The Boss Is Back

Some encouraging signs have surfaced for those itching to load up on stocks at today’s lower prices. Alan Greenspan’s surprise interest-rate cut, which sent the market rocketing higher on Thursday, is one. But even before that move, savvy corporate buyers had been turning up the volume. Last week marketing firm Cendant unveiled a $1 billion program to buy its own shares. This followed on the heels of buybacks by Pfizer ($5 billion), McDonald’s ($3.5 billion) and American Express ($3.3 billion). In September $25 billion in share repurchases was announced–double the pace of earlier this year.

Last spring I noted that corporate buyers–who should know the value of their own shares better than anyone–had turned glum. In a warning that the market was headed for hard times, stock buybacks were slowing, and insiders were selling more than they bought. Now that trend has quietly turned, and it’s tempting to see it–along with the rate cut–as a buy signal. In fact, some nibbling may not be a bad idea. I would certainly endorse a program of monthly buying with a set amount of money.

I would guard against too much restored confidence, however. For one thing, the rate cut could mean that Greenspan views the economy as even weaker than it looks, which of course would not bode well for stock prices. As for the insiders, they are famous for buying too early. During the late-’80s banking crisis, bank executives bought their own “cheap” shares two years before bank stocks hit bottom. And last year, just as stocks were selling at nosebleed prices, corporate purchasers at 1,700 companies announced buybacks worth $220 billion.

Such bullishness would mean a lot more if it persisted, say, until early next year. But there’s a good chance it won’t last that long. Profit margins are getting squeezed, and companies are running out of cash; some may not even be able to make good on the buybacks they’ve promised. Charles Clough, chief investment strategist at Merrill Lynch, notes that the amount of cash that companies have left after investing in plant and equipment–which is the cash that funds most buybacks–has been dwindling for two years. By next year the till may be empty.

Among the industries hurting most are telecommunications, retailers, autos, computers and financial services. Competition there is so hot that firms have been unable to rein in their capital spending; in some cases they’ve borrowed heavily to keep it up. Those industries are overbuilt and headed for retrenchment. For investment, focus on industries not spending so heavily. They will be better able to protect earnings and–who knows?–maybe buy back shares.

Those would include cable TV, where most of the wire has already been laid; Viacom and Media One Group just unveiled big buybacks. Airlines are in a good spot because even though traffic slows as the economy weakens, industry leaders like AMR and Delta can stop buying planes and weed out old gas guzzlers. Dividend-paying electric utilities tend to have appeal in a weak economy anyway, but with deregulation, some (Consolidated Edison, New England Electric) have shed capital-intensive parts of the business–generating power–to focus on transmission. In trying times, companies able to conserve cash should hold up best, even if it turns out that corporate buyers sent a false signal.

See time.com/personal for more on buybacks. E-mail Dan at kadlec@time.com or see him on CNNfn, 12:40 p.m. E.T., Tuesdays.