Tags: Edwards | share | buyback | equity

SocGen's Edwards: 'Share Buyback Party Is Over'

By Dan Weil   |   Thursday, 28 Aug 2014 11:05 AM

Societe Generale equity strategist Albert Edwards has been bearish on stocks for some time, and the S&P 500's breach of the 2,000 level this week hasn't changed his tune.

Corporate stock buybacks have played a major role in the market's rise, as the Federal Reserve's low-rate policy has enabled corporations to issue debt cheaply and then use the proceeds to snap up their own shares.

But, "the share buyback party is over," Edwards writes in a commentary obtained by Moneynews. "S&P is now running on fumes."

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The companies issuing the bonds are "doing what they always like doing with debt in the final throes of an economic cycle," he notes. "They issue cheap debt to buy expensive equity. . . . But a gargantuan funding gap emerges."

So what's the outcome?

"This pro-cyclical process always ends in tears and is regarded in retrospect as typical
end-of-cycle madness," Edwards argues.

That's because once corporate bond issuance fizzles, "share buybacks also stop and one of the biggest drivers for the equity bull market is removed," he maintains.

"The equity bubble has disguised the mountain of net debt piling up on U.S. corporate balance sheets. This is hitting home now QE [quantitative easing] has ended," Edwards adds.

"The end of the buyback bonanza may well prove to be decisive for this bubble. Indeed — is that a hissing I can hear?"

S&P 500 companies bought back $120 billion of shares in the second quarter, down from $159 billion in the first quarter, according to preliminary data from S&P Dow Jones Indices.

Meanwhile, individual investors, who have largely shied away from stocks since the market plunged in 2008, will likely remain reluctant buyers, says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Individual investors are "still nervous, they're concerned," he tells CNBC. "Even though we're into this rally over five years now, and they're getting very little if they're sitting in a bank or some alternatives, they are not moving back into the market."

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