“The practice is even starting to reek of death to market bulls.”
By David Haggith, The Great Recession Blog:
I have pointed out in previous articles how most of the growth in stocks over the past few years has been due to stock share buybacks. Without this hideous (and at one time illegal) practice, there would have been no bull market over the last few years.
That’s right. Research from no other place than Wall Street, itself, indicates that almost all of the returns since 2009 have been due to stock share buybacks!
Liz Ann Sonders, chief investment strategist and perma-bull at Charles Schwab, recently acknowledged that “… there has not been a dollar added to the U.S. stock market since the end of the financial crisis by retail investors and pension funds….” Since every buyer has a seller (and vice versa), what group or groups had enough of a buying presence to push the S&P 500 14.2% off of the February closing lows? Corporations. (Seeking Alpha)
Most people assume what has kept the market afloat this year after sinking 11% at the start of the year was a mixture of better news out of China, oil prices stabilizing, and indications that the Fed won’t raise rates as much as thought. But the real thing bouying the market could be something else: Stock buybacks…. The stock buybacks come at a time when major investors including individuals, foreign investors, and pension funds have been selling off their shares, according to a note from Goldman Sachs, amid market volatility and weak oil prices. (Fortune)
Stock share buybacks may be winding down
But you cannot do share buybacks forever. Companies have been using profits and loading up on debt to make these share buybacks for so long that the law of diminishing returns is kicking in here, too.
First, it is kicking in because companies are nearing the end of their capacity to keep eating themselves. Earnings have been falling while debt has been stacking up, and so the capacity just isn’t there any more. (And I mean even the doctored earnings — as almost all major corporations have moved away from GAAP reporting policies — have been falling badly.)
Secondly, buybacks have gone insane to the point where the practice is even starting to reek of death to market bulls who are growing wary of them.
Over the past five weeks, the value of shares bought back has fallen 42% (yoy). The number of scheduled buybacks has fallen off substantially this year (35% below last year’s pace). So, we can anticipate the market will lose some of the hot air that once kept it aloft.
Here are two confusing headlines for you, released this week within 24 hours of each other: First comes Bloomberg’s “Bull Market Losing Biggest Ally as Buybacks Fall Most Since 2009.” Ah, but then came the Financial Times, with “US companies step up share buybacks in the first quarter of 2016….” At face value this would seem difficult. However, Bloomberg and the FT are in fact measuring two different things.
Bloomberg has been looking at buyback announcements so far in 2016…. The FT meanwhile has been looking at preliminary numbers for the first quarter from S&P/Dow Jones indexes. These suggest that US buybacks were actually up 20% in this year’s first quarter, compared to the old year’s last…. So, what’s the upshot?…
As David Lefkowitz, senior equity strategist at UBS, puts it: “earnings per share were down around 6% in the first quarter so it’s not terribly surprising that there should be a slowdown in buyback announcements.” He stressed however that buyback announcements are just that – announcements not activity. He also pointed out that the oil sector’s early-year wrestle with ever-lower crude prices, and profit worries at the major banks, have left corporate America with a lot less cash to flash….
Corporate buybacks may not continue at the pace we’ve seen since about 2011, but it seems unlikely that they’re going to fade away either. (News.Markets)
In other words, leftover buybacks from prior announcements are still unfolding, but announcements of additional buybacks are diminishing quickly as corporate cash drops.
Buybacks have transformed America into an Alzheimer’s ward of enterprise
We are now a nation full of companies with much bigger piles of debt and much less capacity to keep propping up their share prices with buybacks because those companies are rotting from within. Buybacks syphoned money away from capital expansion and research and development in order to deliver candy to investors now at the cost of crippling the company down the road.
All of that was smiled upon (until now) by Wall Street and government for saving the day while losing the decade. Yes, a decade of potential recovery has been consumed by milking corporations dry, and there will be hell to pay as a result of this self-consuming greed.
Former Republican presidential candidate, Carly Fiorina, championed this kind of corporate management during her stint at Hewlett-Packard until the Crowned Executive Officer was forced off her throne. During her brief reign, HP bought back $14 billion of stocks, which was more than its entire profits during that same period ($12 billion).
That was total self-cannibalism, as during that time HP practically eliminated research and development, caving in to the idea that it was no longer capable of innovation and dominance in the consumer electronic field that it had long dominated. They gave up and walked away from their staple market of personal computers and home printers. Then they rejigged this plan into severing off separate companies. Contrasting this to Apple, can you even think of the last thing HP invented? Can you even remember the last thing that someone else invented that HP successfully produced and popularized?
Because of her great accomplishment at HP, Fiorina believed she was qualified to become president of the United States. Having successfully gotten rid of her, did HP learn anything? Of course not. Her successor tripled down on all of this, buying back $43 billion in shares on $36 billion in profits! Following him, Leo Apotheker did the same thing, buying back nearly a billion dollars in stock every month of his brief eleven-month reign. This is a company that knows how to eat itself one leg at a time.
“HP was the poster child of an innovative enterprise that retained profits and reinvested in the productive capabilities of employees. Since 1999, however, it has been destroying itself by downsizing its labor force and distributing its profits to shareholders….” HP declined to comment. (Reuters)
And this is the new corporate norm for America. Last year, corporations spent almost a trillion dollars on share buybacks and dividends, even though it was largely a year of declining profits. Maybe I should say because it was a year of declining profits. So, they weren’t doing it because they had the money to spend. Like HP, many spent money they didn’t earn.
That’s what you do when your business stinks so bad no one wants your stock because you have started to smell like the toe fungus and old urine that odorizes a bad nursing home. When the company is selling its own limbs on the meat market, it might not be in the healthiest of shape.
When profits are in perpetual decline, you cover the stink of your own slow death with the sweet smell of candy. You throw grain (dividends) to the market bulls to get them to gather.
What have stock buybacks gotten us?
No wonder corporate stock buybacks were illegal until Reagan changed that during his tenure of deregulation. Yes, that deregulation did wonders for the stock market for a long time. It’s amazing how rich shareholders can become (especially the board members and CEOs) when they dine for years on their own company. It’s also amazing how rich you can become when no one is paying for the largess because it is bought on credit.
However, greed and self-delusion among America’s corporate leaders has finally reached the zenith that comes just before self-annihilation. That is what happens when you get carried away with taking the regulations off of avaricious activity. Greed gets bolder and bolder as it explores the outer limits of its success. Evil contains the seeds of its own destruction. It always reaches too far.
Responsible use of credit buys innovation (research and development) or production expansion for the future. Greedy and irresponsible use buys profit sharing for the present when profits are down. That lack of rigorous self-discipline is the new American leadership norm.
For all of this, corporate bosses get bigger and bigger pay and eventually rise to become presidential candidates. That’s because they are best suited to run a country that advocates this kind of business by stripping away the laws that once governed such greed.
Those laws were created because past experience taught us that humans couldn’t be trusted to act in the company’s (and the nation’s) long-term best interest, instead of their own immediate self-interest. Left on their own, many would reap and run. We always forget the lessons of the past, so we ditch those laws when they seem to restraining our progress.
However, the buybacks aren’t yielding the returns they once were, and the corporations have already taken on a load of debt for past buybacks that is even threatening the credit rating of some. Earnings have declined steadily as money spent on building for the future has dropped dramatically. It looks like the golden years when companies buy themselves are winding down, and we shall all convalesce together.
International Business Machines Corp. (IBM) is a poster child for questionable buybacks…. Over five years, IBM bought back $59.1 billion in common shares, while its stock returned only 5%. Meanwhile, the S&P 500 returned 81%…. There have been plenty of solid arguments that IBM could have made much better use of that money by investing in its business. After all, the company’s annual sales have declined 24% over the past five years, while its earnings have dropped 16%. (MarketWatch)
With so many American corporations convalescing, it’s a good thing we have Obamacare. By David Haggith, The Great Recession Blog
Even the SEC woke up. But what will the media do? Read… OK I Get it, Corporate Earnings are a Fairy Tale and Reality is Crummy, But Do They Have to Push it This Far?
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Not to be too critical, but if there were not share buybacks, would not returns instead have come from dividends or capital improvements?
Possibly but those options would not have enriched the Administrators any where near as much as the buyback program’s.
As most of the brought back stock was reissued to executives at a very low stock option price, then brought back from those very same executives at the MUCH HIGHER inflated “market” price.
Said Market price being inflated by the buyback program.
Wolf has an interesting set of numbers on HP (?) showing this process.
Stock buybacks the American Executive way, are asset stripping by the Executives, as opposed to company to company asset stripping, that American hedge funds generally engage in.
The “Maximum return to Shareholders NOW Executive”. That has permeated and polluted American company’s and American business thinking.
Was all along simply a Pirate. Masquerading as an Executive with a “Shareholder Interest first” as the “Maximum return to Shareholders”, really meant
“Maximum return to shareholders”, exercising their stock option’s, NOW.
Thanks for remembering. I dug up some numbers on this on IBM in Oct 2013. I called it the “IBM Hocus-Pocus machine.” So since then, it has gotten a lot worse. And they’re all doing it:
http://wolfstreet.com/2013/10/18/stockholders-got-plundered-in-ibms-hocus-pocus-machine-2/
Thank you.
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The people doing this are either working for the chinese or dont realise they are destroying Americas industry’s from within, for the chinese.
As if they keep on hollowing them out, with these buyback programs, implosion must be the end result .
And the retail small shareholder’s, will be left, as usual.
With nothing.
20/20
The legislation that allowed this was probably one of Reagan’s worst signings.
Nancy was the First Female POTUS.
She probably though a little to old school to believe American executives would do what they are doing, in the buyback program’s today.
I’ve often thought if companies took this to its absurd limits, a company could buy back all its stock except for one share that would be worth billions and yet not innovate one iota, not increase any sales, not bring out any new products. But by golly that one share is worth billions!!
What a sad state! The Great American Engine is grinding to a halt!
Perhaps, but the point remains. Dividends and CAPEX would still have to be be funded by debt just as the buybacks are. The point to the buybacks was to hide the pathetic earnings.
Like a crack addict you really can’t successfully wean of the drug. The addict wants more and more just to “experience” the same high. The whole world has sold it’s future for where we are now? The inevitable is now too scary to even comprehend.
James Rickards was on Max Keiser promoting his new book and talked about his view of the future. He thinks the ECB and the FED will roll their debt into an SDR. His view will take us from a failed Euro and dollar to another doomed to fail currency. I think this is what they will try to do but won’t get away with it. Eventually they will have to write off all the debts.
Funny you should say that. I’ve already been reading/hearing of a call for a year of jubilee.
I usually give Carly Fiorina credit for HP still being in the computer business, but I see your point about the share buybacks. She doesn’t often get blamed for wasting money, only for firing people.
A bit biblical- e.g. use of the word ‘evil’ but pretty good.
When the dust settles on the CRASH this will be one thing that comes under scrutiny.
Evil is a moral concept not just a religious one.
Have any of you started learning about Inverse ETFs?
Have you sold any of your “BLEU Chip” holdings?
How much cash do your investment accts hold?
Do you not go indoors when a thunder storm is approaching?
I don’t own any stock any more; I’m mostly cash. I didn’t want to get rich off this junk on the way up, and I don’t want to get wiped out by it on the way down.
Hi from Oz. Nick Kelly said ‘when the dust settles on the CRASH this will be one thing that comes under scrutiny’. I wish I had your optimism – what came under scrutiny after the last crash? Stuff all. BTW After a few decades I have just started re-reading Any Rand’s ‘Atlas Shrugged’. The references to political / economic ‘progressives’ and their fairytale ideas seem remarkably prescient, and frankly they scare the s##t out of me for my kids future far more than any crash.
The more things change the more they stay the same .we haven’t learnt the basics of history or have chosen to ignore it to somehow think it’s different this time .yes it is different but like the laws of physics you brake them at your peril .the buck stops at the top with Obama and the fed they will prove to be worst since 1929. Are We To Smart For History. I don’t think so time will tell
How can we be sure that the prolonged wave of corporate stock buybacks isn’t just part of “the plan”, the plan being to push out the inevitable collapse of the global economy into the future, i.e., hold off collapse? If one starts with premise that TPTB have long foreseen an inevitable end to economic growth, and therefore our modern way of life (BAU), and have been putting into action plans that have long been in the making, then a lot of what the governments and central banks of the world have been doing begin to make more sense. The pieces all seem to fit together. Pure speculation of course. I do not believe that the stock-buyback craze was or is primarily caused by the unbridled greed of corporate executives, and “easy” as that would be to believe.
Bankers are all short term greedy. None have the foresight or even care about the long term effects of anything.
I’ve been dealing with banksters for close to 50 years, and I haven’t met very many smart ones…
“I’ve been dealing with banksters for close to 50 years, and I haven’t met very many smart ones”
What do you expect America is after all the “Land of the Gangster”.
By the way, I have had many good experiences with loan offices and other bankers – including those that didn’t walk away when the company NEEDED the money because it was losing money, and we were in the middle of a turnaround effort. The bank could have walked, and we would have gone belly-up. I worked with this loan office for years… great guy, and doing a good job for his bank too (it made a ton of money from us).
My current experiences with bankers (from TBTF bank) are good as well. They even run my payroll and do all the government reports, thank God (for a fee that I don’t mind paying).
We really have to distinguish between the guys running the show, and the hundreds of thousands of men and women doing their jobs.
“We really have to distinguish between the guys running the show, and the hundreds of thousands of men and women doing their jobs.”
We really have to distinguish between some of the bad guys running part of the show, and the hundreds of thousands of men and women doing their jobs.
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The vast majority of America financial and corporate issues today can be resolved in 1 act.
Campaign finance, reform and restriction.
Notice Comrade Sanders, dosent have any interest in that.
As it dosent raise as much for his campaign that employs his wife and all his relatives on exorbitant salary’s as beating on Banks does.
The vast majority of Banks dont intentionally do anything regulators dont allow them to.
Banks and the Rich are such an easy target, for those that need one. Frequently so they can use it, to become personally. Richer.
Yes, you said it better, more clearly, and that’s how I should have phrased it: “We really have to distinguish between some of the bad guys running part of the show, and the hundreds of thousands of men and women doing their jobs.”
Editing is easy, I even have qualification’s in it.
Original writing, is not.
“Bankers are all short term greedy. None have the foresight or even care about the long term effects of anything.”
Should read:
American, and many European, Bankers, are all short term greedy. None have the foresight or even care about the long term effects of anything.
Further they have the foresight the fact that they dont cars makes the “Maximum return now” American business model, criminal as they know what they are doing is long term detrimental to the economy and the entity’s they are administering.
I am currently watch an American trained “Maximum return now” because I can CEO. destroy a 30 year old very profitable business.
With his “Maximum return now where else are they going to go” American business model and attitude
It is not a global corporate attitude, it is a corporate attitude Americans are forcing on the global corporate environment.
Allowing America to underhandedly force the British off the stage, was not a good global move.
Proving yet again that you can only add so much water to the soup before it is no longer soup…
I would have thought that the regulators would have learned from the GMC debacle of the dangers of allowing corporations to pay dividends and buy-back their stock using debt, but obviously they have not.
Is there any rationale for not prohibiting corporations from paying dividends and/or repurchasing shares with borrowed funds? Indeed, given the abandonment of GAAP, it might be prudent to limit corporations to using only their net taxable income for dividends and share buy-backs, i. e. no net taxable income = no dividends and no share buy-backs. If the corporations have enough money to pay dividends and buy-back shares, they have enough money to pay income taxes.
“If the corporations have enough money to pay dividends and buy-back shares, they have enough money to pay income taxes.”
1/2
Dividends can legally be paid untaxed at source.
Leaving the tax liability to the recipient.
Which can legally, and legitimately, leave an entity with a “Zero Tax” liability.
Buybacks, where the repurchased shares, are not immediately cancelled should be illegal.
Most buybacks are funded with borrowed liquidity, to circumvent the initial Taxable profit avoidance issues.
Wolf….I have often thought that companies should, instead of getting loans from banks to buy back stocks, wouldn’t it be better of they sold bonds to buy their stock? That way if they become indebted with the bonds and their rating should drop, the bonds are cheaper. Then the company could buy them back at a discount.
Actually, that’s exactly what they’re doing: they issue bonds and then sometime later use the proceeds to buy their own shares. Even Apple has done it this way.
But bonds are debt, just like a bank loan. They have to be paid off in the future, and they cost interest every year (the coupon). So these companies are replacing “equity” with “debt.” It hollows out the balance sheet and risks their financial stability.
But “equity” is what shareholders own. And so shareholders get hollowed out.
And the proceeds from that debt/bonds is not used for any productive activity that allows the company to move forward and increase its revenues and earnings with which to service that debt and ultimately pay it off. Once it used the money to buy back its shares, the money is gone.
Three and a half decades ago the bigwigs purchased laws allowing them to loot companies. And here we are at the end game. They’ve pretty much gotten it all. Our national economy is in a house of cards.
Three large companies I worked for as an engineer are gone. Pretty much, the entire electronics manufacturing industry is a dim memory. I’ve survived in software but there’s no telling how much longer that’ll last. Closed factories dot the landscape. The middle class is gone because the incomes that made it possible are gone.
It will not end well.
When all those outstanding FRN’s get presented for redemption, i.e. total rejection of the “Fraud Preserve” – it’s a fraud and PRIVATE preserve within which all the FRN note folders are the “game” – the fat lady won’t sing cuz she’s DEAD! Get the HELLo out of those cities, Folks!
One piece left out of this puzzle is anemic demand. Part of the reason corporations have turned to buyback is that it makes no sense to invest in more production, if the demand isn’t there. Behind this is the busting of unions and the long term gap between productivity growth and wage growth, leaving big profits and small consumption.
Spot-on analysis! Credit- qualifying consumers are going extinct. And the [smart] “awake/awakening” consumers are hoarding cash, going local rural/self-sufficient or bugging. Time is RELATIVE, the “Quickening” is on!