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Is the buyback game played out? Trading China and the banks: What to watch

Michael Santoli
Michael Santoli

Here are three questions to consider during the trading day.

Number 1:

Will we see a sudden end to the coddling of shareholders by Corporate America?

Probably not, but Blackrock Inc. (BLK) CEO Larry Fink is stirring up lots of chatter today with a letter he’s sending to fellow CEOs telling to stop being so friendly to investors by lavishing them with so many dividends and stock buybacks.

At first look, this seems an odd position to assume for a guy who runs $4 trillion in funds, largely in stocks. But not really, because Blackrock is a long-term owner of equities that must reinvest the cash distributed by companies - in those and other companies.

He worries that the craze for buybacks and dividend hikes – often prodded by aggressive, short-term focused activist investors – has gone too far and is occurring at the expense of productive investment in businesses that can produce economic growth and wealth over decades.

Fink’s stance isn’t new or wholly altruistic, but it fits with a growing sentiment that companies’ reliance on financial engineering amounts to short sighted eating of seed corn.

A whole subsector of the investment industry, of course, has emerged to feast on the companies who are most generously cutting checks to investors or bidding hungrily for their own shares.

ETFs such as AdvisorShares TrimTabs Float Shrink (TTFS) and Cambria Shareholder Yield (SYLD) have done pretty well focusing on those companies that are kicking out the most cash to their owners.

Fink’s letter won’t immediately undermine their strategies or change the game of investors agitating for more corporate cash. But - along with General Electric Co.’s (GE) belated embrace of this tactic with its disinvestment from the financial business and new $50 billion buyback plan – it suggests that the recycling of cash from corporate books to shareholder pockets is a very mature trend.

Question number 2:

Is the public exuberance for Chinese stocks beginning to ebb?

Stocks in Shanghai have vaulted higher in recent months, in part on hopes for more easy-money stimulus in China but largely on the loosening of rules for small investors to buy stocks directly. Brokerage accounts have been opened in the millions in recent weeks, with a new rule allowing an individual to have as many as 20 accounts recently passed.

Shanghai stocks are up 23% in the past month and 75% in the past six months. The fever spread to Hong Kong, with the Hang Seng index there speeding higher by nearly 15% in the past three weeks.

Overnight the Hong Kong market reversed lower by 1% after being up nicely. This is a stray, perhaps early sign that the wild rally along the Chinese coast is taking a breather.

The way the action over there is played here is through a variety of ETFs, including the iShares MSCI Hong Kong (EWH) and Deutsche X-Trackers Harvest CSI 300 China A-shares (ASHR) fund, not to mention some adrenaline-powered triple-leveraged funds, such as Direxion Daily Financial 3X Bull (FAS), for the real sensation seekers.

Monitor those for a read on the movement of speculative juices through the market today.

Question 3:

Can the bank stocks become anything more than ways to bet on interest rates?

Sure, the earnings today from the big banks will be parsed carefully for signs of loan growth and net interest margins and trading prowess at the likes of JP Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC).

But for investors, the frustration with the sector has grown as the stocks have largely just tracked market expectations for when the Fed will lift short-term rates, which would bolster interest income.

Very recently, though, the stocks have diverged a bit from Treasury yields and rate-hike outlook, holding up better than those indicators would suggest.

If the Street can embrace the banks for what they are, or aren’t, rather than as mere trading chits on Janet Yellen’s thought process, it would probably be a healthy thing for this market.