share buybacks – Olduvai.ca

What Does the Fed See Heading at Big Banks? Blocks Share-Buybacks, Slaps on Dividend Caps Due to “Economic Uncertainty” and “Cushion Against Loan Losses”

October 2, 2020

What Does the Fed See Heading at Big Banks? Blocks Share-Buybacks, Slaps on Dividend Caps Due to “Economic Uncertainty” and “Cushion Against Loan Losses”

My Big-Four Bank Index already got crushed back to 2004 level.

After the stock market closed today, the Federal Reserve announced that “in light of the economic uncertainty,” and to provide “a cushion against loan losses,” and to support lending, it would extend for another quarter, so through December 31, the blanket prohibition on share buybacks by large banks (banks with over $100 billion in assets). For the same reasons, it would also cap dividend payments tied to a formula based on recent income.

The Fed said that according to a stress test and additional analysis, whose results were released in June, “all large banks were sufficiently capitalized” to deal with the fallout from the Pandemic.

But it appears that the Fed now thinks the banks need to be even more sufficiently capitalized, so to speak, to deal with whatever may be coming at them. And the Fed will conduct another stress test later this year.

Many banks had voluntarily halted share buybacks in March as all heck was breaking loose. In June, following the release of the stress test results, the Fed imposed the buyback prohibition for the third quarter, now extended through the fourth quarter.

So, let’s put it this way: As far as the Fed is concerned, this crisis is not a blip, and banks need to be prepared for what’s coming at them. The large banks have already set aside billions of dollars each to deal with the fallout on their loan books. But apparently, the Fed thinks there’s more to come.

…click on the above link to read the rest of the article…

US Steel Shares Plunge, Dividend Slashed, Buybacks Halted, 1,500 Workers Cut Amid Deepening Manufacturing Recession

December 20, 2019

US Steel Shares Plunge, Dividend Slashed, Buybacks Halted, 1,500 Workers Cut Amid Deepening Manufacturing Recession

President Trump told a crowd of steelworkers in Illinois in July 2018 that “After years of shutdowns and cutbacks today the blast furnace here in Granite City is blazing bright, workers are back on the job and we are once again pouring new American steel into the spine of our country.”

While US Steel’s Granite City might be operational for the time being, the steel producer has just announced it will shut down a “significant portion” of its Great Lakes Works facility, slash its dividend, terminate 80% of its share buyback program, and layoff 1,500 workers.

Great Lakes Works is expected to halt operations by April 2020. The mill rolls slabs into sheets of steel and has been battered by the manufacturing recession and trade war. The facility laid off 200 workers earlier this year, with another 1,500 in the near term, reported 247 Wall Street.

Boeing Considers Temporarily Halting 737 Max Production

The failed turn around of US Steel comes as the manufacturing recession shows limited signs of abating, forced the company to slash its dividends for 2020 from $.05 per share to $.01. At least 80% of its buyback program will be terminated in early 2020 – a measure to help the struggling steel company avoid bankruptcy.

The company will refocus its efforts at its Mon Valley Work facility in Pennsylvania, Big River Steel in Arkansas, and another in Gary, Indiana.

US Steel CEO David Burritt told investors on a call that “Acquiring the remaining stake in Big River Steel continues to be our top strategic priority.”

Burritt also commented on the upcoming Great Lakes Works shutdown:

“[C]urrent market conditions and the long-term outlook for Great Lakes Works made it imperative that we act now, allowing us to better align our resources to deliver cost or capability differentiation across our footprint.

…click on the above link to read the rest of the article…

Expect Buybacks to Sustain Markets

August 4, 2019

Expect Buybacks to Sustain Markets

With uncertainty swirling around the financial markets right now, many are warning about a financial storm brewing and how to navigate through it.

Let’s consider the storm elements in the world right now. The ongoing trade war is obviously a major concern, which is nowhere near being resolved. Growth is slowing in many parts of the world and central banks are preparing to begin cutting rates again.

Geopolitical tensions are also rising again, especially in the Persian Gulf. Late last week, Iranian forces seized a British-flagged tanker in the Strait of Hormuz, one of the world’s most important chokepoints. Britain has demanded the ship’s release.

On the U.S. domestic front, we are facing government dysfunctional, trade war uncertainty and a looming debt ceiling deadline. A deal will likely be reached, but that is not a guarantee. If a deal isn’t reached, the federal government would run out of money to pay its bills.

That’s why you should consider the tactics of Warren Buffett along with the strategy used by some of the most skilled sailors.

Buffett, one of the most successful investors in history, has made billions by knowing how to steer through storms. One of my favorite Buffettisms has to do with keeping your eye on the horizon, a steady-as-she-goes approach to investing. It also happens to relate to sailing.

As he famously said, “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.”

What that means is that you should carefully consider what’s ahead and choose your course accordingly. Buffett doesn’t strive to be a hero if the risk of failing, or crashing against the rocks (in sailing lingo), is too great.

…click on the above link to read the rest of the article…

What Would Stocks Do in “a World Without Buybacks,” Goldman Asks

April 9, 2019

What Would Stocks Do in “a World Without Buybacks,” Goldman Asks

Companies buying back their own shares has “consistently been the largest source of US equity demand.” Without them, “demand for shares would fall dramatically.” Too painful to even imagine.

Goldman Sachs asked a nerve-racking question and came up with an equally nerve-racking answer: What would happen to stocks “in a world without buybacks.” Because buybacks are a huge deal.

In the fourth quarter 2018, share repurchases soared 62.8% from a year earlier to a record $223 billion, beating the prior quarterly record set in the third quarter last year, of $204 billion, according to S&P Dow Jones Indices on March 25. It was the fourth quarterly record in a row, the longest such streak in the 20 years of the data. For the whole year 2018, share buybacks soared 55% year-over-year to a record $806 billion, beating the prior record of $589 billion set in 2007 by a blistering 37%!

Share buybacks had already peaked in 2015 and ticked down in 2016 and 2017. Then the tax reform act became effective on January 1, 2018, and share buybacks skyrocketed.

The record buybacks in Q4 came even as stock prices declined on average 5.3%, according to S&P Down Jones Indices. On some bad days during the quarter, corporations were about the only ones left buying their shares.

For the year 2018, these were the top super-duper buyback queens:

Apple: $74.2 billion
Oracle: $29.3 billion
Wells Fargo $21.0 billion
Microsoft: $16.3 billion
Merck: $9.1 billion

But who, outside of corporations buying back their own shares, was buying shares? Goldman Sachs strategists answered this question in a report cited by Bloomberg, that used data from the Federal Reserve to determine “net US equity demand.” These are the largest investor categories other than corporate buybacks, five-year totals:

Foreign investors shed $234 billion.
Pension funds shed $901 billion, possibly to keep asset-class allocations on target as share prices soared.
Stock mutual funds shed $217 billion.
Life insurers added 61 billion
Households added $223 billion.

…click on the above link to read the rest of the article…

Corporate Share Buybacks Increasing at Alarming Rate… Again

March 5, 2019

Photo by Mike Kalasnik | CC BY | Photoshopped from original

Corporate Share Buybacks Increasing at Alarming Rate…Again

Corporations have been using buybacks to “rob Peter to pay Paul” since the Reagan administration created laws that allow it.

According to a Goldman Sachs chart, 2018 was a record year for buybacks, which neared $800 billion for S&P 500 companies alone:

Even though these companies bought back shares, which should have spurred investment in more companies, that didn’t keep the S&P from dropping 6 percent by the end of 2018. But corporations are still getting a benefit…

“Buyback Monsters” Perform Market Illusion

This “sleight of hand” illusion allowed Apple to increase their market cap by $118 billion in 2018 on news that it would complete share buybacks in the amount of $210 billion.

They used tax incentives along with other forms of capital to complete the buyback. This move only helped Apple’s economy and their shareholders.

But they’re not the only company that has pulled off this amazing magical feat. Home Depot and “nearly 80 others”are also dipping into the “buyback gravy train.”

Home Depot is in a class of corporations I call “buyback monsters,” companies that have reduced their share count outstanding by at least 25 percent since 2010. It is by no means alone. Nearly 80 companies in the S&P 500 have reduced their share count by at least 25 percent since 2010, and more than 100 (20 percent) have reduced their share count by 20 percent or more, including some of the best-known companies in America.

Using Home Depot’s 35% share buyback as an example, a CNBC article highlighted another implication of being a member of the “buyback monster” club:

All other metrics being equal, Home Depot’s 35 percent share count reduction means that earnings appear 35 percent better, without any change in “fundamentals” like revenues, costs or taxes.

…click on the above link to read the rest of the article…

Expect the Fed to Pause if Volatility Continues

November 1, 2018

Expect the Fed to Pause if Volatility Continues

It’s a good thing October is coming to an end. It’s been a particularly lousy month for the markets. October has seen about $5 trillion in value erased from global markets.

Reasons for that sell-off range from fear over Fed rate hikes, trade wars, elections and buyback “blackout” periods during earnings.

Buyback blackouts are ending, which should provide markets some needed lift over the next month. Buybacks have been one of the primary reasons markets have risen this year.

But other areas will keep the level of volatility high into the year-end. The upcoming elections, for example, could reshape Congress. If there is a turnover from Republicans to Democrats, legislation that relates to tax policy, financial regulations and international relations could be stalled or reversed.

Externally, we’re facing global volatility factors that include increasing uncertainty over what Brexit will look like and how it will impact the European economy. The new election of a Trump-like populist figure in Brazil could have ramifications for trade in the Americas and Asia. Emerging-market countries are also seeing their currencies falter against the dollar.

Volatility is nothing new. It’s how you deal with it that matters.

In early 2016, just after the Fed first raised rates in December 2015 after eight years of zero interest rate policy, the markets took a nosedive. As a result, the Fed put the brakes on hiking rates for an entire year.

Meanwhile, the European Central Bank (ECB) and the Bank of Japan (BOJ) ramped up their asset-buying programs, which provided stimulus to the financial markets.

All of that led to calmer markets. Investors believed easy money would continue. That’s why we saw the Dow Jones industrial average rise over 60% through this September from where it was in January 2016.

But now the markets have fallen out of bed.

…click on the above link to read the rest of the article…

Ban Share Buybacks

August 5, 2018

Mario Tama/Getty Images

Ban Share Buybacks

American corporations are simply raking in profits. Some are so bloated and cash-rich they literally can’t figure out what to do with it all. Apple, for instance, is sitting on nearly a quarter of a trillion dollars — and that’s down a bit from earlier this year. Microsoft and Google, meanwhile, were sitting on “only” $132 billion and $63 billion respectively (as of March this year).

However, American corporations in general are taking those profits and kicking them out to shareholders, mainly in the form of share buybacks. These are when a corporation uses profits, cash, or borrowed money to buy its own stock, thus increasing its price and the wealth of its shareholders. (Big Tech is doing this as well, just not fast enough to draw down their dragon hoards.) As a new joint report from the Roosevelt Institute and the National Employment Law Project by Katy Milani and Irene Tung shows, from 2015 to 2017 corporations spent nearly 60 percent of their net profits on buybacks.

This practice should be banned immediately, as it was before the Reagan administration.

The most immediately objectionable consequence of share buybacks is they come at the expense of wages. Milani and Tung calculate that if buybacks spending had been funneled into wage increases, McDonald’s employees could get a raise of $4,000; those at Starbucks could get $8,000; and those at Lowes, Home Depot, and CVS could get an eye-popping $18,000.

Some economists are skeptical of this reasoning, arguing that wages are set according to labor market conditions. But if you set aside free market dogmatism, it is beyond obvious that this sort of behavior is coming at workers’ expense. Wall Street bloodsuckers are not at all subtle about it, screaming bloody murder and tanking stocks every time a public company proposes paying workers instead of shareholders.

…click on the above link to read the rest of the article…

Stock markets look ever more like Ponzi schemes

July 4, 2018

Stock markets look ever more like Ponzi schemes

The FT has reported this morning that:

Debt at UK listed companies has soared to hit a record high of £390bn as companies have scrambled to maintain dividend payouts in response to shareholder demand despite weak profitability.

They added:

UK plc’s net debt has surpassed pre-crisis levels to reach £390.7bn in the 2017-18 financial year, according to analysis from Link Asset Services, which assessed balance sheet data from 440 UK listed companies.

So what, you might ask? Does it matter that companies are making sense of low-interest rates to raise money when I am saying that government could and should be doing the same thing?

Actually, yes it does. And that’s because of what the cash is being used for. Borrowing for investment makes sense. Borrowing to fund revenue investment (that is training, for example, which cannot go on the balance sheet but still adds value to the business) makes sense. But borrowing to pay a dividend when current profits and cash flow would not support it? No, that makes no sense at all.

Unless, of course, you are CEO on a large share price linked bonus package and your aim is to manipulate the market price of the company. It is that manipulation that is going on here, I suggest. These loans are being used to artificially inflate share prices.

The problem is systemic. In the US the problem is share buybacks, which I read recently have exceeded $5 trillion in the last decade, meaning that US companies are now by far the biggest buyers of their own shares. That is, once again, market manipulation.

And this manipulation does matter.

People think their savings and pensions are safe because of rising share prices. They do not realise it is all a con-trick.

…click on the above link to read the rest of the article…

Here’s What Fueled the Rally in Stocks since February

June 24, 2016

Here’s What Fueled the Rally in Stocks since February

A huge force that’s going to fizzle.

We have another post-Financial Crisis record on our hands!

Share buybacks by S&P 500 companies during the three-month period of February through April soared 15.1% from a year ago, to $166.3 billion, according to FactSet, the highest since Q3 2007, which had set an absolute record of $178.5 billion, just as the Financial Crisis was cracking the glossy veneer of the banks.

The tech sector, whose revenues have been getting hammered by reality, was the biggest spender at $34.4 billion.

The healthcare sector was second. When insurers and Big Pharma aren’t busy buying each other in the ongoing mega-merger oligopoly or monopoly boom, they’re buying their own shares. Buybacks over the 3-month period soared to $33.2 billion, an all-time record for the sector, blowing away its prior record of $24.5 billion.

The biggest buyback spender overall: Pfizer with $8.1 billion. It reduced its outstanding shares by 1.5% year-over-year. It was part of an existing $11-billion buyback program and a new $5-billion program that was announced to make up for debacles elsewhere, such as the collapse of its $160-billion merger with Allergan.

Gilead was the second biggest spender, more than doubling its buybacks from a year ago to $7.4 billion, which cut its shares outstanding by 8.7% year-over-year, according to FactSet. This was part of its $15 billion repurchase plan, on top of which its board approved another $12 billion.

Pfizer and Gilead combined repurchased $15.5 billion of their shares in just three months! They pushed Apple, which had dominated the list, down to third place with $7 billion in buybacks. A third healthcare company made the list of the top ten buyback-spenders: Express Scripts with $3.3 billion, up from zero a year ago.

…click on the above link to read the rest of the article…

“Risky Business”: Companies Are Now Funding Share Buybacks By Selling Bonds To Other Companies

September 26, 2015

“Risky Business”: Companies Are Now Funding Share Buybacks By Selling Bonds To Other Companies

One of this year’s key narratives has been the degree to which US stocks have benefited from a perpetual, price insensitive bid. By that we of course mean corporate buybacks, which one might fairly characterize as having replaced the monthly flow lost to the Fed taper.

The buyback bonanza shown above is of course sponsored by ZIRP. Put simply, when borrowing costs are close to zero and when the market has become completely myopic as it relates to assessing performance, it makes sense to issue debt and plow the proceeds into EPS-inflating share repurchases. Throw in the fact that the FED-induced hunt for yield has forced risk averse investors out of govies and into corporate credit and you have a kind of goldilocks scenario for corporate issuance and buybacks.

This all comes at cost. That is, you can’t simply keep leveraging the balance sheet to artificially inflate earnings. Eventually, some of the proceeds from debt sales need to go towards capex or wage growth or something that’s conducive to boosting productivity, long-term growth, and competitiveness. However, that simply won’t happen in a world governed by what Hillary Clinton correctly (yes, she has managed to get at least something right believe it or not) calls the “tyranny of the next earnings report.”

Once you understand all of the above, you can begin to see why a lack of market depth in the secondary market for corporate credit is so dangerous.

You have an environment that encourages record issuance and the proliferation of bond funds along with the now ubiquitous hunt for yield means any and all supply is promptly snapped up. But if those bonds ever have to be sold in a pinch, there’s no one home at dealer desks thanks to Volcker.

…click on the above link to read the rest of the article…

Weekly Commentary: China Hardens Peg and Brazil Goes to Junk

September 12, 2015

Weekly Commentary: China Hardens Peg and Brazil Goes to Junk

Let’s this week begin with a cursory glance at the world through the eyes of the bulls. First, the global backdrop provides the Fed convenient cover to delay “liftoff” at next week’s widely anticipated FOMC meeting. Even if they do move, it’s likely “one and done.” While on a downward trajectory, China’s $3.5 TN international reserve hoard is ample to stabilize the renminbi. Chinese officials clearly subscribe to their own commanding version of do “whatever it takes” to control finance and the economy. One way or another, they will sufficiently stabilize growth – for now. The U.S. economy enjoys general isolation from China and EM travails. Investment grade bond issuance – the lifeblood of share buybacks and M&A – has already bounced back robustly. The U.S. currency, economy and securities markets remain the envy of the world. “Money” fleeing faltering EM will continue to support U.S. asset markets along with the real economy.

September 10 – Financial Times (Netty Idayu Ismail): “The European Central Bank will ensure its policy stance remains as accommodative as needed amid financial-market turbulence, according to Executive Board member Peter Praet. ‘The Governing Council will remain vigilant that recent volatility does not materially affect the broad array of financial conditions and therefore lead to an unwarranted tightening of the monetary-policy stance,’ Praet said… ‘It has emphasized its willingness and ability to act, if warranted, by using all the instruments available within its mandate.’”

The ECB’s “unwarranted tightening of the monetary-policy stance” comes from the same playbook as Bernanke’s (the Fed’s) “push back against a tightening of financial conditions.” In a world where financial markets dictate general Credit Availability as never before, central bankers have essentially signaled open-ended commitment to liquidity injections as necessary to counteract risk aversion. Such extraordinary market exploitation underpins the fundamental bullish view that global policymakers have things under control.

…click on the above link to read the rest of the article…

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