My Photo
Note: Jeff does not accept guest blog posts on A Dash of Insight.

For inquiries regarding advertising and republication, contact main@newarc.com

Follow Jeff on Twitter!

Enter your email address:

Delivered by FeedBurner

Certifications

  • Seeking Alpha
    Seeking Alpha Certified
  • AllTopSites
    Alltop, all the top stories
  • iStockAnalyst
Talk Markets
Forexpros Contributor
Disclaimer
Copyright 2005-2014
All Rights Reserved

« Market Higher in 2007 Series: Handling Adversity | Main | Oil Prices and Gasoline Prices: An Interesting Divergence »

May 22, 2007

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d83451ddb269e200d835469d2d53ef

Listed below are links to weblogs that reference Market Higher in 2007: The Underlying Bid from Stock Buybacks:

» Cat Fight! from The Learning Curve
Mergers and acquisitions, stock buybacks, etc; aren't these the things we see near market tops? (See Dr. Jeff's opinion on buybacks...). We've seen some incredible market volatility ... [Read More]

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Bond investor

I think it's a mistake to hang your equity bullishness on the flawed Fed model, comparing bond yields to stocks. Two reasons:

1. Whether interest rates are above or below their historical average depends on the timeframe used. If we include decades prior to the Cold War, the averages come down significantly. According to "A History of Interest Rates" by Homer & Sylla (and confirmed with time series on Dr. Robert Shiller's web site), the average yield for 30-year high-grade bonds since 1871 is 4.7%.
Today's 30-year Treasury? 5.08%.

2. I can't debunk the Fed model better than Dr. John Hussman:
http://www.hussmanfunds.com/wmc/wmc070521.htm

oldprof

Thanks for the excellent comments. Mean reversion in earnings deserves a full post. For now let us just note that one could have been singing that song for several years now. As Muckdog points out, companies have enjoyed a multi-year economic expansion and have kept costs pretty low. As to P/E's above the "historical average" the reason is that interest rates are below their historical average.

Thanks again,

Jeff

Bond investor

Jeff, your whole bullish case is based on record profit margins for U.S. firms. Profit margins are a mean-reverting time series. Buying stocks when P/Es are above the historical average, while the "E" component is also at the top of the historical range, should be done cautiously.

RB

Enjoyed this post too. And as our CFO said "Dividends can only go up"

muckdog

Hey Dr. Jeff! This is a really good entry. Enjoyed it. I wonder, though... Don't we tend see this kind of thing near "market tops?" Especially in large numbers hitting the Yahoo Finance news wires day after day?

Companies are flush with cash after a few years into an economic expansion. So we see buybacks, dividend bumps, mergers and acquisitions, etc. Maybe it's just a coincidence because these kinds of things are indicative of a lengthy economic expansion, and what else are they going to do with the money anyways? (Uh, sponsor a sports arena, Muck...)

Agree that it does benefit the shareholder to reduce the outstanding shares. And with the low tax rates on dividends set to expire in the years ahead, maybe there will be a rush out of such stocks soon. So increasing the dividend may not be the wisest choice here.

Have a great Memorial Day weekend.

me

IBM? $35 Billion on buybacks and dead money on the stock price.

Barry Ritholtz

Nice analysis!

To me, the key to understanding what could happen next is the profit cycle: Will earnings continue to decelerate, and what will that mean for future buybacks?

Its also noteworthy that the biggest market winners (outside of materials and energy) are often the major R&D firms: Apple, Google, etc.

Barry Ritholtz

Nice analysis!

To me, the key to understanding what could happen next is the profit cycle: Will earnings continue to decelerate, and what will that mean for future buybacks?

Its also noteworthy that the biggest market winners (outside of materials and energy) are often the major R&D firms: Apple, Google, etc.

The comments to this entry are closed.