For new subscribers, today is a little added bonus. I don’t normally write additional columns because I don’t want to overstay my welcome in your inbox and events don’t normally call for any additional ramblings. However, today, I am going to break that habit and throw a couple of things out there for everyone to think about.
I won’t get into any political meanderings because for the most part my readers don’t believe one thing that comes out of Washington and their disappointment in our current President is obvious. Why throw anymore salt on that particular fire. Leave it to Wednesdays.
No, today is about the economy and markets specifically and it encompasses two major points that need some clarification.
The first point is something that bothers the Hell of me and I am going to clarify things a little. There are some market analysts that believe we are close to the bottom of this selloff and they are waiting for that moment where they can go back, full steam and buy. These analysts should be taken out and made to watch Rachel Maddow non-stop for 48 hrs to pay the price for stupidity. The obvious error is that they are trying to time the market and no matter what anyone will ever tell you, “Market Timers” have a horrible track record and they come and go with the wind. Do not listen to that drivel!
Some analysts are waiting for that massive sell off called “Capitulation” and I have to somewhat agree with them. Typically, long, drawn out selloffs tend to end with one massive event and markets will invariably reverse from that point. The old school thinking is that investors, big and small, will collectively throw up their hands and get out. End the pain, so to speak. This massive selloff generally will happen at a certain point when portfolios are at their weakest and you will see a huge uptick in volume in the market.
That was then, this is now.
I do think a capitulation is possible but there is a good chance we won’t know it when it happens. The comments will be “So thats what it looks like huh?” and all of the geniuses that fill the airwaves will announce it and crow about it as if they knew it all along. What hogwash! Let me be one of the first to tell you that any capitulation will be stock specific and not market specific. Markets are too deep and too liquid to actually see this type of event over a large swath of stocks. One of the leading indicators of capitulation used to be the massive increases in volume along with the free falling nature of a selloff. However, you will not be able to tell if the increases are from capitulation or from other factors and that is the nature of equities today. Without going into a long dissertation on market fragmentation and those “pools of darkness” just trust me on this.
Volume can no longer be used as a factor. It is pricing and angle of declination. I am no technician but every capitulatory event (is that even a word?) has a steep angle of decline in its chart. For example, if you take any stock and look at its normal inclination (going up) or normal declination (going down) they hold to a certain pattern and angle rising at perhaps 20% between troughs. Declining at, lets 35% between troughs. It’s how the stock acts normally. Events may change those numbers but most stocks without an announced event move a certain way. If there is a capitulation event going on that angle of declination will possibly double. You don’t need any expensive charting service either. Go on any business news sight and look at the daily and weekly charts and you can see it happening in real time.
What I do believe we are seeing is an unwinding of investments where higher risk/higher reward investments are being unloaded and other sectors are being tweaked as well. The market prices things out six to nine months ahead. Expectations of earnings growth, volumes, etc are being priced now for what investors think the future will look like and with what we have seen by the Fed and lack of leadership from the White House, investors are not comfortable with this future. It doesn’t mean that this move can’t or won’t be retraced, it just means that right now, the comfort level is not there.
The second thing you might want to think about is something that I believe has helped buoy the market quite a bit, stock repurchasing. These stock buybacks were a major source of liquidity in the market and now you don’t hear a peep about them.
If I am ABC company and I have announced a stock repurchase program while my stock was trading at $100 a share, why wouldn’t I make people aware that we are buying our stock back aggressively at $75 a share and lower. This liquidity event considering that there are over 400 billion dollars of outstanding buyback programs should help support any downside move in the market and yet it has not.
I made a few phone calls and what I came back with is this: Some companies are still buying their own stock but at much lower volumes (for example, a friend of mine used to buy 150,000-200,000 shares of a certain companies stock each day, now its 25,000-50,000 shares a day and the stock is down 40%). Some companies have put those buybacks on the shelf for the time being.
There are a lot of interesting points that can be made here: 1. Companies are going to conserve cash right now. Earnings may not support the expenditure for the next quarter. 2. Companies believe that they can step in at lower prices and have more impact with the same amount of money, while preserving cash immediately. 3. Companies have no clue where the bottom is and do not want to book purchases at much higher prices if their stock still has much room on the downside.
Whatever the reasons for this slowdown in repurchases, it is having a major impact on stock prices. One thing that really got me worked up is that these corporate repurchases helped CEO’s across the board reap higher stock options. They got bonuses when their stocks stayed above a certain average over a certain period of time. Stock buybacks helped tremendously. Ah, you say, these corporate titans are still going to receive those unreal bonuses, how do you respond? Simple. These options were priced at much much lower levels and with the amazing run we have had since March 2020 almost every stock has blown threw those strike prices. Bear market or not, most of these options are still exercisable. Next year, probably not.
I digress. The second point is this. You have a major market selloff and not one company has come out and said one thing about any stock repurchase plan and that alone tells me that companies do not think we have reached a bottom to this selloff. They are not out there protecting their stock price and that sends me a very big signal.
A couple of things, To begin with, excellent article. Hits all the points. Two, You never over stay your welcome. Three, I don't believe the Fat Lady is even humming right now......