The Economic Data calendar for the week of the 18th of July through the 22nd of July is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.
Takeaway: Companies in the S&P 500 spent $166.3 billion on share buybacks during the first quarter. That marked a new postrecession high.
The above is the latest permabull headline from the Wall Street Journal arguing that the buyback boom will live on and continue to stoke stocks.
Hang on a second...
That's worth parsing. The article suggests valuations are cheap and highlights academic studies which show shares of companies that buy back stock outperform the broader market by 12% over the next four years.
Good question. According to FactSet:
"Companies in the S&P 500 spent $166.3 billion on share buybacks during the first quarter, which marked a new postrecession high. Since 2005, only Q3 2007 produced a larger amount of buybacks ($178.5 billion). Dollar-value buybacks in Q1 represented a 15.1% increase in spending from the year-ago quarter, and a 15.6% jump from Q4. This breakout in the first quarter of the year comes amid somewhat of a stabilization period for buybacks since the middle of 2014. With that said, buyback spending still remained at very high levels for the index during this period."
Consider peak buybacks in the context of net income and free cash flow...
"At the end of the first quarter, 146 companies in the S&P 500 spent more on buybacks in the trailing twelve months than they generated in earnings. This marked the seventh highest total going back to 2005... At the end of the first quarter, trailing twelve month buybacks made up 59.6% of free cash flow, which was a 6% increase year-overyear."
In other words, companies are increasingly buying back stock at the expense of long-term investment in their business. As Hedgeye U.S. Macro analyst Christian Drake points out on The Macro Show yesterday:
"If you have record repo activity at all-time highs in equities, pushing on 8 years into an economic expansion maybe you get paid in the short term. But what do you think of that in terms of long-term value creation?"
It's a good question to ponder as permabulls shout "buy, buy, buy" the all-time high.
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Takeaway: "Krugman calls for 'a big burst of government spending and maybe also cash donations.' Godspeed to free-market capitalists."
Paul Krugman joined Ben Bernanke in calling for helicopter money yesterday. Here's the word via Bloomberg:
"Japan should raise its inflation target to 4 percent and embark on a large but temporary fiscal stimulus to boost prices in the economy, Nobel laureate Paul Krugman said.
Speaking at a conference on Thursday in Singapore, Krugman called for 'a big burst of government spending and maybe also cash donations,' though authorities don’t necessarily need to adopt a strategy that involves 'helicopter' money, he said.
'Japan needs to get that inflation rate convincingly high,' Krugman said, adding that worrying about the 'longer-term budget outlook needs to be put on hold.' The Bank of Japan’s current target is 2 percent and consumer prices excluding fresh food, a key benchmark for the BOJ, have fallen for three straight months."
As Hedgeye CEO Keith McCullough wrote earlier today, "Krugman calls for 'a big burst of government spending and maybe also cash donations.' Godspeed to free-market capitalists." In other words, Japan has been pulling out all the stops for some time now to no effect.
Investors are voting with their feet. Take a look at the chart of Japanese equities over the past year:
Takeaway: Shares of Agrium have remained comparatively resilient in 2016, a trend which we expect to reverse in 2H16.
Hedgeye analysts Jay Van Sciver and Ben Ryan hosted an institutional call on Agrium (AGU) earlier this week. Here's the key takeaway:
Shares of Agrium have remained comparatively resilient in 2016, a trend which we expect to reverse in 2H16. As Agrium enters the back half of the year, wholesale margins are likely to see pressure amid lower fertilizer prices and higher input costs. While 1H16 retail margins benefited from early spring 2016 season planting and delayed fall 2015 nutrient application, such support should fade in 2H.
To access our institutional research email firstname.lastname@example.org.
Takeaway: European equities continue to fall as the #GrowthSlowing data continues to roll in.
Below is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:
"One way to keep US Equity Beta Up = Dollar Down (on the week); but how does that continue (from here)? With GBP/USD signaling immediate-term TRADE overbought at $1.34 and US economic growth (Q2 GDP) not tracking to recession (our Q2 predictive tracking algo currently has 1.5-1.8% y/y)?
The other side of the FX (and relative economic slowing) TREND looks like Euro Down (vs. Dollar Up) to me; EUR/USD top-end of the risk range = $1.12, and as European #GrowthSlowing continues I’m looking for a re-test of $1.05; French stocks down -0.8% have the CAC40 out of “crash” mode at -17% from last year’s high, but still bearish TREND @Hedgeye."
Take a look at the chart below of tumbling European equity markets:
Europe's #GrowthSlowing data continues to roll in...
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