Buybacks are nice, but they aren't enough to bring stocks back.
That's what market professionals were saying Thursday, in the wake of recent buyback announcements from companies including
Among the motivations to buy back stock, say experts, are a desire to bolster per-share financial results and a hope to boost investors' confidence. With the major indices in free-fall this week, the latter rationale has taken on greater weight, as corporate chieftains seek to build a floor for stock prices by proclaiming their shares priced at value levels. But as benign as those intentions may be, some people insist buybacks just aren't enough to stop stocks from dropping further.
"I don't think the impact on the broad market is that great," says Michael Metz, a longtime market strategist who's now a portfolio manager at Oppenheimer Investment Advisers.
The Will and the Way
In the midst of an economic downturn punctuated by a terrifying attack on New York and Washington, even willing companies are finding their capacity to buy back stock is dwarfed by the desire of two groups of investors to sell: overseas investors and stockholders selling to meet margin calls. Prices are a function of urgency, says Metz; this week, buyers are "recalcitrant or reticent," while "sellers are extremely anxious or hysterical."
That fact was borne out on Thursday, when Disney bought back 50 million shares from certain major stockholders at a discount to market price. Goldman Sachs bought an additional 85 million shares in the same transaction; the block represented some 7% of the stock's float. Even so, the purchase wasn't enough to prop up its stock; shares fell more than 8% Thursday to close at $16.98.
In fact, some people doubt that buybacks have ever worked, despite what you might read in the paper. While it's part of market folklore that
announcement of a buyback turned the market around after the Dow's 1987 crash, Metz disagrees, as did a number of market observers at the time. "I don't think they were a major factor then," says Metz, "but they were highly publicized."
Way Back When
Similarly, Wednesday afternoon's late-day rally from the market's lows was driven in part by company buybacks, according to some market-watchers. But Todd Clark, co-head of trading for W.R. Hambrecht, says he believes that Wednesday's pop -- erased by Thursday's continuing losses -- was driven by program trading to unwind a position against futures or options. "I don't think it has anything to do with company buybacks," he says.
Typically, says Clark, there's a delay from the time a company announces a buyback to when the process kicks in. And this week is consistent with that scenario, he says, saying there was little company demand for stock Monday and Tuesday, but that, anecdotally, there appeared to be more activity Thursday. The bad news, says Clark, is "there's clearly enough supply around. They're having no trouble buying back stock."
Many large-cap companies, adds Metz, are too highly leveraged to conduct major buyback programs, having spent too much money buying back stock at or near the market's peak. "Now they don't have the balance sheets to do major buybacks," he says.
In Clark's opinion, the pressure to sell -- and the bigger picture of what's happening this week -- is that insurance companies, seeing that they are going to have to fund large liabilities, have been forced to liquidate a lot of holdings, driving down both stocks and bonds. Clark says he's hopeful the pressure to sell is diminishing. "You've got to figure we're close," he says, "because we're trading a ton of volume."
The continuing fall, says Clark, might prompt what he calls the "I-can't-take-it-anymore-get-me-out" selling from retail investors, often the sign of a bottoming market. And the signs for that could come as soon as Friday morning, he says. "If we do get a major washout in the morning," says Clark, "that could be the type of thing that cleans this thing out."
But if the market goes up Friday morning, says Clark, "I would be skeptical of it."