NEW LOW OBSERVER

On July 3, 2019, we attempted to draw conclusions based on data from New York Times references to the words “buyback” and “stock”.  After reviewing the data, it has become clear, when viewed from all the numerous sources available, that our data did not match anything that was out there.

This time, we have sought out data from Barron’s to see of a different outcome would result.  When breaking down the same period of time, it was clear that Barron’s was 1) different from the New York Times and 2) more consisted will all other sources on the topic.  Below is a comparison of the two sources over the same period of time originally posted on July 3, 2019.

It seems clear that there is a disparity between the two sources.  However, in the case of Barron’s numbers, the data is more consistent with many other sources on the topic.  This is best represented in the annual representation of the data when contrasted against a chart found on the The Market Oracle’s website in an article titled “Why Stock Buybacks Are Such A Mistake.”

The number of references to stock buybacks in Barron’s resembles the above dollar value of buyback data (that also includes 2018 & 2019) from Market Oracle:

The upshot to using Barron’s is that it is a dedicated source for financial reporting and therefore a more concentrated resource for tracking share repurchases and writing on the topic.

The point of the data gathering is to determine whether or not stock buybacks are the cause of the increase in the stock market since 2009 or a function of a rising market or completely unrelated altogether.

One way to look at the data is in periods when the Dow Jones Industrial Average traded in a range and compare that data to Barron’s references to stock buybacks.  There are two periods that are most compelling in this regards, 1965 to 1982 when the average annual level of the Dow Jones Industrial Average went from 910.70 to 884.53, a change of -2.87%.

The other period of interest is 1999 to 2010 when the Dow Jones Industrial Average traded at an average annual level of 10,482.61 to 10,668.60, a change of  +1.77%.

In both cases, the average level of share buyback references increased while the Dow Jones Industrial Average treaded water.  The period from 1965 to 1982 saw the number of references to buybacks increase 12.5x.  This is in contract to the period from 2009 to the 2018 peak where the increase has only been 1.75x. 

What is the point of comparing the DJIA levels in known secular bear markets to the period when the index increases roughly 3x from the 2009 low?  First, in the 1965-1982 scenario, the staggering level of the buyback references suggest that buybacks had little impact on the change in the index.

So what impact does buybacks have on the market if from 1965-1982 or 1999-2010, there were substantial references but the market didn’t go anywhere?  Well, within all of those Barron’s references to buybacks was a great article by Anna Merjos titled “Good on the Rebound: Company Stock Buy-Backs Work Only in Rising Markets” dated March 15, 1982.  In that article, the author states the following:

“So, how are companies' stockholders likely to fare when management moves to repurchase some of its shares in the open market? According to a Barron's study of 48 companies that bought back their own stock in 1979, the answer is fine-over the long pull. The conclusion supports the findings of similar surveys published by Barron's in 1973, 1975 and 1979, which showed that large purchasers of company stock in bear - or at least lackluster markets usually outperform the averages in subsequent broad recoveries, but that corporate buying can't stop a stock's decline when the trend is decisively down.”

The accuracy of the observation cannot be overstated and is worth repeating:

• Companies that buy back shares in sufficient quantity will be the biggest beneficiaries in the subsequent recovery after a major decline, as indicated in Anna Merjos’ published work on the topic of buybacks spanning the period from 1960 to 1982.
• Buybacks are not a cure for avoiding declines in a cyclical or secular bear market.

As we said in our February 13, 2009 article on the market’s odds of recovery (link is active and accurate):

“In every instance that the Dow has fallen 40% or more in one fell swoop, as it has recently, the market rebounded 50% to 100% every time.”

Our point then, as has grown in confidence since 2009, is that the market is destined to recover and is likely to increase, on average, +167% from the established low (as seen here) and potentially can go substantially higher (as seen here) especially after a decline of -40% or more.  Additionally, the stock market’s rise since 2009 is probably a function of stock buybacks in the previous cycle and the perceived benefits of the current buyback cycle, 2009 to 2019, may have yet to be seen.