Business Spending

Business spending on equipment and software continues to be sluggish. The fourth quarter saw its largest drop since 2002. One of the obvious conclusions is that corporations have opted to use to cash to fund stock buybacks. Why? most corporate managers are paid based on stock price performance. In an era of marginal investment options for corporate cash flow, CEO's have come to realize that over the short run the only way to meaningfully impact stock price is to shrink the float. Paying out higher dividends or investing in so-so projects will do little to increase the stock price over the short-term; so they buy-back shares. The WSJ reports that market float was reduced by $548 billion last year through a combination of stock buybacks and private equity deals.

This development has the potential to "surprise" the economy. Should business investment stay sluggish, consumer spending continue to moderate and housing decline much more, the Fed might find itself pushing on a string to rev the economy back up.

We think this provides a floor for bond prices and see longer US treasuries as attractive at these levels.