Skip to main content

Advertisement

5 Divident Stocks T0 Own Forever
Market Crisis Coming? Stock Buybacks Plummet as Overindebted Companies Hit a Wall Lombardi Letter 2017-09-04 06:05:17 market crisis U.S. Housing Crisis U.S. Economy U.S. consumer Low interest rates EPA:GLE Societe Generale SA With 70% of the U.S. economy based on consumer spending, a slowdown in consumer credit could lead to a stock market crisis. Here's the full story. 2017,News,Stock Market Crash https://www.lombardiletter.com/wp-content/uploads/2017/08/Market-Crisis-150x150.jpg

Market Crisis Coming? Stock Buybacks Plummet as Overindebted Companies Hit a Wall

Stock Market Crash - By Benjamin A. Smith |
Stock market crisis

iStock.com / artisteer

Stock Buybacks Were a Huge Pillar of Support; Market Crisis May Not Be Far Away

Something wicked this way comes. One of the great pillars of stock market strength during this bull run has been the drip buy demand stock buybacks have provided. But this trend is shifting into reverse. Should it continue, a market crisis may ensue as the huge tailwind supporting historically pricey valuations goes dormant.

As Societe Generale SA (EPA:GLE) analyst Andrew Lapthorne notes, there appears to be a sudden aversion to balance-sheet risk. While companies had no problem borrowing 10-figure sums to help boost buybacks of their stock (providing constant fodder for the multi-year market melt-up), they’ve appeared to have suddenly gotten cold feet. Share buybacks have capitulated over 20% year-over-year. This slide is the biggest decline in corporate buybacks since the U.S. Housing Crisis. (Source: “US Stock Buybacks In Biggest Slide Since The Financial Crisis,” Zero Hedge, August 14, 2017.)

Advertisement

5 Divident Stocks T0 Own Forever

Also ReadWarren Buffett Indicator Predicts Stock Market Crash in 2017

This dynamic is creating a self-fulfilling prophecy. As investors are no longer rewarding companies for buying back their own shares, companies pull back debt-fuel buyback operations. In turn, this leads to declining buy side liquidity in the market, which makes the low volume melt-up more difficult to achieve. Not only is a huge pillar of support taken away, but the bid is also less able to absorb heavy selling. This may exacerbate moves to the downside.

stock market crisis

Another overarching problem is that declining share buybacks could indicate broad-based credit aversion. Be it consumer loans or commercial and industrial loans; when companies stop seeing the benefits of loading cheap credit on their balance sheets, how long before others think the same way? This is problematic because everyone knows the economy is built on credit expansion. Most of the population has little meaningful savings anymore.

Also ReadStock Market Crash 2017? This Could Trigger a Stock Market Collapse

Over one quarter (26%) of Americans have no savings whatsoever, while 36% haven’t socked anything away for retirement. Furthermore, about 38 million households live paycheck to paycheck, meaning they spend everything they make every two weeks. As of 2013, the average bank account balance was approximately $4,436; barely enough to purchase a half-decent used car. (Source: “23 Dizzying Average American Savings Statistics,” CreditDonkey, May 16, 2016.)

The ultimate point of these statistics is that without credit expansion, the U.S. consumer is cooked. Since 70% of the U.S. economy is based on consumer spending, a slowdown in consumer credit cannot end well for this business cycle.

When low-interest rates fail to move the needle in the capital markets, this should be interpreted as a giant red flag. As Societe Generale concluded, “Perhaps over-leveraged US companies have finally reached a limit on being able to borrow simply to support their own shares.” (Source: Zero Hedge, op cit.)

It’s hard to argue that the U.S. consumer hasn’t hit their limit already.

Related Articles