woensdag 15 oktober 2014

Correlation: Buybacks Vs. S&P

Buybacks are the hot item in 2014. Share repurchases happen when companies have a lot of cash. They buy up the company's shares with that excess cash and then destroy the shares. The amount of shares go down, the earnings stay the same. The earnings per share go up, so the share price will go up.

The correlation below shows that relationship between buybacks and share price.

Today (2014), almost 90% of all S&P companies are buying back stock. But when we look at it on a market cap basis, buybacks are decreasing, which will mark a top in the stock market. When the stock market finally goes down, liquidity will be a problem as companies have spent all their cash.

These buybacks are financed by debt.

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