Share buybacks were huge in the first quarter, rising about 60 percent to $160 billion, and that helped put a floor under the S&P 500 stock market index, which gained barely 2 percent.
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The second quarter was considerably better for the market, pushing the year-to-date gain to 6.8 percent, but there's worry that companies—awash in both cash and debt—may become reticent to keep pumping up their own shares. Market data firm TrimTabs, in fact, said buybacks slowed considerably in the second quarter, to $92.7 billion, a number that would be the lowest in seven quarters.
Jim Brown at Option Investor shared these thoughts in his weekend report:
Here is the $64k question. Did they stop the buybacks because they ran out of money or because they expect to buy the stocks back cheaper in the future? I would vote for a combination of the two. With the markets at new highs stocks are not cheap. That means you can buy back less and your money does not go as far. Also, with stocks at new highs going into summer there is always the potential for a correction.
Lastly, since we know Q1 was a weak quarter for sales and profits and Q2 may not be much better there is the possibility companies have elected to save cash to get them over the next soft patch as we head into the midterm election weakness.
In its Buttonwood column, The Economist commented further:
Another factor propping up the stock market has been the repurchase of shares. In America companies have been buying back their shares at an annualised rate of $400 billion, or 2.5 percent of GDP, according to Andrew Smithers, an economic consultant. Buy-backs enhance earnings per share, thereby boosting the value of executive options.
There is a widespread but fallacious belief that the repurchases are the result of improved corporate balance-sheets. Some companies, such as Apple, are awash with cash. But Andrew Lapthorne of Société Générale calculates that, in aggregate, net debt (ie, after subtracting cash) in America's corporate sector is a record $2.3 trillion, having risen by 14 percent over the past year. The ratio of long-term debt to total assets is close to its 2009 peak.
"So companies are not as flush with cash as suspected and buybacks may shrink," Art Cashin, floor director at UBS, said in his morning note that shared the above passages. "That could put pressure on profit margins and (price-to-earnings) ratios. I can't wait till earnings season kicks in fully."