couple of weeks. Can we fire up the wheel of fortune to show if the UK will/will not remain in Europe and what the BS Political argument is for staying/leaving? The results will certainly be more accurate than the current pollsters!

Reply
avatar
checkmate
admin
June 7, 2016 at 11:09 AM ×

For clarity 3 years and out I'm an equity bull, but in the nearer term I am acutely aware that despite sentiment measures and so called money sidelined the situation is still one where leverage is now off of last years highs ,but still much higher than is healthy in the event of any significant economic shock. Looking back it's pretty much unprecedented that leverage at these levels goes unpunished has part of the mean reversion process that has always been implicit in economic cycles. I certainly understand that in this cycle we are actually seeing unprecedented levels of central bank mediation in scale and longevity hence I am unsurprised that leverage remains so high in this cycle. I just don't see the near term rewards for taking on that risk. I'm pretty sure I'm not alone in that, but of course there is no shortage of people about who must always have a position on or are seeking anew position during the cross currents of noise that prevail. Seasonally, I see action much in previous years as far as that goes.

Reply
avatar
TraderJim
admin
June 7, 2016 at 1:50 PM ×

Yes MM and those share buy backs are funded by debt. CEOs are struggling with revenues so this is their balance sheet engineering to sustain EPS.

Corporate debt is very cheap so why not from their perspective.

So as long as Yellen keeps rates on the floor, CEOs will continue buy backs given challenging revenue growth.

In turn Yellen is in the thrall of SPX as she knows if she raises rates by any serious degree SPX will get wacked which will spill into the real economy (Soros's Reflexivity idea where financial market movements chain reaction into economic numbers and then reinforce each other)

It seems she is just 'probing' the market with her speeches to see if she has any room. Seeking to raise rates 'a little' aligned with some positive economic news (or at least a lack of recession signals) so SPX stays buoyant on no recession fears and she gets some normalisation. Of course, if she moves too out of line, SPX dips and she releases the doves and the market rises.

SPX at 2112 today, Yellen's got your back. Go dip buyers.

Eventually, a black swan (or at least a brown duck) will waddle onto the beach and dump on the Fed

But might not be until next year, we need to see some recession signals. None yet.



Reply
avatar
Unknown
admin
June 7, 2016 at 2:38 PM ×

Buybacks actually affect the index more than they should because of the calculation methodology. Instead of adjusting the weight each day as if the buyback was a tiny dividend the index weight is only adjusted on a quarterly basis. If you model it you can see that an index of where returns are paid as buybacks outperforms one where returns are paid as dividends everything else being equal (eg tax etc). This is a stupid result and an artifact of the days when buybacks were just not that important

Reply
avatar
Leftback
admin
June 7, 2016 at 3:14 PM ×

Mindless day ahead. Of the many gaps that have been filled during this orgy of gap filling (some, but not all, of which we predicted at the nadir of February's panic) the one that sticks out as not filled is the NAZ opening gap from 5000. That level has been tagged so many times it would be unsurprising to see it visited once more before the denouement begins.

Some signs of shale oil supplies coming back on line in the US at $50, rig counts will bear watching. WTI and Brent rally on borrowed time here with global demand weak, refineries about to slow down and supertankers drifting outside major harbors.

Reply
avatar
Nico G
admin
June 7, 2016 at 3:34 PM ×

fear and greed in las vegas

http://money.cnn.com/data/fear-and-greed/

Reply
avatar
johno
admin
June 7, 2016 at 3:52 PM ×

Nice piece of work, MM. I hadn't seen buybacks presented that way, but makes the point well -- the supply of this commodity is shrinking. US equity shorts, bear that in mind. Shorting US equities is ... "courageous," unless a recession or credit upheaval comes into view (in which case, firms will reduce buybacks and/or issue equity to shore up balance sheets). A related point made by JPM's strategist Loeys is that no equity bear market has started more than 13 months before a recession. He cheekily remarked this weekend that that means the SPX has to go to a new high because it's been over 13 months since the last high and we've seen no recession. I got a laugh from that, as I'm sure the he intended. Anything can happen, especially since the current economic setup is really without precedent in the post-WW2 era. Another scenario is one where, instead of a sudden recession/shock altering the net supply of stock, we get a gradual deterioration in balance sheets and drawn-out fall in net buybacks. That wouldn't be very exciting to trade.

Reply
avatar
abee crombie
admin
June 7, 2016 at 4:34 PM ×

MM, howard silverblatt of S&P posts a weekly S&P earnings excel sheet where you could have easily gotten those "share" numbers, FWIW, different absolute numbers but same picture. Also some interesting nuggets always. Updated weekly

https://us.spindices.com/documents/additional-material/sp-500-eps-est.xlsx

My playbook is now Spoos from 1990. I was just a kid then but looks very similar. Sell off in January from a double top of the year before, but it was quick and failed to sustain. test of 200 day in March/April and then new highs in June July only to sell off into October.

http://imgur.com/ZuGDuJe

any thoughts from those who were around then

Reply
avatar
Nico G
admin
June 7, 2016 at 4:45 PM ×

habibi i bet you my yacht the sell off comes (well) before October

Reply
avatar
abee crombie
admin
June 7, 2016 at 4:46 PM ×

also, SPBUYUP - S&P buyback index has been under performing pretty nicely since mid 2015... though it is working in EU

Reply
avatar
Anonymous
admin
June 7, 2016 at 7:32 PM ×

Inside the machine..buying €80 billion a month of public and private sector securities...just a simple click of a mouse...we are gouging ourselves on one big free lunch


https://www.youtube.com/watch?v=xZkwu9NRfzs

Reply
avatar
Anonymous
admin
June 7, 2016 at 7:41 PM ×

is it just me or have equities become extremely autocorrelated, especially if you are looking at daily returns over weekly periods. this phenomenon appears to have been going on since basically august of last year. it would make options cheaper than they appear. i'd also point out that retail keeps throwing money in low vol spx funds. these funds effectively change their leverage based on the current realized volatility. than means if we get a selloff, all these funds will rush to delever at once.

anyway, i think its becoming compelling to own some sort of vol (vxx straddles) or synethetic short in the june 30th bucket in spoos to get brexit and a bevy of other macro events. i like selling the 2175/2225 call spread to buy some put spreads.

Reply
avatar
Anonymous
admin
June 7, 2016 at 8:07 PM ×

is there any quantifiable way to draw a relationship btw china capital outflows and bitcoin rip?

Reply
avatar
Corey
admin
June 7, 2016 at 8:10 PM ×

@ Nico - I'll take the over on Oct. I dont have a yacht so would you accept free commode cleaning services in exchange if I lose?

Reply
avatar
skr
admin
June 7, 2016 at 9:25 PM ×

Anyone else feeling, this is the calm before the storm? strange day.

Reply
avatar
Anonymous
admin
June 7, 2016 at 10:28 PM ×

SKR

Seasonality in play...
https://twitter.com/ukarlewitz/status/740284295881711616

Reply
avatar
Anonymous
admin
June 8, 2016 at 1:10 AM ×

MM- any thoughts on MXN here and why it has decoupled from just about everything else?

Reply
avatar
Anonymous
admin
June 8, 2016 at 1:49 AM ×

Daily Mail: Brexit vote is non binding, only advisory.

'The EU referendum is merely advisory; it has no legal standing to force an exit. Parliament is still sovereign.
'We will need an Act of Parliament to revoke the European Communities Act 1972, by which Britain joined the EEC or Common Market, or perhaps a paving bill enabling the Government to start the Leave negotiations. But whatever, a vote will be required."


Reply
avatar
Corey
admin
June 8, 2016 at 3:37 AM ×

I just read my last comment and I want to clarify, I'm not saying I'm bullish, rather heads I win a yacht and tails I get to shovel sh*t, which at this point seems more exciting and potentially intellectually stimulating than listening to these intellectual tufts at the fed try and read the data

Reply
avatar
HardMann
admin
June 8, 2016 at 9:37 AM ×

The buyback index has been underperforming the S&P in the last year I believe ?
The S&P to me is the last thing people can buy. Bonds too pricey in most jurisdictions, Estoxx & Nikkei too risky.....just buy Spoos & tech......and with yields so -ve everywhere money is flooding in.
In the last month or so we have had higher rates, lower rates, strong data, weak data, remain winning, Brexit doing better, $ up, $ down and still the S&P grinds up. There is a large short base and it is being eroded.....against its will.

Reply
avatar