Who’s going to replace that “relentless bid?”
In 2015, S&P 500 companies bought back $569 billion of their own shares, down just a smidgen from $572 billion in 2014, according to FactSet. That’s a combined $1.14 trillion in stock repurchases. With the S&P 500 market capitalization at $18.8 trillion currently, corporate buybacks over the past two years have mopped up about 6% of the total float in dollar terms. And this has been happening year after year with increasing vehemence since 2010.
While some sectors already cut back in 2015, buybacks soared 44% in the Industrial sector and 26% in the Consumer Discretionary sector. Companies buying back their own shares act purposefully as the relentless bid, with the sole goal of driving up share prices. They want to buy high! And it works.
These shares don’t sit in an account waiting to be dumped on the market. Companies cannot sell the shares that they previously repurchased. Selling shares is considered “raising capital,” which requires companies to jump through all kinds of regulatory hoops, often followed by a sell-off. Corporate share repurchases won’t ever reverse and turn into selling pressure. These shares just just evaporate.
So share repurchases add enormous buying pressure. IBM, which most recently reported its 16th year-over-year revenue decline in a row, ending up with its worst quarterly revenues in 14 years, is a master at this. That’s why its stock price magically keeps creeping back up after the post-earnings announcement beat-down.
Share buybacks have been a key part of the well-oiled Wall-Street machinery of financial engineering. They hide the dilutive effects of stock compensation programs and stock-based mergers and acquisitions. And they inflate earnings per share by lowering the number of shares outstanding. In return, they strip the company of equity capital. So IBM’s “tangible” net equity (equity minus “goodwill” and “intangible assets”) have reached negative $23.8 billion, and its liabilities have ballooned to $103.9 billion — its balance sheet has turned into a financial sinkhole.
Hounding reluctant companies into buying back their own shares is also one of the favorite tools by which “activist investors” – corporate raiders, as they used to be called – hope to make a quick buck. Carl Icahn and Apple are a prime example. But the tactic is developing a nasty habit of backfiring: Apple is down 28% from a year ago, and Icahn has bailed out.
Buyback announcements – not actual share buybacks – totaled $2 trillion since 2013. Many of those announced buyback programs stretch over several years, and some of those announced buybacks haven’t been executed yet. But buyback announcements are suddenly plunging. Christine Hughes, Chief Investment Strategist at OtterWood Capital:
According to JP Morgan Quant Marko Kolanovic, announced buybacks have dropped 40% ($250 billion) on a 12-month trailing basis. Share buybacks take approximately 6 quarters to execute so the recent drop will translate into roughly $40 billion less equity demand per quarter.
This chart (via OtterWood Capital) shows the relationship between buyback announcements and the S&P 500 since before the Financial Crisis.
Note how the crazy boom in the S&P 500 (green line) that kicked off in 2009 stalled out in December 2014 and began vacillating wildly – after buyback announcements had stalled over a year earlier, in terms of dollars (red line) and in terms of the number of companies announcing buybacks (blue line). Both of them have begun plunging.
But that plunge in buyback announcements hasn’t made its way to reality yet, and the waves of prior buyback announcements are still being implemented and are still propping up the S&P 500 at this point. But gradually, that plunge in announced buybacks is going to translate into plunging actual buybacks.
That divergence between buyback announcements and the S&P 500, which is off only 3%, is adding some spine-chilling risks to stock prices as the relentless bid that bought over $1 trillion in stocks over the past two years recedes. And given the crazy valuations, volunteers, such as retail investors, are reluctant to come out of the woodwork to replace that relentless bid.
US stock indices – S&P 500 -3.0%, Dow -3.7%, Nasdaq -8.3% – are the cleanest dirty shirts globally, in an unsavory crowd where every major stock index is bleeding red ink. But the small-cap Russell 2000 is already down 11.6%. And the USA IPO index, down 23.7%, has joined the growing group of indices that have gotten caught up in the NIRP Rout. Read… What the Heck’s Going on in Global Stocks?
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please provide valid references to reliable sources to prove the $1tn ?
http://www.factset.com/websitefiles/PDFs/buyback/buyback_3.17.16
That would be the tip of the iceberg….
Can you imagine how much money would be following the buy back into the trade… with the expectation of riding a coat tail….
And heaven forbid that a company official would ever leak news that a buyback was imminent….
That would never happen….
The buyback plan is meant to enrich the management hollow out the company. The management then reorganize the company and shifts the good assets and accounts to one division and leaves the crap in another division. I’m not mentioning any names but this has already happened at two large high tech companies recently. Once the numbers get really bad and they will, the management uses the money they stole from the shareholders in the first place to take the good part of the company private, leaving the crap for the dumb shareholders that stuck around. After a few years they go public again.
Anybody that holds shares in a company doing a buyback deserves to get swindled.
I was planning to launch a new fund that uses the following strategy:
– identify failing companies that have no prospects for a turn around
– filter them down to those that are TBTF and that are not carrying too much debt
– go long these companies banking on the expectation that they will tap debt to buy back shares on a massive scale
I was going to call this The End of the World Insanity Fund.
You have saved me time and effort by writing this article. The strategy looks to be already obsolete.
The plunge in this buyback announcement is yet to meet reality, and the prior buyback announcements are still being implemented and are still propping up the S&P 500 at this point. I do not think that it will be very helpful..But, I hope it works…
I take it you mean relentless bid in the subhead?
Yes. Thanks! Fixed.
:-]
Can the shares be used to compensate employees or in trade of some kind? Or other ways besides selling on the market?
People respond to incentives. When you tie the compensation of senior executives to stock price, you encourage the most influential decision-makers in the company to use whatever tools they have at their disposal to raise the stock price.
On top of the incentives, you have this bizarre herd mentality where everyone on Wall Street pretends it’s absolutely normal that companies hand more cash to shareholders than they generate via their operations.
It’s a totally unworkable scenario. Unfortunately, share repurchases have driven an incredible amount of wealth (and thus influence) into relatively few hands. A positive feedback loop emerges, where wealthy people get wealthier, gather more influence, and then encourage more stock repurchases.
It’s a ticking time bomb, from the perspective of corporate valuations. Thanks for sharing your insights Wolf. The more this message is shared, the more likely mom and pop investors can start to protect themselves.
“mom and pop investors can start to protect themselves”
Gold up;
one month + 2.34%
52 weeks + 7.60%
Silver up;
one month + 5.77%
52 weeks + 7.95%
All other global market markers are in negative territory.
I am certain I make some people ill with my repeated suggestion of “taxation by artificial intelligence” (instead of the “Rules Game” and Tax Code and loopholes and “fixes”) but “share buyback” is just the sort of perversion that a fixed system of rules for taxation causes (especially when the aim of adjusting the rules invariably turns out to be =more concentrated wealth for the wealthiest 0.1%.
An AI tax system (with no appeal) would observe firms such as IBM using stock buyback announcements and raise the levy on IBM (and others) for this practice that does not benefit the USA economy, but merely concentrates wealth. It would only take a few instance of touching the “live wire in the black box” for corporations to seek real investments for their capital, and eschew “financial engineering”.
I have no idea what an AI tax system is but I know about AI and it is total BS.
“…and it is total BS.”
Except, you are involved with “artificial intelligence” every time you get on the internet.
You have zero idea what specific, or broad, systems of artificial intelligence involve.
I first heard the term AI in 1986 in a comp sci course. At that time the instructor described as a sales tool.
To someone who has never seen one before a 1970’s hand held calculator has AI.
I can still remember the first time a saw a calc do a square root.
I said ‘that’s impossible’ because I knew there was no math s-root app like division or multiplication.
Sure enough the 6502 chip inside the calc- same micro chip as Apple 2, does a series of calcs, it homes in on the answer, and then rounds it off- so you don’t get 2.000045 when you take root of 4
First time you see it- that’s intelligent!
Lately it’s surfaced as a new sales buzz word- more to drive up share price than actual sales.
With the desperation in financial engineering reaching a peak, it is the new- in thing to describe computer stock selection as AI- even if the software has been around for years.
It was belief in a series of computer calculations, designed by Nobel laureates that led to the Long Term Capital Management
crisis of 1998, the first attempt by fin-tech to destroy the economy.
Not ‘knowing’ much about that stuff, the AI didn’t forsee Russia defaulting on its bonds.
but have you heard about the rule based Goldman Sachs email scanner?
I was lurking while some wonks discussed AI and I think Petunia is correct…because they said that there is no AI but they call it that because that is where the funding is. This was on the platform that provided alphago with the terabytes of info needed to beat one of the 5 best human players 4 games out of 5 in go/baduk/weiqi.
Everything’s OK, Wolf–the sad murder of Jo Cox has derailed the Brexit campaign so the stock market is golden*. Buy, buy, buy! Fundamentals be damned!
* At least for 24 hours.
WorldBLee the bloom is already coming off the rose 2PM and the DOW is up 195 points from 260 earlier Looks like a slow descent back to unchanged by the close who knows Gold and silver are recovered alittle
I imagine the DOW will stick around +1% today but we’ll see. Instead of 24 hours, I should have said “for this hour”, lol. But after the Brexit vote fails (assuming it does) there will probably be another little bounce, followed by a slower decline until everything is back where it started. Since these fluctuations depend more on propaganda than real data, it’s hard to predict.
The dow is where the fed wants it to be.
Pithy.
I recall reading an article I can’t find that quantitatively demonstrated current share buybacks don’t impact the outstanding number of shares because they are offset by (executives exercising) stock option grants. The WSJ addressed this in a more anecdotal way – “Many buyback programs appear to be prompted less by a company’s enthusiasm for its own shares and more by a desire to offset the dilution caused by executives exercising stock options.”:
http://www.wsj.com/articles/the-downside-to-stock-buybacks-1414284206
In addition, stock buybacks increase executive (CEO) compensation that is determined using performance measures such as EPS and ROE. A CEO that correctly times share buybacks can boost his or her performance based compensation, then remove the (per share) impact of collecting the compensation which increases his performance measures for the next year.
This may seem like I’m overly cynical about a perverse incentive, but keep in mind that “since 2011 Cisco has repurchased $21.9 billion in stock. Since then, it has fired 21,000 people”:
http://www.zerohedge.com/news/2014-08-13/cisco-quarter-nutshell-terminating-6000-while-buying-back-15-billion-stock
Quoting the story in this Cisco link: “assuming the terminated 6,000 jobs paid a generous salary of $100,000 per year, that means CSCO, net of restructuring charges of course, just cut down on some $600 million in annual compensation…….if CSCO was indeed so focused on preserving cash and streamlining its operations would it also spend more than double that amount in just one quarter on repurchases.”
Wow, it sounds like a possible opportunity to invest into stocks soon *lol. Thanks for the share Wolf Richter.
Wow.
The market dropped 50% twice during the last 16 years. No one remembers this or considers it when investing. It seems increasingly likely to happen again.
About a week ago I commented on WS (with some apology for raising politics ) that although this is a finance / economy site, the apparent win of the GOP race by Donald Trump is a ‘black swan’ an event unforseen with possible huge economic impact.
Yesterday, Moody agreed, saying that if he was President, to the extent his ‘platform’ was carried out, it would produce a recession, unemployment about double, and because of big tax cuts (easy) with small budget cuts (hard) an explosion in the deficit.
There is more mention on this site of Brexit, and re: immigration some overlap with Trump but at least the Brexit supporters aren’t as wound up on trade issues.
For some reason the US has a hang- up about the trade deficit with China.
China’s trade with US can be summed up in one word- Walmart ( ok plus dollar stores) It sells budget clothing, toys, electronics, shoes, kitchen ware etc. Where it sells stuff like bikes they will be econo types.
The majority of this stuff will never be made in the US again, unless it was mandated by law in which case prices would go through the roof.
If you want to worry about trade where you can compete- look in the driveways: do you see Chery and Geely Chinese cars? No, you see German, Japanese, and South Korean cars.
China has never achieved the quality ( or if you like the reputation for quality) that Germany, Japan and now South Korea enjoy.
But for some reason the most frequent word from Trump is ‘China’
True, everyone in the world is upset about China’s flood of steel, but the US is putting an up to 200 % duty on it. The UK is also upset about dirt cheap steel, but as a relatively tiny place, I suggest letting the Chinese supply you with steel and add value to it making stuff.
Nick,
Moody’s has their collective heads up their collective a$$e$:
[1] We’ve been IN a non-stop recession since ’05. The metrics that say we are not are TOTAL BS.
GDP went negative in ’05 and has not been positive since.
http://www.shadowstats.com/alternate_data/gross-domestic-product-charts
[2] Unemployment has ALREADY doubled. Again, the metrics that say it has dropped are TOTAL BS.
http://www.shadowstats.com/alternate_data/unemployment-charts
[3] The deficit has ALREADY exploded.
Not worthy of providing a chart. Look it up.
Why the delayed and selective indignation? The guilty party is already in the White House.
There are lots of warts on the US economy, no doubt unemployment has already doubled, however the deficit as a % of GDP is down last few years. But not a pretty picture.
But the idea that things can’t get worse is not true- they can get a lot worse.
Today’s laugh- Mr. Billions who wouldn’t be beholden to special interests because he would self- fund his campaign, put out an ’emergency request’ to the party for 100, 000 to buy ads.
A billionaire should have 10, 000 times 100, 000.
If you were running for office and you made a 100 grand a year- would you spend 10 bucks?