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.
This chart shows the actual share buybacks as reported by companies in their quarterly earnings reports. Q1 broke all records, and as the May announcement indicates, that record will likely be broken soon:
Just the expertly timed and orchestrated buyback announcements and the media hoopla and online hype and algorithmic knee-jerk reactions that come with them have a large impact.
For example, on May 1, Apple announced, along with its earnings report and what some folks thought were disappointing iPhone sales, that it would repurchase $100 billion of its own shares sometime in the future. The day before, shares had closed at $169.10. The day after the announcement, shares jumped 4.4% and ended the week up 13%, their largest one-week percentage gain since October 2011. Today, shares closed at $193.31, up 14.3% from before the announcement had been made.
Apple hasn’t executed any of those announced share buybacks yet. It’s still buying back shares under the prior programs. In its May 1 earnings report, it said that it would complete the old buyback program in the current quarter. And only then will it start executing the new batch of buybacks. But its perfectly timed announcement, the round record-setting number ($100 billion), and the deafening global media hype around it were enough to boost its market cap by about $118 billion!
The hype of the share buybacks, and the actual share buybacks not only boost the individual stocks of the companies making the announcements but the overall market as it spreads buying enthusiasm all around.
The hype alone is enough to make this equation work. The actual share repurchases can then be used either as icing on the cake, or when overvalued shares are plunging because sales aren’t going anywhere, margins are shrinking, market-share is shriveling, or other untoward things are occurring. Share buybacks don’t fix a company’s operational issues, nor do they make grossly overvalued shares more reasonable, but they do prop up the shares.
The note TrimTabs provided as to why these share buybacks are suddenly blowing off the charts is key: The corporate tax law has changed concerning the “repatriation” of “overseas cash” that represents many years of untaxed profits invested mostly in US Treasuries and corporate bonds. This “repatriation” is a one-time affair. Once this limited “overseas cash” has been “repatriated” and spent on share buybacks, dividends, and executive bonuses, it’s gone. And then what?
These immensely overvalued shares will then have to find real buyers.
But for now, companies are selling their Treasuries and corporate bonds, which have taken a beating recently, and are using the proceeds, while they last, to buy back their own shares at historically overvalued prices. This gives the market, that has been struggling since January 26, some crash insurance, but with an expiration date.
This time, it’s different, say the Goldman Sachs strategists. So we’ll take a look. Read… FANGMAN Stocks Are Not a Bubble, Pleads Goldman Sachs
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Share buybacks increase the price of a share, so each subsequent buyback buys fewer shares or cost more. Theoretically, the cost of the last share is…
The leading line of an obituary.
Taken to its logical conclusion the ultimate end of buybacks is to take the company private which used to be the end of the road for borrowing and expansion of the franchise. Its a strategy for an economic contraction. If you were buying back shares in yourself you would be putting more money in the bank and not spending. When business does that it means things are getting worse. As a retail investor it is the best of both worlds, you benefit from the value added on the back of new credit, without being obligated to pay off that debt, assuming you are nimble enough.
Buying back your own shares using borrowed money used to be illegal, for good reason, before the rules were changed in the Reagan Administration.
That law, intended to prevent stock manipulation, is long dead and gone. Stock manipulation is now considered beneficial and constructive – just ask the Fed. Corporations are only doing their part to contribute to the wealth effect and helping the Fed implement the policy Ben Bernanke announced some years back.
Besides, there doesn’t seem to be any shortage of money eager to invest in bonds used to invest in stocks. Money is money and as long as there is a surplus slushing around stock prices will need to go higher to meet the demand from new money seeking investments.
Up, up, up and then up some more. Ben’s policy has really taken root – get on the train or get left at the station.
Everything is so manipulated these days it is hard to keep cynicism at bay. In fact, it’s hard to know what is real and what isn’t. This is a time to look inward and listen to our own reasoning. The initial loss of honesty and values now taken as normal seemed to coincide with renaming people as ‘consumers’.
Old Ben was either intellectually dishonest or worse. Otherwise, he would have named it correctly an impoverishment effect. Pumping up stocks, bonds, and real estate in one synchronized or*gy sinks all boats but a few in a sea of inflation.
The fraud and manipulation in the system has become so entrenched and systemic that a financial collapse is inevitable. My only hope is that the sheeple will be sufficiently enraged after getting swindled yet again by the Wall Street-Federal Reserve Looting Syndicate that they may finally demand REAL hope and change, not the snake oil peddled by a Soros- and Goldman Sachs backed film-flam man from the most corrupt political machine in the nation.
We will not have honest markets or sound money until we end the Fed and impose some long-overdue accountability on its Wall Street accomplices, as well as the captured regulators, enforcers, and Congress critters who aided and abetted these massive financial frauds and swindles.
Wolf, What happens to the corporate bond market when this huge bid has disappeared from the overseas market?
What Apple and others are doing is selling corporate bonds and US Treasuries and they’re shifting this money into buying their own shares (stock market). So new investors have to step in and buy those bonds from Apple. These investors will have to be enticed with higher yields (lower prices). And that’s what has been happening. This is a global market, so investors could be anywhere.
DJIA dead cat bounce is nauseating.Up 200 points,down 193 points,up again 205 points…
Say,this bouncing eventually stops.And DJIA will fall until it reaches reasonable P/E ratio of 7.
What happens then ? Vice will be punished ? Virtue will be rewarded ? I guess not.
“You think Roman Empire was bad ? Wait till you see Dark Ages ”
( last words of Romulus Augustulus,Ravenna,476 A.D.)
I just don’t believe stocks are capable of correcting anymore (no sarcasm). I’ve heard about the immanent stock crash, that never comes, for years. It doesn’t matter where the money comes from, all that matters is it always comes. Even a tiny drop, such as witnessed last February, always results in an ever larger flood of money and new record highs. I don’t believe stocks will ever crash again, I would sooner believe the Sahara desert could transform into a jungle.
My 401K is now 100% stocks and I have zero fear of even a tiny market drop. My bigger fear was the drop in the value of money and by holding all of my wealth in stocks I no longer have that fear. Jerry Powell and company have my back, any hint of a market drop and the Fed will ride to the rescue. Stocks and Real Estate are 100% insured by the Federal Reserve – it’s too late for me to afford even a modest condo in my area ($800K +) but at least I’m fully and safely invested in the stock market.
Individual stock market caps have gone from thousands to millions to billions and now trillions – Quadrillion market cap companies will arrive soon enough. S&P 500 –> 3000 before the end of June and to surpass 3500 by year end – if you were to ask Ben, Janet or Jerry I’m sure they would agree.
As long as zeros are cheap stocks never will be.
How I learned to stop worrying and love the bomb, I mean market, spelled F-E-D.
Did you use the word immanent (=inherent,operating within) instead of the word imminent (=pending) on purpose ?
If the answer is “yes” all I can say is “Far out,man”.Hope you remember the 60’s.
I’m pretty sure it’s sarcasm. Could be wrong tho.
no, I just have bad grammar. Actually I’m correct and the English language is wrong (and I mean seriously messed up and wrong).
‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ All economic problems have been banished from the kingdom by our “Financial Engineers”, Alice said. Shame on Wolf Street for doubting!
Do not call these rigged, broken, manipulated “markets” anything other than what they are: the biggest Ponzi in human history, courtesy of the Fed and its fellow central bankers and their creation of trillions in “stimulus” out of thin air.
.Not out if “thin air”, but rather by robbing savers and pensioners through inflation….
The stocks have reached a permanently high plateau. Wink, wink.
“Herbert Hoover does not share the widespread belief that the speculative debauch in the stock market is a happy and healthy phenomenon.
On the contrary, he has been supporting the Federal Reserve Board in its unavailing efforts to check the flow of credit into speculation, and he has done his share of worrying over the possible consequences of a collapse of prices.
We believe that by this time the boom is well beyond control, except by some drastic measure which might bring on the very crash it was intended to avert.
Otherwise the economic skies seem clear. Business is undeniably booming.
Perhaps the speculative storm will manage to blow itself out and all will be well. Prosperity, these days, has come to be taken for granted.
Busy men whose desks are piled with problems pressing for solution do not borrow trouble by debating just when and how it might come to an unimaginable end.
There may be a recession in stock prices, but not anything in the nature of a crash.
We expect to see the stock market a good deal higher than it is today within a few months.The economy is fundamentally sound. ”
From the book “Only yesterday”
Great addition, John. It brings to mind an excellent study on bear markets (several) carefully constructed by Russell Napier, “Anatomy of the bear”. Another, different look at bear markets, also well done, is John Rothchild’s, “The bear book”. Rothchild incidentally is the co-author of all of the Peter Lynch books.
How many times have people uttered the EXACT same thing you’re saying throughout history? But THIS time it’s different?
Sigh. There’s so much wrong with this post, there’s really no point in bothering.
What’s wrong is that too many who post think there are conspiracies under every mattress.
For those who did not believe me when I said this was gonna be a green year, just looks at all those currencies that lost value to the US dollar in the last few months. The QE Unwind and raising FED rates are also pushing the value of the dollar up at least short term.
All that makes cheap credit become a thing of the past. But don’t go and Short Netfix, is kinda impossible to figure out when it will fall at this rate.
And we are getting all these banking distractions, like Visa on Friday in Europe, what’s up with that? Was it a hack or upgrade that went wrong?
Plenty of people eating their fingernails because of those US-dollar- and euro- denominated EM bonds, especially given the bulk of what banks sold to their customers is fixed yield so plummeting prices do not automatically translate into higher yields.
That’s the other story, the one financial media don’t like covering because they were crucial in selling those bonds as “risk-free or very nearly so” to yield-starved investors.
Credit is getting tighter, that’s true, and it’s especially true for “marginal” markets.
Just don’t tell real estate speculators in Italy, Portugal and Turkey. Those economies depend on cheap financing to keep on building houses the locals don’t need or cannot afford.
Em Bonds would be a scary place to be now if it was “Your ” money in them.
So much of it is OPM so MEH is all you currently get from traders and fund managers who have already received their HUGE slices in US $.
“Just don’t tell real estate speculators in Italy, Portugal and Turkey. Those economies depend on cheap financing to keep on building houses the locals don’t need or cannot afford.”
Just don’t tell real estate speculators in Italy, Portugal, Spain, and Turkey. Those economies depend on cheap financing to keep on building houses, the locals need, but cannot afford.
So is there a time limit set by the US Government in which the overseas cash can be brought back into the US without incurring taxation ?
So where does one hide?
Aside: Notice the vast majority of those buybacks are specific to a particular sector?
BTW, IMO the real crash insurance might be the mess in Europe.
The best place to hide is stocks.
The monetary system just continues to crash – you want to hide out in stocks until the dust settles and that could take years.
Land, with timber, orchards, gardens, water. Skills. Tools and stores. Some guns. Community and friends. Stocks, any stock, isn’t on the list. This entire article was about manipulation of paper assets. I do not think they offer security, only more vulnerability, everyday. Just my opinion, (and you know what they say about opinions). :-)
Stop telling people this. Seriously.
I will never stop telling people to sell their currency and buy stocks.
If you can afford to buy timber, lumber and the other stuff Paulo suggests then good for you, but most of us don’t have enough wealth to collect those types of assets (including houses).
For most of us stocks are the only solid asset we can readily exchange for our rapidly declining currency. I’m just glad someone is willing to get stuck with my dollars in exchange for their stock each and every pay day.
Cash is trash. As soon as I’m tossed the hot potato (payday) I toss it to someone else, better their hands get burned then mine.
Prediction: the S&P 500 will never again dip below 2500 – so if it does throw that one back at me.
“Prediction: the S&P 500 will never again dip below 2500 – so if it does throw that one back at me.”
This proves you have no idea what you are talking about, and are in fact dangerous to the financial health of others.
Never ever say “NEVER”.
About what a financial stock list/index, can, and can not, do.
I’ll be sitting here on my cash and watch financial geniuses such as yourself crash and burn so that I can buy their assets at pennies on the dollar. Please follow your own advice and keep buying cause I’ll be patiently waiting :).
Same here +
Thanks to the recent rise in yields I’ve bought enough short term treasuries <=1Y such that the American Taxpayer now makes my mortgage payment in exchange for their "free services".
waiting for the wreck in junk bonds. Possibly a short index fund is a good hedge
Unless there’s some once-in-a-lifetime event there will be no conventional crash in junk bonds. Single bonds may crash or even implode, but as a whole don’t expect a trainwreck.
What will happen is what has been going on for the past year or so: yields will zigzag higher and prices will zigzag lower. Attractive yields from “safe and boring” fixed yield, such as US Treasuries, will accelerate the phenomenon.
There will be a lot of carnage, make no bone about it, but it will be spread far and wide over several years and all Continents including Antarctica (think large junk-rated fishing companies going after Antarctic toothfish).
Don’t expect to find much in the media: when Air Berlin went down last year it received barely a mention outside the specialized press despite being the largest bankruptcy in the airline industry in many years.
SO which is better, an overnight crash, or an attempt at a soft crash landing over 30 + Years.
INHO A attempt at a manged crash is safer from the economic management perspective but bad fro me as I will probably be dead before there is any real economy recovery as we still have 30 + years to go in this attempt at a Managed crash landing.
Remember states have been issuing 100 year bonds at untenable low rates/yields. Even now the US 30 year rate and yield is untenable low.
So for how long does that continue to unbalance the system.
Theoretically, Amazon could go to $1 in a day if no one wanted it, even though its closing in on 1700..what!! 1700!
It’s like all those film noir days, everyone chain smoked and the rooms were filled with smoke ..and no one questioned it..they just kept doing it ..not even thinking : could this be a bad thing? Same thing with these stocks there smoking today.
Actually smoking was seen as bad as soon as it started even if no one knew how much it ruined health back then. It just that they tried very hard to make smoking be cool. Witers and the media went with it because money dear boy. Heck I am old enough to remember a time tobacco companies could not only advertise on TV but do so without any health warning whatsoever.
Dont forget that the US govt got a lot of TAX from Tobacco.
Which was “The crop”, in the South, they sought to milk and keep impoverished, post 1865.
So the last thing they wanted to see, was that revenue source restrained.
One of the oldest Anti smoking posters I can remember seeing, in a old book. Predates 1880’s, and compares “growth of boy who did not smoke, with boy who did, and stunted his growth” showing boy smoking a Cornish clay pipe, in pre 1880’s English style dress.
Just like the early “Clean air Preserve the Planet’ creatures these “Anti Smoking” creatures were, ungodly, evil, and MAD.
WR: you opine about the gross over valuation of almost everything but you also think the bursting of the bubble will be slow. Share buybacks is one reason you cite to slow the descent.
In the case of Apple, fair enough. It has the cash on hand to support the share price, and the new tax regime helps. But in the case of IBM, the cash is borrowed and so it can support the share price until it can’t borrow cheaply enough to make it worthwhile.
My question is: when the inevitable recession arrives, why would the flight from what I believe you say are grossly overvalued stocks be gradual?
And how will so much trading being done by computer algorithms play into either a gradual or panicked sell off?
My time frame is about a year for this magic to work. This “overseas cash” is going to dry up, interest rates are rising (“gradually”), and credit problems will eventually haunt junk bonds. When the junk-bond market goes, it will drag the stock market with it because there are so many junk-rated companies, including Netflix, that will have a harder time funding themselves. Over the next few years, many junk-rated companies will default. When a company defaults on its debt, its shares tend to go to zero-ish.
(But let’s be clear, I don’t think Netflix will default).
But there is a lot of money (beyond the corporate buyback money) sitting there waiting for all these events. That money will jump in and buy the crash, and it will stop the crash before it goes very far. So you have dips and rallies, and I think they will have a downward bias over the long term. I have never seen in my life so much liquidity waiting to make money on the next crash and the next big sell-off that they’re all sure will arrive pretty soon.
I think QE will dog the markets for a long, long time.
Wolf, what specifically do you see as the sources of this massive amount of liquidity or “cash on the sidelines” waiting to pick up cheap stocks after a crash. Everyone around me seems to subscribe to the “cash is trash” aphorism and feels necessary to be fully leveraged in stocks and real estate at all times.
This “cash” is likely not actual cash or bank deposits, though some is. Much of it is invested in short-term securities that mature daily or are very liquid and can be sold quickly to turn into cash to buy something else with.
The range goes from hedge funds specifically set up to do this to individual investors, including some commenters here. Buffett’s enterprise sits on a huge pile of “cash” waiting for a buying opportunity.
You describe me perfectly! Roughly 80% in T-bills, average maturity of about 4 months. So easily sold at very little loss to the bid-ask. The rest is in boring stocks, the kind that make money and trade at reasonable p/e’s. This is the lowest stock allocation I can remember over 40 years of investing.
I am 58. If there is a big crash — say a 40% drop in the overall market — I may go back up to 50% stock. I don’t ever see going higher than that.
“I have never seen in my life so much liquidity waiting to make money on the next crash and the next big sell-off that they’re all sure will arrive pretty soon.” <– This. I don't have privilege to that view, but I hear it from the people around me who are asset rich. There is a chart on ZH showing how the "smart money" has dramatically exited the building, and I presume it's poised as you say.
Sadly I followed all the wrong commentators and prognosticators – the doomers – and for the last five years have been primed for the crash that just refuses to materialize, and apparently may never come (could Janet Yellen have been right after all?). I was the idiot in the room saying the sky was going to fall and you should buy gold. In the process I have lost lots of money and missed out on a lot of potential profit. The worst part is I've stuck to my guns, and am still waiting for the crash.
QE has ended up in a relatively few pockets, but those who've benefited have done so handsomely. The people I know who've benefited are the ones who were optimistic about the future, or were at least didn't worry too much.
Oh well, c'est la vie.
ps. The flip-side is that the levels of indebtedness are awesome, and if interest rates do go up or the housing market were to crash (which both seem unlikely), they would find themselves in a very different situation. But that's just pessimistic.
There will be a correction to benefit the morally justified. The question of when applies pressure to one’s patience but patience will work out in your favour. Where I live oil money drove up all assets but I saw a slow down coming in the patch a little over a year before the oil really did crash. I sold my house and held on to my money because housing was going to correct once the oil corrected. People said I was crazy until the real world proved I wasn’t. Now I am still not jumping in until the correction has completed its course, but I also am not stuck holding onto overpriced junk waiting for the next peak to destroy the next generation. I may not be wealthy, but I sure feel good when I sleep at night.
The crash is occurring but not in the assets you expected.
The crash is happening to currencies around the world as governments and central banks flood the world with confetti cash to allow borrowers (governments, hedge funds, home buyers…) to default (via inflation) on past and future debt. The crash is occurring in the cash market.
Houses that sold here in Seattle three years ago for about 350K are selling now for over 1 million – yet somehow everybody keeps pretending inflation is “contained”. I’m an engineer who earns well above average pay for the area and yet I’m completely priced out of housing! Yeah sure, there’s no inflation.
Also, I’m tired of people repeating the tired cliché: “the Fed is out of bullets”. The Fed will run out of bullets when the number system runs out of zeros.
My thoughts exactly.
But I also think people will probably lose faith in all fiats because of this abundance of liquidity.
There was too much liquidity in China too, but now there’s not enough. Defaults are rising, and the Chinese government is trying to thread the needle between cutting back on shadow banking and avoiding a cascade of defaults. I don’t think China can to it myself, but we’ll see. These stock buy backs sound like they are price insurance, but if China breaks, they’ll just be money down the drain.
The Retail “investor” is nowadays a factor that can not move The markets.
SO the Crash trigger has to be an Implosion of a “Lehman type player” followed by one or more “Bear Stearns type player/s”.
These players will be Hedge Funds or Mega entities like Blackstone not necessarily banks, and not necessarily in the US.
Another thing these Buybacks are doing is taking the small investor OUT of the Market/Equation.
In Entities that are not using them as HP did which, was simply to enrich the Executive, at the expense of the shareholder.
“I don’t think China can to it myself,”
They can, and they will. In china.
When you can dictate that banks convert NPL’S into “Equity” at prices dictated by the CCP. Then Hold that “Equity” on the bank’s books as “Assets.” At the price dictated by the CCP until the CCP gives the bank permission to sell them, at a price acceptable to the CCP, And the CCp controlled Central bank can backstop that bank, and also Instruct that bank to lend to the Entity they just took Equity to Clear NPLS in, again, as it is “Debt Free” currently. You can keep a lot in the air, for a very long time.
Especially if you allow foreigners to take limited % Shareholding in the bank’s in question through
“NEW SHARES”.(which then CCP is currently starting to allow).
What the CCP can not, and will not, be able to control, is the knock effects, to the rest of the planet.
That will eventually come back and hit china even harder, just as their aggressive trade practices, resulted in the “Opium wars”.
The aggressive actions of P 44 are very similar to the Global trade situation, and actions by various players, prior to what became the Opium period.
History dosent repeat, it just Rhymes, in this case Almost perfectly.
I am Broken clock, as I can not tell you when.
Realistically CCP china is so Opaque I dont think anybody can tell you, when.
This is what makes CCP china, so VERY VERY dangerous, for the entire planet.
Wolf, do you think long-term market valuation measures such the CAPE, Price/Revenue, corp profits/GDP ratios have entered some kind of new paradigm whereby they will remain elevated permanently?
Market players certainly seem to believe so :-]
Wolf, here’s one thing that has been on my mind, and I wanted to get your temperature on it:
Because of the easy money era we have had–and not just from the FED, but specifically from VC funds going deep, deep into multiple funding stages–these junk companies are larger than ever before and still expanding, while losing money at record pace.
I can’t help but think that the next recession is going to be a doozy because of the sheer size of insolvent companies that are going to be distressed. I think it will affect tech more than any other sector, which makes me uniquely bearish on SF and South Bay real estate in the intermediate to long term, and possibly on the entire California economy.
Obviously, there’s a ton of liquidity out there, but there is a lot of junk out there as well. People aren’t going to be gobbling up all of it. Businesses will fail.
What’s your sense of the scope of the next downturn in relation to these unprofitable companies?
I’m with you. There are lot of excesses balled up and they will have to unravel. I just think that this unraveling will be slow with many ups and downs. In the example you cited, some junk rated companies will default and all low-rated junk bonds – esp. CCCC – will take a big hit in sympathy. But then the dip buyers will come in to buy some of the bonds at a big discount and some PE firms will come in and fund the companies some more, and the market will recover a little, before the next wave of defaults causes some of those dip buyers and PE firms to lose their shirts. Rinse and repeat many times….
I suspect hubris will bring the markets (stock, bond, housing…….) down as it has done for many businesses, organizations, governments, kings, emperors, what have you, throughout history. Hubris is one of human nature’s critical flaws, yet appears with astonishing regularity. Give some people a little success and they see themselves as kings of the universe and that whatever comes, they can handle it. Now scale that up to outfits the size of those grouped together as FANGMAN.
Now if I only knew when that was going to happen.
I have my eye on some land down by the landfill. Land down by the river is way too expensive around here to put my van on. :)
This is what asset inflation looks like. Get used to it.
Stocks and bonds are not investments; they sit on the liability side of the balance sheet. Investing happens when businesses buy inventory and capitalized assets that sit on the asset side of the balance sheet. In that sense, businesses that repurchase shares impoverish their companies by failing to invest in profit-making assets, instead wasting cash or going in hock to overpay for their own shares.
Repurchasing shares is a red flag for any long term owner. Sell ASAP any company that does so.
You said: “Stocks and bonds are not investments; they sit on the liability side of the balance sheet.”
Not quite. When a company or any entity with a balance sheet buys a stock other than its own, it ends up on the asset side, and it’s considered an “investment.”
When a company buys its owns shares, they’re treated differently. They generally just disappear (unless a company treats them as “treasury stock.”). At the same time, cash (on the asset side of the balance sheet) goes down by the amount spent, and “stockholder equity” (in the capital section of the balance sheet) goes down by the same amount.
When a company buys a bond other than its own, it ends up on the asset-side of the balance sheet and is considered an “investment.” This is often classified on the balance sheet under “cash equivalent.”
When a company issues a bond, it borrows money from the capital markets. This is a debt that the company owes, and this debt ends up on the liability side of the balance sheet.
Every bond and every loan and any other credit are some entity’s liability and another entities asset, by definition.
Agreed. But from the perspective of a company, its own stocks and bonds are on the liability side. If a company is engaged in financial engineering rather than developing its own revenue-generating assets as part of its business operations, it probably doesn’t have much of a future. Employee training (human capital) and maintenance of equipment won’t show up on a balance sheet, but is a wiser use of cash than share repurchases. Counter example: Sears.
Stocks are fractional ownership of a company and as such a (potential) claim on it’s current and future earnings, if that’s not an “investment” then the word has lost all meaning (much like the word hero).
“Investment” is tangible capital formation in an enterprise with the goal of making a profit. The colloquial use of the word to refer to passive owners of stocks or bonds is unfortunate.
Stock and bond owners don’t create wealth. And “investors” (owners of stocks and bonds) are not capitalists despite what their inflated egos may tell them.
Record-braking? Intentional slip?
I wish :-]
Where the hell does all this cash come from? There is so much money around we are told. Where? Who has it? Why are so many people really struggling? I’m confused……as usual! Please explain Wolf or is it simply dodgy funds and printed worthless paper?
Ah, the grand question. Where does new money come from? It can’t be government spending, because government has to balance its spending with taxes and issuing treasury bonds. It can no longer be the Fed because they are reducing their balance sheet. Are people reducing their consumption and buying stocks instead. Nope, purchasing is up. Drawing down savings? Maybe a little, but that is nowhere near the increase stock prices. So what other source could be producing the money? What else is declining rapidly as funds are shifted into stocks?
Who has this money?
Individual savers have over $9 trillion in the US banking system and in credit unions. Corporations have a record amount of cash or cash equivalent (liquid investments) — though they also have a record amount of debt. Investment funds (PE firms, hedge funds, Buffett’s enterprise, etc.) sit on large amounts of cash-equivalent investments ready to be deployed.
Perhaps half the consumers have essentially no savings. The other half has savings. And the top layer is wealthy. global QE has created a lot of wealth in a relatively small part of the population.
“global QE has created a lot of wealth in a relatively small part of the population.”
And is still creating lots of it, in an even smaller part of the population. And still will be even if the ECB does halt its QE in 2019.
If I remember right, the last time I looked into Buffet’s Berkshire they had $100 billion in short term treasuries on their books. They have added to their Apple holdings recently and sold their position in IBM(the bet on AI didn’t work out). Remember it was Berkshire who loaned Goldman Sachs money in 2008 to stay solvent so they wouldn’t have to go begging to the Fed. Stock buybacks tell you one thing, the companies who use them have no other way to use their cash more profitably or they would be expanding and growing their own business.
It think you may be confusing stocks prices with money. Money is cash. Stocks are not. Stocks can up or down for no reason at all. Stocks are at all time highs, but that doesn’t mean there is more money. Stocks could crash 100% tomorrow, and the money supply would be the same.
Stocks, bonds, and cash aren’t “wealth” per se, they are only claims against it. You can think of them as different currencies whose exchange rates can fluctuate against each other. Right now, the exchange rate of cash is extremely depressed relative to stocks and bonds. Will it remain there permanently? History suggests the answer is ‘no.’
cash is created by the banking system (includes the central banks) and governments (together with their central banks). We are nearing the end game, stay out of cash.
The new money comes from The Fed. But their friends get it first – then they trade fungible assets back and forth (with insider information), and make a killing.
By the time the “little people” get their hands on the “new” X’s and O’s”- it’s already a depreciated POS worth about 7% less …..
Thanks Fed – for caring about the rest of us …..
When you reduce the number of outstanding shares by buying back your own shares, two things occur: 1) your income/ dividend per share increases even if your revenue stays the same. 2) The executives whose pay is supplemented by stock options can exercise their options when the company is buying back their owns shares. Stock options are taxed at 28% versus the maximum individual income tax rate of 37%. Stock options aren’t subject to payroll taxes (FICA, SS, MC etc.) since they are treated as capital gains.
perhaps another way to look at this is despite all these stock buy backs the market has been unable to return to this years high. That is not a bullish sign.
Here is the recent history of Micron share purchases/sales:
Oct 2014, share price $32.
Micron announces $1 billion share buyback. Their announcement happened to coincide with the cyclical peak. Subsequently the shares go below $10, but Micron never buys them.
Dec 2016, share price: $17.
Micron sells $1 billion worth of shares to Nanya as part of the payment for Inotera. They were free to pay with cash, but chose to pay with shares as much as the deal allowed.
Oct 2017, share price $41.
Micron sells $1.2 billion worth of shares.(They did get a bit of a discount on buying back bonds due to the share offering)
May 2018. Share price 60.
$10 billion share buyback announced.
How it makes sense for a company to sell shares for $17, then sell more shares a year later at $41 only to buy all these shares(and more) back a year after that for $60+.(or $150, that some people expect MU to trade for)?
If the shares rally, as many hope, and Micron ends up buying $10 billion worth of shares at the average price of $115, then it will be exactly the shares they sold recently for $2.2 billion. The net effect will be no change in share number and -7.8 billion in cash + small interest savings – fees.
These stock market valuations are a bit nutty all the same.
For perspective, Amazon has added the equivalent of the market capitalization of Walmart since the beginning of 2018.
Actually, i think i’ll write the previous sentence down on a piece of paper and sock it away in a drawer for 2 years and then read it again.
And when this prop runs its course, some unforeseen new prop will appear.
Equifax stock just rocketed higher, on the news of insiders buying more shares than ever.
If I were an Apple shareholder, I would much rather hear that they are using the repatriated cash to invest in new product development or building new factories. Share repurchases are a sign of incompetent management. They are lost at sea without Steve Jobs.
Sell, sell, sell that sucker.
They aren’t lost without Steve Jobs. They are simply following the stock market road map laid out by all other stock market unicorns. I am sure they purchased their own stock with him in charge. This isn’t new. If you sell now it wouldn’t be the worst idea, but with how often they inflate their stocks you might miss out over the next couple years or couple months. A big expensive guessing game.
Wolf, you don’t really know that another 1929 couldn’t happen even with all of this manipulation and artifice in the front of the store. in the back of the store, there are empty pallets of ‘nothing’ that on signs in the front look like giant stores of gold bullion. eventually, somehow, all of this artifice is going to cock up and crash no matter how good the PPT algo’s are to prop it all up, no matter how many illegal scumwad schemes the courts hand to the banksters to steal more loot with from the moron sheeple.
any of you who are goading sheeple into buying stocks, you yourselves are telling moron sheeple to jump off of that cliff in the future like the stupid lemmings they would be to believe that shit.
honestly, it’s going to crash. not today, not tomorrow, but the big plan is to kick all of the poles of the tent out so they can see the world the ‘new and improved shekel’ (jooo world odor).
the crash is part of the mechanism to move as much wealth from the pockets of the gullible into the gold vaults of the Rothschilds and their ilk.
it’s going to come. not today, but it’s by design. they never set the ball up for a spike without someone rushing to the net to spike the fucking thing into the sand.