BETTER PART OF DISCRETION

TrimTabs, a well-know independent research group that focuses on supply and demand of stock shares and money flows, recently reported that much of the hoopla about companies buying back their shares--a move that many believe has buoyed share prices--is waning.

Founded in 1990, one of TrimTabs premises is that stock prices are more a function of available money than just value. It's another way of saying it's about supply and demand not any different from any tradeable goods in the market.

Buybacks usually occur for one of two reasons: there's a lot of easy money around, as is the case now, or there's actual hidden value out there that's gone unrecognized in general. Some might refer to it as the Buffett play. 

The moral of the story is this. As James Authers of  the Financial Times points out today in his column, "Tide turning against buybacks ahead of the market top," one of the so-called pillars supporting and even helping push them higher is apparently ending. It's a mouthful of an headline, but worth a look if caution is still a registered word in your lexicon

Citing research from TrimTabs, Authers notes that money flowing into corporate buybacks the last two months declined to its lowest level since the first of 2013.  Moreover, announced buybacks, according to TrimTabs, peaked in February 2013 and have drifted lower ever since.

So far this June around $22 billion went to buying back shares compared to about $63 billion last June. And there's more. Announced buybacks among U.S.companies, 38 so far this year, has trended to its lowest level since 2011, according to Authers.

Some have called buybacks the classic example of corporations' lack of imagination, a tactic resorted to when you can't come up with any good ideas to spend your cash. Recall a couple of years back one of MSM's raves was how much cash U.S. corporations were sitting on. It's sort of a business version of shoppers who buy just to be buying because they got the money.

But buybacks, like insider buying, can also represent a value play when corporations view their own shares as being cheap.With the huge run-up in the market most of that has all but changed for arguing this point in our view. Carried to an extreme, what this falls under is the category of  the magician's art, financial engineering versus real growth.

The other side of that marker is insider selling, a figure that, according to TrimTabs, is up dramatically in recent weeks. A quick note on this. Given the recent take off in energy, much of it caused by the Iraqi situation, here's just one example. Twelve different insiders at Pioneer Natural Resources Company (PXD) between the end of May and now unloaded 90,400 shares.

Now one company does not a trend make. But there were no purchases during that time and four of the 12 cut their holdings by more than 10%. 

No doubt bulls will come up with counter arguments like M & A activity, arguing that a number of them have been cash deals. But there's no unwritten rule that says cash deals create value. Call it a show of confidence or whatever you want. We call it caution.

The market seems set to go higher and there's no shortage of folks who want that. But pulling a few coins off  the table in the next  upward burst, if there is one, and going long some options if you need to be long might just be the better part of discretion.