Here’s my brief commentary from September 12th:

Quotes of the Day: This Has Our Attention!

“When prices have been driven by a lot of leveraged buying and the market gets fully long, leveraged, and overpriced, it becomes ripe for a reversal. This reflects a general principle: When things are so good that they can’t get better—yet everyone believes that they will get better—tops of markets are being made.”

Dalio, Ray. Big Debt Crises

Leveraged share buybacks (companies borrowing to buy back their own shares) are the first sentence above by definition. And this very much has our attention!

Here’s Investopedia on the topic:

“Between 2008 and 2018, companies in the United States spent over $5 trillion buying back their own stock, or over half their profits. As a result, more than 40% of total EPS growth has been from share repurchases.

Leveraged buybacks have made a big comeback in the U.S., where share repurchases have exceeded free cash flow since 2014.

The buyback boom has increased the risk for both bondholders and shareholders. Even investment-grade companies have been willing to sacrifice their credit ratings in order to reduce the number of shares. For example, McDonald’s, whose executives depend on EPS metrics for 80% of their pay, has borrowed so heavily to fund buybacks that their credit rating fell from A to BBB between 2016 and 2018.”

Back to today:

Aside from the fundamental concern over how they were paid for, make no mistake, share buybacks have had much to do with keeping the present bull market afloat these past few years. And, frankly, “much to do with” could be an understatement! 

Here, alas, is from Market Watch this morning:

“Share repurchase volume was $145.9 billion in the third quarter, just a little over half the $281 billion worth of stock repurchases in the sequential second quarter, and the lowest quarterly total since the third quarter of 2017.”

Yet another development that has our attention!