A Very Unwelcome Development

 | Feb 26, 2013 | 7:45 AM EST
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All of those buybacks. All of those takeovers. All of that buying power. But it doesn't mean a thing in the last hour of trading, as we saw in that brutal close Monday.

Among the many companies with just-announced share buybacks were 3M (MMM), United Tech (UTX) and IBM (IBM), and these were down huge Monday -- the biggest percentage contributors to the decline in the Dow. With all these buybacks, you wouldn't think we'd see this torrent of surprisingly large, unbridled selling, totally unmet by anything other than the most meager buying.

But the buybacks can't be used in force to stabilize stocks at the end of the session, as that's regarded as manipulative. So the companies, which say they want to buy back as much stock as they can -- or have accelerated buybacks or are supposed to be active -- don't get to use those buybacks when they would be most effective.

That's why I have always preferred higher dividends to buybacks. The dividends are "in play" during every selloff. That is, we know a stock is a terrific place to go if a yield gets to 4% from a stock's decline, but a buyback doesn't even stop a futures-led decline.

Now, I know that buybacks can shrink float, and that this is what allows the earnings per share to rise -- but that's not what I am talking about. I am saying that, in a world where we are using stocks as fixed-income equivalents, the dividend is the thing that entices us -- not the buyback. The buyback is ephemeral for most, because so many of them don't even do anything but cancel out the stock options a company issues to management.

Of course, in January there were terrific fund flows, which come in all day and they can cushion the decline. That's why we'd been spared these kinds of hideous closes, as money in stabilizes the market better than does any buyback.

But the money in has dried up. That's why you have this moment, again, in which we see what stocks are like when the data are mixed and the public's already given up, or is spent, or is holding back, because of the tax holiday and the gasoline issue.

The spike of money in, it seems, was just a spike.

My hope had been for a gentle rally and stabilization on big down days, thanks to a combination of aggressive buybacks, more bountiful mergers and a public that recognized the tax law still favors stocks over bonds. That's what had been the case for the first seven weeks of the year.

Now the streak's run out. The question is, can it return anytime soon? I hate to say this, but it does feel as if it was nice while it lasted, and now we are back to the same old grind. There's just not enough money in. The market has come too far for yield support, and the buybacks aren't helping.

If the data weren't mixed, this wouldn't be an issue. The market could still go higher on multiple expansion. But, after the economic rebound post-fiscal cliff, the big lift has apparently stalled, making it much harder for stocks to go appreciably higher until the data improve.

All that said, I don't think stocks are going to get crushed here. I just think the volatility is back and that, once it's returned, it becomes very hard to make it go away again without more money in. Of course, it then becomes self-fulfilling, as the public is not going to come to a market that can lose 150 Dow points in 60 minutes, as was the case Monday.

For the bulls this is, indeed, a very unwelcome development.

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