Buyback slowdown in the U.S. & manufacturing in China, Europe: What to watch today

Here are three things to keep an eye on today while trading Tuesday...

Number 1:
 
The world is getting a test today on whether bad news is bad for stocks and good news good.
 
The bad - or at least disappointing – news from China overnight was that its PMI manufacturing gauge fell to an 11-month low.
 
China’s slowdown has been a theme for months now. A frothy real estate market is coming off the boil. Exports are pressured. Foreign investment in the country has slowed. The transition to domestic consumer spending as a driver of growth is happening - but gradually.
 
And yet the mainland stock market has been screaming higher. Deutsche X-trackers Harvest CSI300, the U.S.-listed fund that follows the local A shares market in Shanghai, which trades under symbol ASHR, is up 12% this month and more than 60% in the past six months.
 
This rally has been carried along in large part by hopes that the Chinese authorities “mini-stimulus” efforts will be broadened to become a more aggressive easy-money campaign. Shanghai stocks again traded higher on the news overnight, and now U.S. investors get to weigh in.
 
Today will help show whether this “bad news is good news” trade is still in force.

Number 2:

Halfway around the world, a crucial European manufacturing indicator hit a 46-month high, with German activity leading the way. The results were stronger than forecast, offering hope that a pickup in growth on the Continent is taking hold.
 
Is this because of the European Central Bank’s bond-buying plan, which has been knocking down the value of the euro? Was the economic pendulum already poised to swing back in a positive direction anyway?
 
Maybe both, but it doesn’t much matter. What does matter is how the markets ingest this pickup in growth, which so far is happening without much of the ECB’s hoped-for inflation.
 
The euro has rallied against the dollar on the news, continuing a nice little bounce that began with last week’s dampened expectations for Fed tightening. The euro crossed above $1.10 for a time overnight.
 
This, of course, will challenge one of the most popular investment bets in the world: that the dollar would surely continue its dominance, driving European stocks roaring higher in euro terms.
 
The Wisdom Tree Europe Hedged Equity ETF (HEDJ) is the stimulant of choice for those hooked on this trade. The fund owns Europe stocks but hedges out exposure to the euro. It has gathered billions of fresh money in recent months, a sign of just how confident the little-guy investor has become that this was a can’t-lose trade.
 
Now we might see just how much of a no-brainer this trade is.

Number 3:
 
Companies have been by far the biggest and most reliable source of buying demand for stocks the past few years. Corporate share buybacks last quarter approached a record, as strong profits, low borrowing costs and little appetite for capital investment keep CFOs bidding for their employer’s stock.
 
Companies that have been most aggressive in soaking up the supply of their own shares have far outperformed the market. The PowerShares Buyback Achievers ETF (PKW), one of several ETFs that target such companies, has vastly outpaced the market in recent years.
 
But we might be approaching a seasonal stutter-step in this strategy. As Goldman Sachs points out, companies must halt buyback activity in the weeks before reporting quarterly earnings, and then can resume them afterward.
 
The majority of companies in the S&P 500 with buybacks have entered that so-called blackout period in the past week or so and will remain there, in most cases, until mid- or late April.
 
What typically happens is the stocks of these companies tend to underperform while the buybacks are suspended – and indeed, the overall market as often pulled back too.
 
Goldman shows that these soft patches have tended to be good buying opportunities for the related stocks. So as March ends, there might be a sale on these stocks and ETFs while those CFOs are forced to turn their buyback machines off.