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The Buyback Bubble Will End Badly

Mar. 15, 2018 5:06 AM ETBA, DVN, WFC234 Comments


  • With the stock market at historically high valuations and earnings peaking, lower share counts are important to keeping stock prices rising.
  • Buybacks had started to fall in the second half of 2017, but were invigorated by the Trump/Republican Congress tax cuts.
  • The demand for stocks is falling, except for the buybacks, and intermittent foreign demand, which are supporting share prices.
  • Buybacks will fall dramatically once the economy starts to slow and the impact of repatriated money dissipates - as soon as Q1 2019.
  • Sell highly valued, slow growth and high debt stocks ASAP into stock market strength this year.

Supply and demand for stocks are the ultimate key drivers of stock prices. Reduce demand for stocks and prices fall, unless of course, the supply of stocks available to buy falls more - as has been the case recently.

In recent years, the total stock outstanding in the U.S. has fallen substantially due to buybacks. Ultimately, those buybacks have kept the market from falling inline with reduced demand for stocks by other investors.

Yardeni Shares OutstandingYardeni.com is under construction

For 2018, stock buybacks are surging on the back of tax cuts. But, how long can that last? Once money is repatriated, will there be enough tax savings to continue to drop cash to the bottom line? Unless there is a sudden surge in revenue and earnings, the answer is no.

Who's Been Buying Stocks?

Corporate stock buybacks have been the only real driver of stock demand in recent years. Households, despite a sharp rotation from mutual funds to ETFs, have only very recently started adding to their stock holdings.

Here it is important to understand that households for these statistics include hedge funds, nonprofits, private equity funds and personal trusts. Clearly, hedge funds often quickly change their net positions and private equity can become net sellers quickly as well.


In Q4, we also saw a surge in foreign investment again after a slump for a couple of years. This foreign appetite could be sustainable and we need to monitor it closely. If the dollar continues to fall, foreigners may continue to buy American stocks.


If there is a surge in the dollar several months out, as LIBOR-OIS spreads suggest, then that foreign demand can dry up quickly [more on this in my Macro Monday article on March 19th].

Institutions, as opposed to households, have been net sellers of U.S. stocks. This a case of big guys

This article was written by

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