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Buyback Binge: Another Sign of a Market Peak, Says Elliott Wave’s Hochberg

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It has been six years since we last saw a spike in stock buybacks, and it has also been six years since we last saw a market crash.

While some might dismiss that fact as mere coincidence, for Steve Hochberg, chief market analyst at Elliott Wave International, it's proof that another major correction is about to occur.

"It has occurred cycle, over cycle, over cycle. It occurred 1999. It occurred in 2007. And now it's occurring again," Hochberg says of the trend that shows a spate of share repurchases is a warning sign rather than a positive indicator that the people who know the company best see value.

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He dismisses the "conventional view" of share buybacks as "an accounting gimmick," and disputes the oft-cited belief that having fewer shares on the market drives up earnings per share.

"We don't view it that way," he says. "If you look at the history of buybacks, they tend to spike right around market highs, and we just had a huge spike in buybacks recently."

What's even more troubling to him is the recent trend where companies actually borrow money through the bond market to fund their stock repurchase programs.

"That's just insane," he says. "It's a sign of peak optimism that they (company boards and CEOs) are confident enough in their share price and their businesses that they can pay back the debt and their share price will continue to rise."

For those unfamiliar with his firm, Elliott Wave International has made quite a name for itself by studying investor psychology and market cycles. And as smart and as well paid as our corporate leaders might be, Hochberg says their track record on buybacks proves two things. First, they can't think of anything better to do with company money, and second, they're "subject to the same crowd psychology" as the rest of us.

"We look at signs of optimism and pessimism to judge where we are within the cycle of the market," he says, "and I think this is one more sign of peak optimism."

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