The stupidest thing I’ve read this morning - stock market top 2013

The stupidest thing I’ve read this morning….

“There’s no doubt that stock buybacks have helped boost EPS [earnings per share] growth, although you could make the case that as long as companies are buying back their stocks, people should do it as well,”.  This horrendously bad advice was given by someone at a significant investment industry firm this morning.

Truth Points:

When company share buybacks are very high, investors should avoid doing the same. Share buybacks are a tool used by company management to drive the stock price higher via the increased earnings per share (EPS) that result from reducing the number of shares outstanding. 2013 buybacks are very elevated — topped only by 2007 buybacks. 2013 will likely see 3-4% of S&P500 shares outstanding removed via buybacks. That’s more than the pace of EPS growth this quarter and last quarter!
Frequently during years when share buybacks are very high, company management is heavily selling their own shares. Now there’s conviction!  Insider selling reached panic levels in 2007 and has been topped…yup… this year!
Sadly, this phenomenon also is frequently accompanied by retail investors buying heavily. Retail investors trampled heavily into stocks, setting records in 2007 and 2000. Those records have been smashed this year.

When these things happen together, the stock market is usually going through a secular topping-out year (before a mammoth market crash). That’s what happened in 2000 and 2007. The data suggests this year is the same –only with even more acute risk.