Saturday, March 5, 2016

Waning Enthusiasm for Share Buybacks Signals Major Market Reversal

by elliottwave
In the May 2008 issue of The Elliott Wave Financial Forecast, three months before the infamous Lehman Brothers bankruptcy, we cited a sudden loss of enthusiasm for company buybacks as another component of a major market reversal.
We noted that for companies issuing buyback announcements “cheers invariably turn to jeers” as the stock market reverses from up to down.
Our evidence included the following headline from 2001: “Buybacks Hit a Wall of Fear.”
The 2008 version from The Wall Street Journal read, “[From] Buyback Boom To Buyer’s Remorse.”
Well, here are some more recent headlines:
Stock Buyback Deals Can Be Stinkers (USA Today, Nov. 5, 2015)
The Stock Market Has a Buyback Problem (Fortune, Nov. 18, 2015)
Surge In Stock Buybacks Good or Evil? (The Wall Street Journal, Nov. 22, 2015)
As the following chart shows, through the first three quarters of 2015, buybacks were the strongest since the record year of 2007, when stocks made a major top.
Until recently, share repurchases were considered a positive development for companies. But a widely circulated report from Research Affiliates says buybacks offer “little overall benefit. ‘Buybacks are simply a mirage.'” Fortune concludes, “Investors might soon regret the buyback binge.”
They always do, and the outbreak of skepticism is a sure sign that the falling share prices that invariably compounds those regrets is very close.

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