This Bull Market Is a House of Financially Engineered Cards

By Tony Sagami, Mauldin Economics:

Corporate America is flush with cash. Amazing amounts of cash. According to research house FactSet, the combined cash balances of just the 500 companies in the S&P 500 is sitting at a record $1.4 trillion.

That’s a mountain of cash, but here’s some perspective on just how much money we’re talking about. $1.4 trillion is enough money to buy all the shares of Berkshire Hathaway, Facebook, Apple… and still have money left over. That amount increases to almost $2 trillion if you expand the universe to include all publicly traded stocks.

A publicly traded company has five options when it comes to deploying that cash:

  1. Pay down debt
  2. Buy other companies
  3. Pay out dividends
  4. Buy back its own shares
  5. Let it sit in the bank and earn interest

The last option—let it sit in the bank and earn interest—isn’t very attractive in this day and age of zero interest rates, and most companies with gigantic cash hoards have already paid down most, if not all, of their debt, so the only viable choices are numbers 2, 3, and 4.

According to S&P Dow Jones, American companies spent $903 billion—$350 billion in dividends and $553 billion on share repurchases—in 2014. However, the pace of buybacks and dividends is expected to exceed $1 trillion in 2015.

ETFs have become a trillion-dollar industry, but ETF flows are a fraction of corporate America’s buybacks. Heck, corporate America is now a bigger buyer of stocks than all the individual investors in America combined!

While those buybacks have buoyed stock prices, there’s also an ominous connect-the-dots warning hidden in the avalanche of stock buybacks: the stock market rally is driven more by financial engineering than by profitability.

No matter how many shares a company repurchases, what really matters is the health of the underlying business. Are revenues and profits growing? Or are those profits just being spread over a small pie of shares because of share buybacks?

No question: stock buybacks are the fuel behind this bull market. At some point—next week, next month, next year—investors will wake up and realize the bull market is a house of financially engineered cards.

The news from General Electric last week tells me that that wake-up call may be right around the corner. Last week, General Electric announced that it would return $90 billion to shareholders through a series of dividends and share buybacks. Investors cheered that news and sent GE stock up sharply.

However, in order to return that money to shareholders, General Electric said that it will need to repatriate some of it cash hoard currently residing in foreign countries. That repatriation is expected to cost General Electric a whopping $4 billion in taxes!

Look, it doesn’t matter whether you’re the CEO of a giant company like General Electric or just a regular person like you and me… nobody likes to write big checks to the IRS. What the General Electric action tells me is that it can’t make any more productive use of its corporate capital than paying dividends and gigantic tax bills.

This lack of productive uses for capital, when corporations are sitting on a collective $2 trillion, tells me the Wall Street party is just about over. Here’s how my Rational Bear readers are getting ready for the tougher times ahead.

“When did Noah build the ark, Gladys? Before the rain.”
—Nathan Muir (Robert Redford), the movie Spy Game

30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here. The article Connecting the Dots: Corporate America’s Millstone of Too Much Cash was originally published at

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  10 comments for “This Bull Market Is a House of Financially Engineered Cards

  1. interesting
    Apr 23, 2015 at 4:22 pm

    why do we constantly hear about the corporate cash horde but in the articles they never mention corporate debt level?

    isn’t there 2 sides to a balance sheet?

    • Petunia
      Apr 23, 2015 at 4:51 pm

      My thought exactly. Most of this cash comes from issuing debt and most of it is spent making management rich.

    • Jungle Jim
      Apr 23, 2015 at 5:12 pm

      What worries me is that a significant amount of that debt may be hidden off the balance sheets. That is what actually sank Lehman Bros. Their CEO, who is now in court, was moving huge amounts of debt off the books at quarter-end and then back on again after the start of the new quarter. It’s legal, but it shouldn’t be.

      • fledermaus
        Apr 23, 2015 at 5:54 pm

        Tell that to Enron, they pulled the same trick for years.

    • Apr 23, 2015 at 5:30 pm

      True, there are two sides to the balance sheet, and on the other side, there is a record amount of debt. But I think I already write too much about corporate debt, junk bonds, leveraged loans, the “greatest credit bubble in history,” etc., so it’s OK to have an article that focuses on cash, rather than debt, for a change :-]

      In fact, I’m working on another debt article right now. Will be up later today.

  2. NotSoSure
    Apr 23, 2015 at 6:25 pm

    Hm, this game can still go on for many more years, me thinks. Without any external shocks, the CBs have the market under control.

    • interesting
      Apr 24, 2015 at 4:03 am

      wouldn’t that then imply that the “market” is wrong and ‘needs’ to be controlled?

      capitalism seems to have failed as there are no bailouts in capitalism, no?

  3. Michael
    Apr 23, 2015 at 10:11 pm


    They have it under control until they do not. Their current control is killing the real economy. Do they take the red or the blue pill? Even great men bow before the Sun; it melts hubris into humility.”
    ― Dejan Stojanovic

  4. NOTaREALmerican
    Apr 24, 2015 at 12:31 pm

    I judge “the market” based on how many of my co-workers are “investing” in it. There are people who, 3 years ago thought an option was check-box on and IDE, are now “investing” their way to an early retirement in “the market”.

    8% annual debt growth for 50 years + normal male pathological optimism + normal male herd behavior = (not sure what it equals, but it sure is interesting).

  5. Julian the Apostate
    Apr 25, 2015 at 6:07 am

    “In the clearing stands a boxer
    And a fighter by his trade
    And he carries the reminders
    Of ev’ry glove that laid him down
    Or cut him ’til he cried out
    In his anger and his shame
    ‘I am leaving, I am leaving’
    But the fighter still remains.”
    -Paul Simon

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