A very unwelcome development for the bulls

The stock buybacks couldn't help stabilize that brutal close Monday. Now it feels as if we are back to the same old grind.

By Jim Cramer Feb 26, 2013 10:07AM

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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 Jones Industrial Average ($INDU). 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.
Stock market crash Kyu Oh Photodisc Getty ImagesOf 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.

Cramer 

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long UTX and IBM.

 

 

 

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40Comments
Feb 26, 2013 12:54PM
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"a $46 billion reduction in the Pentagon’s fiscal 2013 budget out of $700 billion, barring a last-minute political compromise" will cripple our defense and endanger troops? Sounds like we need some new management in the DoD. If we bring all of our troops back home how can they be endangered?

Feb 26, 2013 12:59PM
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Stocks rise on upbeat housing recovery ! Consumer confidence rebounds ! More BULL "S" from the Spin Masters to feed the Sheep ! There is no Housing recovery look at the true statistics boys and girls ! The American consumer is the middle class and they have no confidence ! Contrary to the current spin they are heavily in debt have no assets and are losing everything !  WELCOME TO 2013 THE YEAR OF THE SNAKE  !!
Feb 26, 2013 1:01PM
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What else could Bernake say...... the truth would put him out of favor with his master.
Feb 26, 2013 11:36AM
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has anyone written a book on the topic of "Herd Management"? 

 

the concept of understanding how crowd control happens would be great for investing.  understand the in's and out's of the manipulation game means one would just need to monitor the charts and react to what is occurring.  since you're just WATCHING the game, and not an insider, i think this scheme could be a decent investment strategy. 

Feb 26, 2013 4:11PM
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Re -Tog  Correct their year of the SNAKE ! Our year of the SERPENT  !

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The stock market tanked Monday because China announced the nail in the US economy.

 

They are selling Renminbi contracts in Hong Kong now and allowing Sinapore (the third largest money clearing house outside Great Britain and the US) to sell the contracts also.

 

Also they and Great Britain are allowing banks in London to deposit and square up accounts in Renminbi.

 

With Bernanke printing money officially at a $85 billion a month rate and letting banks borrow another $125 billion a month at zero percent interest so they can buy worthless US T-bills this means the end of the US economy perhaps in a year or at most 2 years.

 

Expect a total collapse of the US economy by the end of 2015.

 

 

Feb 26, 2013 3:00PM
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In a rare occurrence, I agree with Cramer on the point that dividends are preferable to buybacks.  As to the volatility, there will probably be plenty of that between now and Friday before it settles down for a bit.  This is also dependent upon the Feb. jobs numbers.  After that, we'll play a wait and see game until the 1st round of estimates come in for Q1 GDP.  If we're in the negative again and officially in a double dip, we could see a 20% move to the downside pretty quickly.
Feb 26, 2013 1:29PM
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Talking heads aside, I'm getting mixed messages from real estate pros from various parts of the country.  Rental properties seem rather hot in the midwest.  Condos are doing awful in Fla.

 

Nationwide, there still seems to be a substantial inventory of residential property hanging over the market

 

The job market remain in the dumper. 

 

I'm really not a gloom merchant, these remain the facts.

 

Oh yeh, and then there's a whole bag of problems in Europe.

 

.

 

Feb 26, 2013 3:28PM
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Cramer´s getting bearish...time to dive in now ! 
Feb 26, 2013 1:21PM
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From the lips of the Almighty Wizard himself Helicopter Ben's  morning speech says  BUY GOLD AND SHORT BONDS !  GO FIGURE ?

Feb 26, 2013 1:39PM
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Why do companies always buy back when the price is high. Very dumb.
Feb 26, 2013 11:07AM
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Great time for successful enterprises like Apple, Intel, Microsoft and even Nokia to buyback shares at huge discounts while the government and politicians cut spending and raise taxes. It's all going to get better in 6-9 months so follow those enterprises and buy their shares also.
Feb 26, 2013 7:12PM
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We got back 10% of Monday's losses today. So far we havent had a gain in the markets since 2007 and then we have to go back to 1999. All that has happenned is we have been recovering past losses.
Feb 26, 2013 4:12PM
Feb 26, 2013 3:00PM
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Corporations are buying back stock because Obama is bad for business.  Without growth in the US economy, investment to expand will be absent.  And, Cramer a recovery never happened.  Growth is not 2-3%, that is simply movement.  Better to stand pat with no prospect of growth.
Feb 26, 2013 11:18AM
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Yes, we are up over 100 points, the world is fine again...Not really, be very very careful today, we had good housing news but like we always say,  news do not move markets, people do....All eyes and ears on the Fed now; in fact we already started to drop...Too many manipulators is never a good thing...More later.
Feb 26, 2013 9:26PM
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Decent afternoon for the good guys; of course didn't recover much from yesterday's aberration but a positive day after that feels better...Better believe it will not get easier tomorrow...There are plenty of people down here that want to drop us big...We will see.
Feb 26, 2013 1:32PM
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Retog

If you held on to your Home Depot today you're getting your reward!

Feb 26, 2013 12:51PM
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Manipulators down here trying to take over slowly but surely; at 1145 there was a call to accelerate the selling so down we go...Seems like we were up over 100 points a week ago, not this morning, yesterday we were up over 70 at about the same time...Oh well, maybe this afternoon something can be done...We will see.
Feb 26, 2013 2:16PM
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