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We Have Seen This Happen Before The Last 3 Recessions – And Now It Is The Worst It Has Ever Been

We Have Seen This Happen Before The Last 3 Recessions – And Now It Is The Worst It Has Ever Been

Since the last financial crisis, we have witnessed the greatest corporate debt binge in U.S. history.  Corporate debt has more than doubled since then, and it is now sitting at a grand total of more than 9 trillion dollars.  Of course there have been other colossal corporate debt binges throughout our history, and they all ended badly.  In fact, the ratio of corporate debt to U.S. GDP rose above 40 percent prior to each of the last three recessions, but this time around we have found a way to top that.  According to Forbes, the ratio of nonfinancial corporate debt to U.S. GDP is now nearly 50 percent…

Since the last recession, nonfinancial corporate debt has ballooned to more than $9 trillion as of November 2018, which is nearly half of U.S. GDP. As you can see below, each recession going back to the mid-1980s coincided with elevated debt-to-GDP levels—most notably the 2007-2008 financial crisis, the 2000 dot-com bubble and the early ’90s slowdown.

You can see the chart they are talking about right here, and it clearly shows that each of the last three recessions coincided with the bursting of an enormous corporate debt bubble.

This time around the corporate debt bubble is larger than it has ever been before, and risky corporate debt has been growing faster than any other category

Through 2023, as much as $4.88 trillion of this debt is scheduled to mature. And because of higher rates, many companies are increasingly having difficulty making interest payments on their debt, which is growing faster than the U.S. economy, according to the Institute of International Finance (IIF).

On top of that, the very fastest-growing type of debt is riskier BBB-rated bonds—just one step up from “junk.” This is literally the junkiest corporate bond environment we’ve ever seen.

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

General Motors And General Electric Were Both Victimized By The Same Ponzi Scheme, And They Are Both Telling Us The U.S. Economy Is In HUGE Trouble

General Motors And General Electric Were Both Victimized By The Same Ponzi Scheme, And They Are Both Telling Us The U.S. Economy Is In HUGE Trouble

America’s twin economic “generals” are both in very deep trouble.  General Electric was founded in 1892, and it was once one of the most powerful corporations on the entire planet.  But now it is drowning in so much debt that it may be forced into bankruptcy.  General Motors was founded in 1908, and at one time it was the largest automaker that the world had ever seen.  But now it is closing a bunch of factories and laying off approximately 14,000 workers as it anticipates disappointing sales and a slowing economy.  If the U.S. economy really was “booming”, both of these companies would probably be thriving.  But as you will see below, both of them have been victimized by the exact same Ponzi scheme, and both firms are sending us very clear signals that the U.S. economy is heading for troubled waters.

Whenever you hear the word “restructuring”, that is always a sign that things are not going well for a company.

And it turns out that GM’s “restructuring” is actually going to cost the firm 3.8 billion dollars

General Motors said Monday it plans to effectively halt production at a number of plants in the U.S. and Canada next year and cut more than 14,000 jobs in a massive restructuring that will cost up to $3.8 billion.

Of course GM doesn’t have 3.8 billion dollars just lying around, and so they are actually going to have to borrow money in order to close these plants and lay off these workers.

Needless to say, President Trump is not very happy with General Motors right now…

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

General Motors And General Electric Were Both Victimized By The Same Ponzi Scheme, And They Are Both Telling Us The U.S. Economy Is In HUGE Trouble

General Motors And General Electric Were Both Victimized By The Same Ponzi Scheme, And They Are Both Telling Us The U.S. Economy Is In HUGE Trouble

America’s twin economic “generals” are both in very deep trouble.  General Electric was founded in 1892, and it was once one of the most powerful corporations on the entire planet.  But now it is drowning in so much debt that it may be forced into bankruptcy.  General Motors was founded in 1908, and at one time it was the largest automaker that the world had ever seen.  But now it is closing a bunch of factories and laying off approximately 14,000 workers as it anticipates disappointing sales and a slowing economy.  If the U.S. economy really was “booming”, both of these companies would probably be thriving.  But as you will see below, both of them have been victimized by the exact same Ponzi scheme, and both firms are sending us very clear signals that the U.S. economy is heading for troubled waters.

Whenever you hear the word “restructuring”, that is always a sign that things are not going well for a company.

And it turns out that GM’s “restructuring” is actually going to cost the firm 3.8 billion dollars

General Motors said Monday it plans to effectively halt production at a number of plants in the U.S. and Canada next year and cut more than 14,000 jobs in a massive restructuring that will cost up to $3.8 billion.

Of course GM doesn’t have 3.8 billion dollars just lying around, and so they are actually going to have to borrow money in order to close these plants and lay off these workers.

Needless to say, President Trump is not very happy with General Motors right now…

Trump said he spoke Monday with GM’s CEO, Mary Barra, and ‘I told them, “you’re playing around with the wrong person”.’

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

Mind Blowing

Mind Blowing

We’re in one of the longest economic expansion cycles in history and nobody’s happy. It’s mind blowing. You’d think 2018 would have people dancing in the streets. 3.7% unemployment, record stock market prices. Well the ladder until recently that is.

So let me rephrase:

What happens if you have record buybacks, record dividends, and record earnings but 89% of assets yield a negative return in US dollar terms?

No really that’s just what happened:

The short answer is: Nobody knows because it has never happened before.

According to $DB: “A whopping 89 percent of assets have handed investors losses in U.S. dollar terms, more than any previous year going back more than a century”.

Mind Blowing.

No wonder The Fed Crying has Begun. Bulls are now dependent on a big year end rally to turn the ship around. And a technical case for that can certainly be made. But they only have a few weeks left in the year and they better hurry otherwise they owe everyone a big apology and can kiss their year end bonuses goodbye.

But that’s markets in 2018. It’s not reflective of what has happened to the middle class over the last 20 years.

Summary: Utterly screwed.

How else to square headlines such as these:

America’s 1% hasn’t controlled this much wealth since before the Great Depression

1 in 3 Americans have less than $5,000 saved for retirement

65% of Americans save little or nothing—and half could end up struggling in retirement

I could post more links, but the message is clear: Wealth inequality is vast and nobody’s happy.

If you don’t think so have you looked at our political discourse lately?

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

The Everything Bubble: When Will It Finally Crash?

The Everything Bubble: When Will It Finally Crash?

Much like the laws of physics, there are certain laws of economics that remain constant no matter how much manipulation exists in the markets. Expansion inevitably leads to contraction, and that which goes up must eventually come down. Central banks understand this reality very well; they have spent over a century trying to exploit those laws to their own advantage.

A common misconception among people new to alternative economics is the idea that central banks only seek to keep the economy afloat, or keep it expanding forever. In reality, these institutions and the money elites behind them artificially inflate financial bubbles only to deliberately implode them at opportunistic moments.

As I have outlined in numerous articles, every economic bubble and subsequent crash since 1914 can be linked to the policy actions of central bankers. Sometimes they even admit to culpability (to a point), as Ben Bernanke did on the Great Depression and as Alan Greenspan did on the 2008 credit crisis. You can read more about this in my article ‘The Federal Reserve Is A Saboteur – And The “Experts” Are Oblivious.’

Generally, central bankers and international bankers mislead the public into believing that the crashes they are responsible for were caused “by mistake.” They rarely if ever mention the fact that they often use these crises as a means to consolidate control over assets, resources and governments while the masses are distracted by their own financial survival. Centralization is the name of the game. It is certainly no mistake that after every economic implosion the wealth gapbetween the top 0.01% and the rest of humanity widens exponentially.

Yet another crash is being weaponized by the banks, and this time I believe the motivations behind it are rather different. Or at least the goals are supercharged.

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

Stock Prices Are Surging Because Corporations Are Spending More Money On Stock Buybacks Than Anything Else

Stock Prices Are Surging Because Corporations Are Spending More Money On Stock Buybacks Than Anything Else

The primary reason why stock prices have been soaring in recent months is because corporations have been buying back their own stock at an unprecedented pace.  In fact, the pace of stock buybacks is nearly double what it was at this time last year.  According to Goldman Sachs, S&P 500 companies spent 384 billion dollars buying back stock during the first half of 2018.  That is an absolutely astounding number.  And in many cases, corporations are going deep into debt in order to do this.  Of course this is going to push up stock prices, but corporate America will not be able to inflate this bubble indefinitely.  At some point a credit crunch will come, and the pace of stock buybacks will fall precipitously.

Prior to 1982, corporations were not permitted to go into the market and buy back stock.

The reason for this is obvious – stock buybacks are a really easy way for corporations to manipulate stock prices.

But these days it is expected that most large corporations will engage in this practice.  Large stockholders love to see the price of the stock go up, and they are never going to complain when smaller shareholders are bought out and their share of the company is increased.  And corporate executives love buybacks because so much of their compensation often involves stock options or bonuses related to key metrics such as earnings per share.

So in the end, stock buybacks are often all about greed.  It is a way to funnel money to those at the very top of the pyramid, and those stock market gains are taxed at capital gains rates which are much lower than the rates on normal income.

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

Stock Market Manias of the Past vs the Echo Bubble

The Big Picture

The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.

Who’s who in the zoo in 2018

The above combination is consistent with a market close to a major peak – although one must always keep in mind that divergences can become even more pronounced – as was for instance demonstrated on occasion of the technology sector blow-off in late 1999 – 2000.

Along similar lines, extremes in valuations can persist for a very long time as well and reach previously unimaginable levels. The Nikkei of the late 1980s is a pertinent example for this. Incidentally, the current stock buyback craze is highly reminiscent of the 1980s Japanese financial engineering method known as keiretsu or zaibatsu, as it invites the very same rationalizations.

We recall vividly that it was argued in the 1980s that despite their obscene overvaluation, Japanese stocks could “never decline” because Japanese companies would prop up each other’s stocks. Today we often read or hear that overvalued US stocks cannot possibly decline because companies will keep propping up their own stocks with buybacks.

Of course this propping up of stock prices occurs amid a rather concerning deterioration in median corporate balance sheet strength, as corporate debt has exploded into the blue yonder (just as it did in Japan in the late 1980s).

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

Harvard Professors Expose ‘The Real Problem With Stock Buybacks’

Many critics say buybacks crimp investment. But the real problem is that – unlike dividends – buybacks can be used to systematically transfer wealth from shareholders to executives..

There is a problem with share buybacks – but it isn’t the one many critics and legislators are obsessed with.

Some critics claim that repurchases starve firms of capital they could invest for the long term, harming workers to enrich shareholders. Democratic Sens. Chuck Schumer of New York and Tammy Baldwin of Wisconsin agree and have introduced legislation to “rein in” corporate stock buybacks. The bill would give the Securities and Exchange Commission authority to reject buybacks that, in its judgment, hurt workers. It also would require boards to “certify” that a repurchase is in the “best long-term financial interest of the company.” Sen. Baldwin has introduced another bill, co-sponsored by Sen. Elizabeth Warren (D., Mass.), that goes even further: It bans all open-market repurchases.

This criticism of buybacks is flawed; there is simply no evidence that the overall volume of dividends and repurchases is excessive. The real problem with buybacks is that they tend to enrich executives at the expense of shareholders. Fortunately, there is a simple remedy.

Flawed argument

Buyback critics say S&P 500 firms don’t have enough investment capital because dividends and repurchases routinely exceed 90% of their net income. Between 2007 and 2016, for example, these companies distributed $7 trillion to shareholders, mostly via repurchases. That was 96% of total net income. But our research shows that public firms recover from shareholders – directly or indirectly – about 80% of the capital distributed via repurchases. Shareholders return this capital by buying newly issued shares, mostly from employees paid with stock, but also directly from firms. Taking into account all types of equity issuances, net shareholder payouts in S&P 500 firms during the decade 2007-2016 were only about $3.7 trillion, or 50% of total net income.

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

Huge New Prop under the Stock Market is a One-Time Affair

Huge New Prop under the Stock Market is a One-Time Affair

Crash insurance with an expiration date. But its working while it lasts.

In May, with great and perfectly orchestrated fanfare, US corporations announced plans to buy back $173.6 billion of their own shares sometime in the future. It was the largest monthly buyback announcement ever. And some of the announcements were expertly timed to overcome operational debacles.

The record amount of share repurchase announcements was due “in large part” to the changes in the corporate tax law, according to TrimTabs, which gathered the data.

This report was released when the digital ink was still drying on my musings about the FANGMAN stocks – Facebook, Amazon, Netflix, Google’s parent Alphabet, Microsoft, Apple, and Nvidia – that are so immensely overvalued that Goldman Sachs considered it necessary to come out with a note explaining that, based on fundamentals, they’re actually not in a bubble, which I had some fun pooh-pooing.

Some of the FANGMAN stocks are massive share buyback queens, such as Apple and Microsoft. Others are bottomless cash-sinkholes, such as junk-rated Netflix, which has to constantly raise new money, either by selling more shares or selling debt, so that it has more fuel to burn through, and it doesn’t have a dime to buy back its own shares.

That $173.6 billion in share repurchase plans includes the record-breaking mega-announcement from Apple that it would buy back $100 billion of its own shares. Here are the top five that account for $134.3 billion, or 77% of the total:

  • Apple: $100 billion
  • Micron: $10 billion
  • Qualcomm: $8.8 billion
  • Adobe: $8.0 billion
  • T-Mobile: $7.5 billion

To put that May total of $173.6 billion – these are just announcements of planned repurchases sometime in the future that may never fully transpire – into perspective: In Q1, total actual share buybacks reported by the S&P 500 companies amounted to $178 billion, an all-time record. That averages out to “only” $59.3 billion a month on average, compared to the announcements in May of $173.6 billion.

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

 

Why I Think the Stock Market Cannot Crash in 2018

Why I Think the Stock Market Cannot Crash in 2018

But the crash-insurance policy is a one-time deal. And then what?

The 85% of S&P 500 companies that have reported earnings so far disclosed they’d bought back $158 billion of their own shares in Q1, according to the Wall Street Journal. The quarterly record of $164 billion was set in Q1 2016. If the current rate applies to all S&P 500 companies, they repurchased over $180 billion of their own shares in Q1, thus setting a new record:

At this trend, including a couple of slower quarters, S&P 500 companies are likely to buy back between $650 billion and $700 billion of their owns shares in 2018. This would handily beat the prior annual record of $572 billion in 2007. Here are the top buyback spenders in Q1:

  • Apple: $22.8 billion
  • Amgen: $10.7 billion
  • Bank of America: $4.9 billion
  • JPMorgan Chase: $4.7 billion
  • Oracle: $4 billion
  • Microsoft: $3.8 billion
  • Phillips 66: $3.5 billion
  • Wells Fargo: $3.34 billion
  • Boeing: $3 billion
  • Citigroup: $2.9 billion

Buybacks pump up share prices in several ways. One is the pandemic hype and media razzmatazz around the announcements which cause investors and algos to pile into those shares and create buying pressure. Since May 1, when Apple announced mega-buybacks of $100 billion in the future, its shares have surged 11%. The magic words.

Other companies with big share buyback programs have also fared well: Microsoft shares are up 14% year-to-date. And if buybacks don’t push up shares, at least they keep them from falling: Amgen shares are flat year-to-date.

Shares of the 20 biggest buyback spenders in Q1 are up over 5% on average year-to-date, according to the Wall Street Journal, though the S&P 500 has edged up only 2%.

Share buybacks also prop up prices because they create buying pressure by the company itself when it finally does buy the shares. This is the only entity in the market that doesn’t want to buy low.

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

The Two Janet’s And The Perfect Storm Ahead

The Two Janet’s And The Perfect Storm Ahead

The Bloomberg news crawler this morning is heralding the heart of our thesis: Namely, that “flush with cash from the tax cut”, US companies are heading for a “stock buyback binge of historic proportions”.

This isn’t a “told you so” point. It’s dramatic proof that corporate America has been absolutely corrupted by the Fed’s long-running regime of Bubble Finance. Undoubtedly, the C-suites view the asinine Trump/GOP tax cut not as a green light to invest and build for the long haul, but as manna from heaven to pump their faltering share prices in the here and now.

And we do mean a gift just in the nick of time. The giant Bernanke/Yellen financial bubble is finally springing cracks everywhere, putting corporate share prices and executive stock option packages squarely in harms’ way.

So what could be more timely and efficacious than an enhanced, government debt-financed wave of stock buybacks to rejuvenate the speculative juices on Wall Street and embolden the robo-machines and punters for another round of buy-the-dip?

Indeed, corporate stock buying is now cranking at a $1 trillion annual rate or nearly double the rate of the last several years. That huge inflow of cash and encouragement to Wall Street will undoubtedly break the market’s fall in the short-run; and over the next several quarters, perhaps, enable an extended stop-and-start stepwise decline rather than a sudden sharp plunge as in the fall-winter of 2008-09.

It also underscores why the Paul Ryan school of conservative policy wonks got it so wrong on the corporate rate cut. They still dwell in a pari passu world where higher after-tax rates of return would, in fact, stimulate increased investment, growth, employment and income.

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

It’s Raining Money

It’s Raining Money

With apologies to the Dire Straights:

Now look at them yo-yo’s that’s the way you do it
You play the bull on the fin TV
That ain’t workin’ that’s the way you do it
Money for nothin’ and stocks for free

After 9 years of artificial liquidity drenching markets the same game continues in 2018: It’s raining money. Again. Still.

Last week we saw the standard script of the last 9 years unfold: Dovish talk by central bankers and artificial liquidity taking over markets. The latest avalanche of free money entering markets are of course buybacks courtesy of tax cuts which now are expected to reach $650B in 2018 announcements coming to $50B a month.

In many cases companies don’t know what to do with all that free cash, but to buy back their own shares. Warren Buffet pretty much spelled it out this weekend and today:

“A large portion of our gain did not come from anything we accomplished at Berkshire,” Buffett wrote.

The firm’s most recent annual letter revealed the investment conglomerate’s net worth surged $65 billion in 2017, with $29 billion of that stemming from tax proceeds. That gain was realized in December, after the passage of the tax plan.

So he has a problem, knowing that stocks are expensive he’s having a hard time investing the cash so he’s opening the door to buy back his own shares over issuing more dividends. None of this creates jobs, jobs, jobs of course, but is a refection of the absurdity of the ill devised tax cuts that will continue to expand wealth inequality but will continue to produce a bid underneath markets until the bitter end.

Lest also not forget that the ECB keeps running QE at 30B Euro a month and overnight the BOJ’s Kuroda announced persistent monetary easing is needed while China injected 150b yuan in overnight liquidity as well and voila a sea of global green:

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

This Year’s Stock Buybacks Are Already Bigger Than All Of 2009’s

While there is still some fringe debate what companies will do with the hundreds of billions in offshore funds repatriated to the US as part of the recently passed Trump tax reform, the discussion is largely over, especially after last week’s Cisco results. The company, which has $68 billion of overseas cash, third after AAPL and MSFT, announced that it would raise its buyback authorization by $25 billion, and revealed plans to repurchase its entire authorization of $31 billion during the next 6-8 quarters, equal to roughly 15% of its current market cap.

Call it a partial LBO, courtesy of Donald Trump.

In other words, those who said that companies will use virtually all repatriated proceeds for buybacks, congratulations, you were right, or as the FT humorously put it:

Flush with cash after the Republican tax cuts, Cisco announced on Wednesday that it was building gleaming factories across the US, employing hundreds of thousands of workers to make the latest cutting-edge routers.

Sorry, of course not. The money is going back to shareholders.

Don’t believe it? Here’s what Goldman’s David Kostin said in his latest Weekly Kickstart report:

Since December, S&P 500 firms have announced buybacks totaling $171 bn. YTD announcements of $67 bn represent a 22% increase versus the same period in 2017. The buyback window has re-opened and firms are taking advantage of the recent correction; the GS Buyback Desk reported that last week was the most active week in its history.

The $171 billion in YTD stock buyback announcements is the most ever for this early in the year. In fact, it is more than double the prior 10 year average of $77 billion in YTD buyback announcements.

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

Debt Has No Consequences? Color Me Skeptical

Debt Has No Consequences? Color Me Skeptical

The entire status quo is based on the delusion that rapidly rising debt will never generate any negative consequences.

Here’s a chart of America’s national debt, extended a mere dozen years into the future: the current $20 trillion in debt will double to $40 trillion, and that assumes 1) trillions of dollars in private and local government pensions don’t implode and have to be bailed out by the federal government, a bail-out that will have to be paid by borrowing more money, 2) a recession doesn’t slash federal tax revenues, 3) Universal Basic Income (UBI) doesn’t become policy, adding $1+ trillion in additional borrowing annually–and so on.

Color me skeptical that doubling the debt in 12 years won’t have any negative consequences. Let’s start by noting that federal debt is only the tip of America’s total debt load, which is rising fast in all sectors: federal, state/county/city, corporate and household.

Total government, corporate and household debt soared from $15.5 trillion in 2000 to $41.1 trillion in 2016. (see chart below, courtesy of 720Global). If we extend this expansion another 12 years, we will have a total debt load in the neighborhood of $100 trillion by 2030. And that’s if the “recovery” news is all good.

The consensus is that all this debt will have no negative consequences because 1) interest rates will remain near-zero forever and 2) it’s all “investment”, right? Actually, no; the vast majority of this debt is consumption, not investment, or even worse, it simply services existing debt or funds speculative gambling (stock buybacks, etc.)

Recall that every debt is somebody’s asset. Debt jubilees sound great to debtors, but not so appealing to insurance companies, pension funds, mutual funds, etc. that own the debt and rely on the income from that debt to pay pensioners their pensions, settle insurance claims, etc.

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

Alice in Wonderland

If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?

– Alice’s Adventures in Wonderland

Mad_Hatter_0011A public service message from the Mad Hatter – bad news is bad. Ominous, even. Hat help us all!     Illustration credit: Bob Kane

BALTIMORE – The Dow rose the fifth week in a row last week, ending with a 120-point jump on Friday. This has put the index firmly in the black for 2016. Well, this is a showdown, isn’t it?

Either us… or the great mass of investors – one of us is wrong. In the weeks to come, we’ll find out who (notice to new readers: It could go either way). But wait a minute…

Our old friend Rob Marstrand, who writes at Of Wealth.com, explains why the great mass of investors has little to do with it. Apparently, corporations have nothing better to do with their money than buy their own shares.

“There’s a dirty little secret in the U.S. stock market. Corporate America is paying out more cash to shareholders than it earns in profits. This means there’s nothing left to invest in business growth. It also means debt levels are going up, increasing risk…

Analysis by Bloomberg shows that those companies are on track to spend $590 billion a year on buybacks in 2016, at the first-quarter rate. That would be even more than the last point of peak buybacks – at the previous market top in 2007, just before the last crash. Put simply, companies are spending record amounts of cash on buybacks at precisely the wrong time (as usual): when stocks are extremely expensive.”

1-Buybacks vs. fund flows

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

Olduvai IV: Courage
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Olduvai II: Exodus
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