I will try to be brief here but a few bearish charts to look over and just have a think.
- Corporate buybacks
- Capital goods orders
- Restaurant performance index
- US personal savings
First a lot has been said about corporate buybacks and how there are the only source of capital holding up equity markets. This is usually the throwback from a frustrated bear who cannot put any rhyme or reason on the seemingly teflon like nature of the stock market. Every time the market looks vulnerable to a sell off low and behold the invisible hand steps in and lifts the market back to new highs. Most have attributed this to corporate buybacks. Its true to say that Corporate buybacks have been a strong feature of this rally. Sadly its also true to say that corporations are the worst stock traders in the market and this cycle since the GFC has been no exception.
Two charts below show a number of things to worry about. If you subscribe to the theory that the “only thing keeping this market up is buybacks” then look at the drop off in activity over the last three months. I have no doubt the pending elections in the US have something to do with this as companies adopt the wait and see approach for whats in store for them come November but its a stark withdrawal of capital that was sitting on the bid and in my view makes us very vulnerable to a sharp sell off very soon.
(Chart courtesy of Bloomberg)
To say that buybacks are out of the norm and the only thing holding up the market is to ignore the pretty strong history that buyback activity has enjoyed please see the activity levels preceding the GFC and the resulting lower levels of activity after the GFC. Corporations only buy back stock when they are expensive ( it is after all only a way to engineer the appearance of a rising stock price nearing the end of a cycle)
Another reason buybacks may be down is that companies are noticing the below drop off in capital goods orders. See below 2016 cap good orders vs the 3 y avg, doesn’t look great does it ? FYI the S5INDU index of cap goods stocks are trading higher than 3 yr avg – like 20-25% higher…….
Although i have referenced capital goods above I dont really view the US a manufacturing based economy anymore, that ship sailed long time ago ( and it was built elsewhere!), i do however often think that it is a country where over 50% of the people serve the rest in some way related to food, drink entertainment etc etc . the restaurant performance index is not looking to healthy either despite a few decent months in Q1 this year it would appear it wasn’t the best summer season for them.
If it was not the best summer season and restaurant performance is declining that would suggest tips and wages are probably declining too, that will make it just that bit harder for the average US consumer to finance two things: Their shiny new car and the loan or financing that came with it ( despite probably purchasing it for almost zero financing and cheap petroleum) and perhaps also their hefty student loan. Chart A below shows the stunning performance of auto sales recently ( up approx 14% on avg)
Now if you put all that together and mix it in with a toxic energy drink like a new presidential regime in a few weeks and the uncertainty that can have on markets for a period of time, it may well explain how the US consumer has changed it ways slightly. They are not spending with wreckless abandon and actually starting to dare i say save money. US personal savings has some way to go to get back to an “average” level but a pronounced bounce off the lows – currently 5.7 – average of 8.5ish
None of this scream growth- some of it certainly in my mind screams correction- if it were me I would be eyeing puts on industrial’s and mid caps. All of this disappears out the window if some grand scale fiscal policy gets announced – but we all know how long something like that takes in this day and age.