Technology companies have once again been leading the Buyback Parade.  The 20 most active tech companies on the buyback scene spent a little over $260 billion over the 12-month period ended with their most recent fiscal quarter reports.  That comprised about 40% of the total dollars spent by the 100 largest buyers in the S&P500 over that time.  The largest few accounted for the lion’s share of those purchases; Apple Inc., Oracle, Qualcomm, Cisco Systems and Microsoft spent a combined $175 billion over the past 12 months—triple their combined spending over the same period two years ago. Apple alone spent a little over $75 billion buying back shares over the past four quarters, accounting for about 4% of cumulative shares traded during a time that the company’s iPhone business has slowed dramatically. Oracle spent an unprecedented $36 billion buying back shares in its fiscal year that ended May 31. The software giant’s overall revenue grew less than 1% for the period. But while most giant tech companies are hardly short of cash, the recent pace of buybacks seems unsustainable for many. Oracle’s buybacks over the past year have reached the equivalent of nearly three times the company’s free cash flow for the period according to The Wall Street Journal.

But when it comes to ‘financial engineering’ on the stock buyback front, there is no company that acts as a better ‘poster child’ than Apple Inc.  While we don’t argue about the merits of the company, the growth ahead from the move away from device sales to services or the financial viability and strength of the company, the numbers below do show how the company has used stock buybacks and a low interest rate world to inflate their stock valuation.  When we look at the past four years, during which time the market capitalization of the company has basically doubled from $500 billion to $1 trillion, we see that actual net income has been almost unchanged (up just 1%).   However, earnings per share have risen over 25% due to the reduction in the share count over that period.   Moreover, a good portion of those buybacks were funded by a debt issue of $100 billion at extremely low interest rates.  It’s hard to argue the rationale for a company that had over $200 billion in cash on the balance sheet to issue such debt, especially since it was not used to make any acquisitions.  Instead, the company used share buybacks to boost earnings growth which, in turn, lead to the market putting a higher multiple on the stock.   Almost like magic!Is Apple Flat? AAPL financials

One more point to bolster our cautious outlook has to do with stock market sentiment.   We keep hearing that this has been the ‘most hated bull market’ ever because investors have been stuck on the sidelines ever since the Financial Crisis.  The numbers don’t really bear that out.  The latest survey from Investors Intelligence shows 54% market bulls and 17% bears for a net bearish position of 37%; hardly a ‘market low’ type reading.  Moreover, the percentage of stocks accounting for total wealth in the U.S. (where the most recent accurate data is available) shows stocks at their highest percentage of total wealth since the peak of the ‘tech bubble’ in 1999.  Investors may hate this market but they are definitely more invested than either they realize.

But despite all the warning signs that we may see out there, investors on the whole aren’t worried!  The S&P500 hasn’t had a 1% move in either direction for 40 trading days, the longest such streak since June to October 2018 when it went 74 days without a 1% move.  One yardstick of stock swings, the CBOE Volatility Index, or VIX, has fallen 49.5% this year, on pace for its biggest annual decline ever, according to Dow Jones Market Data.  The gauge measures expectations for volatility over the next month, and tends to rise when investors are wagering on big moves in the S&P500 through options.  Point of warning;  that 74 day period of low volatility last year ended in early October and was then followed by stocks falling in the fourth quarter which culminated in the worst December for stocks since the 1930’s.

1 2 3