Tags: Hulbert | share | buyback | correlation

Hulbert: Reduction of Share Buybacks May Signal End of Bull Market

By    |   Thursday, 10 July 2014 11:15 AM

Companies have begun to trim their share buybacks, and that's not good news for the stock market's five-year rally, says Mark Hulbert, editor of the Hulbert Financial Digest.

New corporate stock repurchases dropped to $23.2 billion in June, the lowest level in 18 months, from $24.8 billion in May, according to TrimTabs Investment Research. Last year, the monthly average totaled $56 billion, Hulbert notes in his MarketWatch newsletter.

So why is that bad for stocks? Because "buyback volume has a high positive correlation with stock prices," TrimTabs CEO David Santschi tells Hulbert.

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On the correlation scale, where 1 indicates perfect correlation and zero represents no correlation, the correlation between monthly stock buybacks and stock prices registered 0.61 from 2006 until this spring, Santschi explains.

"That's highly statistically significant," Hulbert writes. And it makes intuitive sense, he says.

"That's because, when a company announces a share-repurchase program, it sends a strong signal that its management thinks its stock is undervalued — so much so that it's willing to put its money where its mouth is," Hulbert explains.

"So it's bullish for the overall market when lots of companies are simultaneously announcing such programs."

Some experts don't think highly of share buybacks. "Most of them have been paid for by near record levels of corporate borrowing," Sharon Snow, CEO of Metropolitan Capital Strategies, and David Schombert, the firm's chief investment officer, write in a column for ETF Trends.

"On the surface, investors may view this as a good thing. But if you are still holding the stock, you now have a liability in the form of debt on the balance sheet where previously you had an asset with free cash."

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Companies have begun to trim their share buybacks, and that's not good news for the stock market's five-year rally, says Mark Hulbert, editor of the Hulbert Financial Digest.
Hulbert, share, buyback, correlation
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2014-15-10
Thursday, 10 July 2014 11:15 AM
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