The Dumbest Dumb Money Finally Gets Suckered In

Authored by John Rubino via DollarCollapse.com,

Corporate share repurchases have turned out to be a great mechanism for converting Federal Reserve easing into higher consumer spending. Just allow public companies to borrow really cheaply and one of the things they do with the resulting found money is repurchase their stock. This pushes up equity prices, making investors feel richer and more willing to splurge on the kinds of frivolous stuff (new cars, big houses, extravagant vacations) that produce rising GDP numbers.

For politicians and their bureaucrats this is a win-win. But for the rest of us it’s not, since the debts corporations take on to buy their own stock at market peaks tend to hobble them going forward, leading eventually to bigger share price declines than would otherwise be the case.

The ultimate loser? The only people traditionally willing to buy in after corporations are finished overpaying for their stock: Retail investors, of course.

Let’s see how it’s playing out this time.

First, corporations spent several years elevating stock prices with share repurchases. Note the near perfect correlation between the two lines:

Now they’re scaling back their purchases:

Saying Bye to Buybacks

(Wall Street Journal) – Companies in the S&P 500 are on pace to spend the least on buybacks since 2012

 

Large companies are repurchasing their shares at the slowest pace in five years, as record U.S. stock indexes and an expanding economy propel more money out of flush corporate coffers into capital spending and mergers.

 

Companies in the S&P 500 are on pace to spend $500 billion this year on share buybacks, or about $125 billion a quarter, according to data from INTL FCStone. That is the least since 2012 and down from a quarterly average of $142 billion between 2014 and 2016.

 

Buyback activity among top-rated nonfinancial debt issuers, many of which have regularly borrowed money to finance share repurchases, declined for the third straight quarter in the July-to-September period, according to Bank of America Merrill Lynch. Meanwhile, mergers and acquisitions among that group of companies had their biggest quarter of the year, analysts at the bank said.

 

Factors including high stock price, historically high share valuations and uncertainty over the future shape of the tax code mean that “companies may be less likely to favor buybacks over other uses of cash in 2018,” analysts at Goldman Sachs Group Inc. said in a report this week.

And – here’s the really sad part – individual investors are taking up the slack:

The emboldened retail investor may be a new catalyst to help take stocks higher — for now.

(CNBC) – “The level of enthusiasm about the market … has been building. We’re seeing more individuals come in,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

 

Sonders said she’s anecdotally seeing signs of more individuals putting money to work in the stock market in the last several months, after years of skepticism and concerns about “every variety of doom and gloom.”

 

She says she is getting fewer investors asking about bubbles or about what’s the next shoe to drop.

 

“I think it’s finally starting to suck people in … emotionally, and actually it’s hard to judge why now all of a sudden, but maybe it’s because of how persistent the move has been with so little volatility on the upside and on the downside,” Sonders said. “This year has been different. This kind of year pulls people in.”

 

Retail brokers have been reporting an influx of accounts. Charles Schwab, in its earnings release, said clients opened more than 100,000 new brokerage accounts a month in the third quarter, making for a record-breaking 10-month streak of new accounts topping 100,000. Its rival, TD Ameritrade, said on its earnings call last month that new accounts, asset inflows and other indicators are at the highest since the financial crisis.

What’s frustrating about this is the repeating pattern of government creating conditions in which smart money (that is, the guys who donate big to political campaigns) is allowed to get in early, make huge profits, and then hand the bag to regular people who aren’t connected or sophisticated enough to see what’s happening. The rich, who are or will soon be shorting the hell out of this market, get richer and the rest see their hopes for a decent (or any) retirement dashed one more time.

And the political class wonders why voters don’t like them anymore.

Morgan Stanley: "Client Cash Is At Its Lowest Level" As Institutions Dump Stocks To Retail

The "cash on the sidelines" myth is officially dead.

Recall that at the end of July, we reported that in its Q2 earnings results, Schwab announced that after years of avoiding equities, clients of the retail brokerage opened the highest number of brokerage accounts in the first half of 2017 since 2000. This is what Schwab said on its Q2 conference call:

New accounts are at levels we have not seen since the Internet boom of the late 1990s, up 34% over the first half of last year. But maybe more important for the long-term growth of the organization is not so much new accounts, but new-to-firm households, and our new-to-firm retail households were up 50% over that same period from 2016.

In total, Schwab clients opened over 350,000 new brokerage accounts during the quarter, with the year-to-date total reaching 719,000, marking the biggest first-half increase in 17 years. Total client assets rose 16% to $3.04 trillion. Perhaps more ominously to the sustainability of the market"s melt up, Schwab also adds that the net cash level among its clients has only been lower once since the depths of the financial crisis in Q1 2009:

Now, it"s clear that clients are highly engaged in the markets, we have cash being aggressively invested into the equity market, as the market has climbed. By the end of the second quarter, cash levels for our clients had fallen to about 11.5% of assets overall, now, that"s a level that we"ve only seen one time since the market began its recovery in the spring of 2009.

While some of this newfound euphoria may have been due to Schwab"s recent aggressive cost-cutting strategy, it is safe to say that the wholesale influx of new clients, coupled with the euphoria-like allocation of cash into stocks, means that between ETFs and other passive forms of investing, as well as on a discretionary basis, US retail investors are now the most excited to own stocks since the financial crisis.  In a confirmation that retail investors had thrown in the towel on prudence, according to a quarterly investment survey from E*Trade, nearly a third of millennial investors were planning to move out of cash and into new positions in the second half of 2017. By comparison, only 19% of Generation X investors (aged 35-54) were planning such a change to their portfolio, while 9% of investors above the age of 55 had plans to buy in.

Furthermore, according to a June survey from Legg Mason, nearly 80% of millennial investors plan to take on more risk this year, with 66% of them expressing an interest in equities. About 45% plan to take on “much more risk” in their portfolios.

In short, retail investors - certainly those on the low end which relies on commodity brokerages to invest - are going "all in."

This was also confirmed by the recent UMichigan Consumer Survey, according to which surveyed households said there has - quite literally - never been a better time to buy stocks.

What about the higher net worth segment? For the answer we go to this morning"s Morgan Stanley earnings call, where this exchange was particularly notable:

Question: Hey good morning. Maybe just on the Wealth Management side, you guys had very good growth, sequential growth in deposits. There"s been some discussion in the industry about kind of a pricing pressure. Can you discuss where you saw the positive rates in Wealth Management business and how you"re able to track, I think, about $10 billion sequentially on deposit franchise?

Answer:  Sure. I think, as you recall, we"ve been talking about our deposit deployment strategy for quite sometime, and we"ve been investing excess liquidity into our loan product over the last several years. In the beginning of the year, we told you that, that trend would come to an end. We did see that this year. It happened a bit sooner than we anticipated as we saw more cash go into the markets, particularly the equity markets, as those markets rose around the world. And we"ve seen cash in our clients" accounts at its lowest level.

In other words, when it comes to retail investors - either on the low, or high net worth side - everyone is now either all in stocks or aggressively trying to get there.

Which reminds us of an article we wrote early this year, in which JPM noted that "both institutions and hedge funds are using the rally to sell to retail." Incidentally, the latest BofA client report confirmed that while retail investors scramble into stocks, institutions continue to sell. To wit:

Equity euphoria continues to remain absent based on BofAML client flows. Last week, during which the S&P 500 climbed 0.2% to yet another new high, BofAML clients were net sellers of US equities for the fourth consecutive week. Large net sales of single stocks offset small net buys of ETFs, leading to overall net sales of $1.7bn. Net sales were led by institutional clients, who have sold US equities for the last eight weeks; hedge funds were also (small) net sellers for the sixth straight week. Private clients were net buyers, which has been the case in four of the last five weeks, but with buying almost entirely via ETFs. Clients sold stocks across all three size segments last week."

The best way to visualize what BofA clients, and especially institutions, have been doing in 2017 is the following chart:

Meanwhile, a familiar buyer has returned: "buybacks by corporate clients picked up as US earnings season kicked off, with Financials buybacks continuing to dominate this flow."

And just like during the peak of the last bubble, retail is once again becoming the last bagholder; now it is only a question of how long before the rug is pulled out. For now, however, enjoy the Dow 23,000.