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A Strong Sign for 2014 – Capital Spending vs Buybacks

A solid durable goods report is another bullish sign


Trading volumes were thin in Tuesday’s abbreviated session, and they aren’t expected to improve much in the few trading sessions for the remainder of the week.

Lack of volume notwithstanding, stocks will likely continue to build on the positive momentum following the Fed announcement and finish the year in style. Tuesday’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 Tuesday’s Wall Street Journal, with Apple (AAPL), Exxon (XOM), and Pfizer (PFE) 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 that Durable Goods report is a sign of things to come, then it would be representative of a material improvement in the economic outlook.

Sheraz Mian
Director of Research

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