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Capital Spending vs. Buybacks

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Tuesday, December 24, 2013

Trading volumes will be thin in today’s abbreviated session, but they aren’t expected to improve much in the few trading sessions after the Christmas holiday either. Lack of volume notwithstanding, stocks will likely continue to build on the positive momentum following the Fed announcement and finish the year in style. This morning’s strong reading on corporate spending, thus far a weak spot in the economic picture, should help sentiment as well.

The Durable Goods orders report for November came in better than expected both on the ‘headline’ as well as on the internals, offsetting the very weak reading from the preceding month. Business spending has been a persistent ‘no show’ in this recovery and it is perhaps to premature to declare an end to that trend on the basis of this reading. Instead of making capital investments, companies have been investing record sums into share buybacks.

Buybacks totaled $128.2 billion in Q3, the highest quarterly level since the fourth quarter of 2007, according to a story in today’s Wall Street Journal, with Apple (AAPL - Free Report) , Exxon (XOM - Free Report) , and Pfizer (PFE - Free Report) as the biggest buyers of their shares in the quarter. Given the stock market’s strong run this year that has pushed the broad indexes into record territories, one is justified to wonder whether the companies are making the most optimal use of their cash.

But if today’s Durable Goods report is a sign of things to come, then it would be representative of a material improvement in the economic outlook.

Merry Christmas to all.

Sheraz Mian
Director of Research

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