Bad Omen: The Buyback Trajectory Is Slowing

Ok, it’s time for an update on the corporate bid for U.S. equities as investors ponder the outlook for markets after a truly abysmal October for stocks that were sitting at fresh all-time highs a scant six weeks ago.

Anytime there’s a selloff and folks are looking for excuses to stay bullish, buybacks obviously come up and it’s not hard to understand why. The corporate bid has been the largest source of U.S. equity demand for quite some time now, and this year, the tax cuts catalyzed a veritable buyback bonanza that was at least in part responsible for keeping U.S. markets insulated from global turmoil.

Over the course of the year, JPMorgan’s Nikolaos Panigirtzoglou has been keen on tracking the extent to which repatriated cash is being deployed.

JPMorgan uses the line item “foreign earnings retained abroad”, found in Table F.103 in US Flow of Funds for the “Nonfinancial Corporate Business” to assess corporate cash repatriation. Back in June, the bank predicted the torrent pace of cash repatriation would likely slow in Q2 following a Q1 that likely saw some $225 billion return to U.S. shores.

In September, the latest Flow of Funds data seemingly proved the bank was correct. Here’s Panigirtzoglou, from a September note, documenting the Q2 figure and providing some context with the 2005 episode that was frequently cited last year as a blueprint for what to expect from the new tax law:

The repatriation flow appears to have slowed considerably in Q2 to $105bn, less than half of the Q1 amount. Despite the deceleration in Q2, the current repatriation episode is still bigger and faster than the previous US repatriation episode of 2005. During the repatriation episode of 2005, $134bn was repatriated by US nonfinancial companies during the last three quarters of that year based on the decline in “foreign earnings retained abroad” relative to previous four quarters. This represented around 16% of the estimated $842bn stock of offshore cash at the time which we proxy via the cumulative “foreign earnings retained abroad” flow over the 10 years preceding 2005. In Q1 this year alone we had 11% of offshore cash being repatriated. In Q2 we had an additional 5% of cash being repatriated. So the cumulative 16% repatriation of 2005 has already been reached in only two quarters this year.