It never fails. If you want to know who is behind anything, simply follow the money.
Earnings aren’t looking good, sales and revenue are shrinking, and central bank policies are wreaking havoc across all types of equities.
Corporate cash is piling up, but heavily concentrated in a handful of large corporations.
The rest of the market is issuing debt for cheap as fast as it can while the risk vs. reward balance is broken for investors. Companies are borrowing from their future, yet making no plans for when cheap debt will inevitably end.
And through all of this something keeps pushing share prices up. Look at this chart, something is clearly missing:
Seems kind of fishy, eh? It only gets worse when you start to follow the money.
Who Buys All-Time Highs?
Money is being pulled out of the stock market from the three main traditional sources of funds at a disturbing pace.
In fact, in the week leading up to April 20th, $7.3 billion was pulled from stocks, according to Bank of America Merrill Lynch. That was the most in nine weeks, and marked 11 weeks straight of outflows.
So who exactly is buying when all of the traditionally major sources of cash inflows are pulling out?
We can turn to Goldman’s David Kostin for a detailed explanation:
Corporations purchased $561 billion of US equities during 2015, 40% higher than during 2014 ($401 billion) and the second highest level since at least 1952 ($721 billion in 2007). Managements remained committed to share repurchases (net of issuance) last year amidst modest US GDP growth of 2.4% and extended valuations. Outside of the Great Recession, corporates have been the primary source of US equity demand.
Goldman included a couple handy charts. This first one shows how this corporate buying spree near all-time highs is getting out of control:
Goldman expects $450 billion in buybacks this year alone. As it reckons, this will manipulate earnings-per-share to show a 9% gain, all without the pesky need to actually go out there and expand your business or find new revenue sources.
This really doesn’t bode well if this money flow dries up quickly. That $450 billion inflow comes with an expected $225 billion outflow from other sources.
In other words, if corporations weren’t buying their own stocks, there would be a $225 billion projected outflow this year. You can imagine what that would do to already expensive shares.
All of this could be fine. If these corporations earned their money fair and square, they would have a right to use it how they see fit.
Except that isn’t exactly how it is panning out.
Debt Fueled
Remember, the tons of corporate cash sitting around out there isn’t evenly spread. It really is just a small fraction of publicly traded companies that are letting it accrue.
So it isn’t really the corporation’s money that typically gets used for these buybacks. It’s ours.
SocGen produced a great graph showing how closely tied together debt issuance and buybacks were last year:
This is where investors are going to get left holding the bill.
Coupled with the massive outflow of money from stocks over the past three months, investors poured $4.9 billion into bonds.
So while investors are fleeing stocks that are overpriced and volatile, they are buying long-term investments in the same companies with earnings that don’t reflect the reality of shrinking revenues and sales.
It is, shall we say, far from ideal.
Searching for Stability
All of this suggests one thing: investors are searching for stability and turning to fixed income to do it.
This makes sense, and it is a smart thing to do in normal times. But with the level of intervention from central banks to drive down interest (your yields) without addressing the systemic flaws they create (risk), many investors are setting themselves up for nasty surprises.
This is particularly risky for those investors out there who may have finally broken even after the losses of the Great Recession, or are still trying to make up for all the lost time.
There are other options people rarely explore though, especially for fixed income strategies.
Outsider Club founder Nick Hodge just completed a report for his Like Minded People readers that gives all of the strategy and background information needed to lock in consistent, guaranteed income, without having to worry about bloated, volatile shares, or spiraling debt in an age of shrinking revenues and cash flows.
If you’re looking for less risk for a good return from the core of your investment account, check it out.
