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Mark Hulbert
June 11, 2010, 12:01 a.m. EDT · Recommend (2) · Post:
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Contrarian look at stock sentiment
First Take "º
A quintuple nine-to-one up day
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- Ghost of 2008?
That ghost still lives, even after Thursday's impressive buying stampede. That's because the stock market's plunge last month -- the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,173, +273.28, +2.76%) had its worst May since 1940 -- prompted many investors to worry that the European debt mess will lead to a replay of the credit crunch of 2008.
Corporate finance officers, however, don't appear to be scared of any such ghost. And they're not just saying so. They're backing up their words with money -- particularly by initiating new share-repurchase programs.
If corporate financial officers did think another credit crunch like 2008's were imminent, they would be hoarding their cash. After all, if a liquidity crisis that severe were to take place, most corporations would lose access to outside funding. Those without sufficient cash would not survive.
But, far from hoarding their cash, corporations are choosing to return a lot of their cash to shareholders through repurchases. Several large share-repurchase programs have been announced this week alone. ( Read full story on stock buybacks.)
When I last wrote about share buybacks in mid February, I pointed out that, for the first six weeks of 2010, they were already well ahead of 2009's pace. I reported that, if this faster pace were maintained for the remainder of 2010, share repurchases for the year would total $198 billion, nearly double 2009's total. ( Read my Feb. 15 column.)
In fact, the pace of share-buyback program announcements has been even faster than what I extrapolated in mid February. For the year to date through June 10, according to Thomson-Reuters, a total of $122 billion in repurchases has been announced -- equivalent to a full-year total of $276 billion. That would be nearly triple 2009's total.
Note carefully that the increased pace of share-repurchase activity is not simply a function of corporations having more cash. David Ikenberry, a finance professor at the University of Illinois at Urbana-Champaign, who has extensively studied corporate buybacks, points out that corporations had lots of cash a year ago too.
The difference, he said in an interview, is that corporate officers are increasingly confident that a recurrence of the 2008-2009 credit crisis is not imminent.
Ikenberry added that he believes this trend will not only continue, but accelerate: "The potential exists that, in coming months, there will be an avalanche of share-repurchase announcements," he said. That's because "share buybacks are one of the primary ways in which companies can deploy their cash, since other possible uses -- such as increasing the dividend -- require a longer-term commitment than a one-time share repurchase program."
By the way, buybacks are not only a bullish omen for the economy and market as a whole. They are also bullish for the individual companies that announce a buyback program.
Consider the performance of the Buyback Letter, edited by David Fried, an advisory service that recommends stocks based on buyback activity. Since the beginning of 1997, which is when the Hulbert Financial Digest began tracking this service, it has produced a 10.7% annualized gain, compared to 5.1% for the overall stock market (as measured by the Wilshire 5000 index). Among all the services the Hulbert Financial Digest has tracked since 1997, the Buyback Letter is in third place (second when ranked on a risk-adjusted basis).
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
If these were normal times, Thursday's stock market thrust would have to be counted as a very bullish omen, writes Mark Hulbert. These are not normal times.
4:30 p.m. June 10, 2010 | Comments: 56
- JUNT4twan | 12:21 a.m. Today12:21 a.m. June 11, 2010
"Mark Hulbert: Contrarian look at stock sentiment http://on.mktw.net/aPXcJq" 11:14 p.m. EDT, June 8, 2010 from MktwHulbert
"Mark Hulbert: No statistical basis for Summer Rally http://on.mktw.net/9yPUnX" 11:44 p.m. EDT, June 7, 2010 from MktwHulbert
"Mark Hulbert: Insiders more bullish than at February low http://on.mktw.net/bpsYDn" 11:22 p.m. EDT, June 3, 2010 from MktwHulbert
"Mark Hulbert: Outlook for the 10-year Treasury yield http://on.mktw.net/cFRkLd" 11:45 p.m. EDT, June 1, 2010 from MktwHulbert
"Mark Hulbert: Those suspicious late-day reversals http://on.mktw.net/bXH67s" 6:40 a.m. EDT, June 1, 2010 from MktwHulbert
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