Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.


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US SHARE BUYBACKS: OFF TO THE RACES © Leo Haviland May 3, 2015

How best to explain the monumental ascent in key United States stock benchmarks such as the S+P 500 that began in March 2009? What factors should guide marketplace handicappers in their opinions as to whether or not that bull climb will continue? Marketplace guides select between and evaluate assorted and intertwining variables. Their perspectives and arguments differ. However, considerations such as corporate earnings, sustained highly accommodative monetary policy (interest rate yield repression and money printing), and deficit spending stand out on many lists. In today’s global scene, numerous clairvoyants extend their horizons to include other nations to help understand US equity price levels and patterns. Analysts of American stock movements may also rely on interest rate, US dollar, and commodity price levels and trends. Many players harness technical analysis of marketplace phenomena (for example, picture bar charts and moving averages) to their review.

Some gurus include share buybacks by US corporations in their inventory of bullish factors. Such marketplace observers typically focus on the last several years (or recent calendar quarters) and the billion dollar programs of noteworthy firms.

However, to better assess the influence of share buybacks by US companies, investigators should review them primarily from the standpoint of net, rather than gross, buybacks. The focus should be on whether or not there are net share buybacks (in other words, negative net issues) over a given time span. After all, some firms issue new stock. Moreover, explorers should review buybacks over a long run history as well as in relation to after-tax corporate profits and nominal GDP. Let’s concentrate on the Federal Reserve Board’s nonfinancial corporate business category. When reviewed in the context of corporate profits, but also (and especially) from the standpoint of nominal GDP, US net share buybacks in this domain in recent years have been very substantial. This inquiry reveals not only that net share buybacks (negative net issues) have played a particularly prominent role within that US equity arena in recent times. The noteworthy net buybacks (negative net issues) situation has persisted for a few decades. This longstanding accumulation of shares via net buybacks probably has reduced the amount of shares and thereby probably has had increasingly bullish consequences for US stocks in general.

Even if net share buybacks persist, a significant slowdown in their pace (reduction in their level) probably would be a bearish warning sign for equity signposts such as the S+P 500.

The sustained yield repression scheme of the Federal Reserve Board and its central banking allies not only has helped to encourage many fortune hunters seeking reasonable (good) returns (yields) to purchase equities. It also has lowered corporate borrowing costs. To what extent do net share buybacks, arguably often financed by corporate debt issues, reflect a widely-embraced management opinion that investment opportunities are relatively unattractive? In this context, remember that many corporations nowadays have large cash hoards not being directly invested in their business.

Everyone knows that corporations can raise funds via issuing stock or debt securities, or by borrowing from banks or similar entities. Diverse motivations surely explain share buybacks. Yet at some companies, executive compensation links to the firm’s share price and earnings per share. So perhaps some undoubtedly altruistic corporate leaders nevertheless have an alluring incentive spurring them to reduce the number of shares outstanding.

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US Share Buybacks- Off to the Races (5-3-15)