After I wrote my last post about the GAAP gap, which addressed many of the concerns about shortfalls in earnings quality (see The GAAP gap as Rorschbach test), I had a number of discussions about the vulnerability of the stock market to buyback activity. I had been meaning to write more on this topic, but Cullen Roche and Ben Carlson both beat me to it with some balanced perspectives on fundamentals behind buybacks. Nevertheless, here is my two-cents on the topic.
The concerns about buybacks gained prominence from a post from Josh Brown, who highlighted analysts from HSBC showing that buybacks accounted for much of the equity demand since 2008. As the market enters a buyback blackout period during Earnings Season, could the stock prices weaken as this key demand slackens?
Despite the above chart, the relationship between buybacks and equity returns is tenuous at best. Let me explain why.
The full post is available at our new site here.