“The leveraged share buyback game has ended, which also means an end to the phony earnings growth.”
By Wolf Richter for WOLF STREET:
HSBC and Goldman Sachs have now both come out with estimates about the extent of the collapse of share buybacks. So far into this crash, over 50 companies have suspended share buybacks, accounting for $190 billion in cash that is not flowing into the stock market, representing over a quarter of total share buybacks in 2019.
HSBC estimates that over the next two quarters, share buybacks in the US could be cut by $300 billion, meaning $300 billion in “lost inflows” into the stock market.
And more cuts are coming. A note by Goldman Sachs analysts, reported by Bloomberg, added: “Reduced cash flows and select restrictions mandated as part of the Phase 3 fiscal legislation suggest more suspensions are likely.”
And slashing share buybacks would have an impact on stocks, the Goldman analysts said: “Higher volatility and lower equity valuations are among the likely consequences of reduced buybacks.”
Share buybacks – until 1982 a form of illegal market manipulation under SEC rules – have had a massive impact on the stock market on the way up. Last year, companies in the S&P 500 Index bought back $729 billion of their own shares, according to S&P Dow Jones Indices. In 2018, they bought back $806 billion of their own shares. Over the two years combined, that amounts to over $1.5 trillion. Since 2012, share buybacks amounted to $4.6 trillion.
This is cash that became a fresh inflow into the stock market. Most of these shares were canceled after the companies had bought them back. From a company point of view, this money just disappeared.
This huge inflow – this relentless bid by companies to buy their own shares at the highest possible price to drive up share prices further – and the ceaseless hype surrounding it, helped inflate share prices into one of the greatest stock market bubbles ever, including a ludicrous 30% gain of the S&P 500 in 2019 when the economy was already struggling and when actual earnings growth had stalled.
So starting in late February, when the market began its epic crash and the liquidity crunch hit companies because their revenues plunged or vanished due to the lockdowns, the first reaction was to switch into survival mode and preserve cash. Share buybacks incinerate cash. And they’re the first on the cutting block, ahead of dividends.
In addition, there are now rules in the $2 trillion stimulus-and-investor-bailout package that prevent companies from buying back their own shares until a year after they paid off their bailout loans. President Trump himself spoke out several times against share buybacks recently, airing his frustration that the proceeds from the corporate tax cuts of 2017 were in fact, as had been widely predicted, plowed into share buybacks rather than invested in the US to drive the economy forward.
So at least over the near term, the rug got pulled out from under the share buyback scheme.
In terms of the impact of vanishing share buybacks, Chris Wood, global head of equity strategy at Jefferies, said in a note, also reported by Bloomberg, that he saw two problems:
- One, US stocks “began the downturn so overvalued at a record high valuation to sales”;
- And two, “the leveraged share buyback game has ended, which also means an end to the phony earnings growth it produced.”
As companies are laying off millions of people in order to stem the cash outflow, and as their shareholders and creditors are getting bailed out to the tune of trillions of dollars created by the Fed or borrowed by the US government, share buybacks are mostly off the table for now.
Part of the great science of financial engineering, share buybacks have three goals:
- Drive up share prices;
- Conceal from shareholders the costs (via dilution) of stock compensation packages for executives;
- Create “phony” growth in earnings per share. Share buybacks reduce the share count (the denominator of earnings-per-share), thereby increasing earnings per share when actual earnings go nowhere.
But share buybacks come with massive costs that don’t hit home until there’s a crisis: By incinerating $4.6 trillion in cash since 2012, and often borrowed cash – the “leveraged share buybacks” – companies willfully burned up their equity capital and rendered themselves recklessly fragile and overleveraged, and predictably far less able to withstand the next crisis, though they knew perfectly well that there is always a next crisis.
Neither the Fed nor the Treasury can bail out brick-and-mortar retailers. Read… Post-Lockdown New Normal: Many Brick & Mortar Stores Will Not Reopen, CMBS will Default, Mess to Ensue
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Buyback shares when the market is flying, and immediately suspend the buyback program when shares become cheap.
Why do we pay these guys?
yeah, It does sound counter-intuitive. “Let’s restrict them from buying their own shares after the fact.”
Sry. I forgot to mention. I’m sure there will be a loophole to buy the shares back through shell companies. I mean….let’s not be naive here. These companies have a whole team of accountants. Rules are meant to be broken. :P
The shareholders pay theses guys a lot of bucks.
Andy: great question !!! These guys, simply through connections or otherwise simply elbowed their way into these positions. “They” are certainly no smarter than most, but what makes them dangerous is they have less ethics…make that no ethics…and certainly no scruples. As I’ve said before, I hope that Dante (Alighieri ) is correct in his account of Hades (L’Inferno) in the Divine Comedy and, that there is a special lower rung in Hades for people like this. From my vantage point, I am of the strong belief that many folks out there, especially those in positions of power, have lost faith or simply don’t believe in a greater purpose. If I am correct, then I put nothing past these people….and I include, bankers, politicians, big corp. execs, Hollywood, many athletes, etc.
As I’ve posted before on the accounting side of these stock buybacks – known as Treasury Stock Transactions:
1. Company borrows money, assets and liabilities go up, equity unchanged.
2. Company buys back shares, assets and equity go down, but the liability remains!!!
3. Buying back shares reduces the float and increases EPS – ASSUMING, all this remain the same and decreases any FUTURE dividend payout as these shares are now in treasury.
The company basically blows a big HOLE in it’s balance sheet to try and enhance EPS. Execs of course redeem shares at higher prices.
Stock market crashes and the debt remains on the books, the company’s very survival becomes an issue.
At the very least, this is malfeasance on the part of management, as it was carried on beyond what is reasonable. Ill gotten profits need to be clawed back and jail time is in order. This would stop all the garbage dead in its tracks!!!!
So would independent auditors of all the books. If there’s even one corporation in America where the books are legit I’d like to know which one? Buying back shares at 5 to 10 times their true value just means chapter 11 will come a lot sooner.
excuse me! The real Tony? How dare you. :P
I went back and got an accounting and finance dual degree in 2012. In accounting, we had to take six different ethics classes because of Enron. In finance, it was the wild west, wannabe hotshots who wore suits to class, and no mention of ethics at all.
There were anecdotal reports that Jeffrey Skilling, the guy in charge of Enron, once argued in a class at Harvard Business School that corporations who fulfilled the requirements of the law and killed people had no ethical or moral responsibility for their deaths.
IOW, if there is no law or regulation that prevents a corporation from making a profit by killing people, it’s OK because the law is being obeyed and corporations have a fiduciary duty to their shareholders to maximize their profits. That was his argument.
This later became reality when the killer clowns at Enron deliberately shut down the power plants they owned in California, in order to force the electric utility to buy power from elsewhere at a huge profit for Enron. This produced massive blackouts, and it’s almost certain that somebody, somewhere – an elderly person who lost air conditioning on a hot day, for example – died as a result.
He served 12 years in prison for a variety of charges but is now a free man.
HBS made a big show about adding ethics courses, but the simple fact of the matter is that our system selects sociopaths as leaders in numbers that are vastly disproportionate to their prevalence in the population. A mandatory ethics course or two won’t do squat to make a sociopath into a decent person.
Do you know who the most famous graduate of the Dale Carnegie course in “How to Win Friends and Influence People” was?
The prison reform people hoped that this course would make criminals less antisocial, and perhaps that worked for some of them, but not for Charlie.
He thought that it was just great that he could use psychology to manipulate people instead of using overt violence. He could kill without getting his own hands bloody.
When you teach a psychopath or sociopath how to influence people, you don’t end up with the Brady Bunch, you end up with the Manson Family.
Skilling was a smarter, more urbane, and more sane person, but they were both sociopaths who used education as a means to become more effective, and thus more dangerous, sociopaths (and a psychopath too, in Manson’s case).
Couldn’t agree more EN: In my long career, the very worst person I ever dealt with had an MBA, and although his elder brother was my best client ever and warned me, (perhaps a little to mildly/politely,) about his sociopath brother, I went ahead and lost my biz to the modern version of the lying/cheating ”robber barons.”
One answer is, “Clean House, Senate Too.”
Vote out every incumbent at every level until we get people who are actually public servants and not paid political puppets.
Some serious election reform would help too, for sure!
Look guys, this denigration of people with MBA degrees is getting ludicrous. I know plenty of people with MBAs among their degrees. This includes me. An MBA is just a degree people get to launch a career or to make a career change. It’s not a personality disorder or some mental disease.
4. Borrow money to buy back stocks. Liabilities goes up Equity goes down Assets remain the same.
Assets do not remain the same. The cash from the loan is expensed as compensation and further reduces the equity. It’s a liquidation in disguise, eventually leaving no equity and only the liability.
Base case company has $100 cash and $100 equity. Borrow another $100 pay all cash as compensation $200, it comes out of equity. Now you have $100 liability, negative equity, zero cash -> bankrupt.
The share buy-backs were not to benefit the majority of shareholders. Price increases in shares before enabled wealthy owners to divest at to prices and corporate officers to exercise their options to buy shares at reduced prices and then sell the shares for a hefty profit.
Now, if these companies continue the buy-backs, since not all can be bailed out and many probably have engaged Enron-style shenanigans, the misconduct might come out if the companies go bankrupt. Thus, to avoid jail, many corporate officers will be very conservative (stopping share buy-backs) to avoid disclosure of the Enron-style accounting shenanigans in bankruptcy court and their resulting prosecution for criminal stock/accounting frauds.
As if we did not have enough problems, there was just a significant earthquake near the Yellowstone supervolcano. That is all we need. If that were to blow, the coronavirus would be a forgotten threat: it would stop the coronavirus in the US dead. Our economic problems would also become moot, as would most of our national problems.
This is like the ancient, Chinese curse: “may you live in interesting times.” The news reports are starting to sound like we are in some disaster movie with our top leader providing comic relief with his constant, demonstrably false misstatements.
Definition of an MBA: Someone who knows the price of everything and the value of nothing.
You forgot the full circle: Issue new shares after the price dropped 90% in order to stay liquid. That is then true financial wizardry.
Andy- “We” pay these guys because the directors pay them. The directors are voted in or out by shareholders. The shareholders are basically only big entities like pension and mutual funds. They almost never vote these people out.
“Corporate Governance” is a joke.
The interesting misunderstanding that is often stated is “people over profits”. It is not profitable- in the long term(!)- to do these nonsensical things like stock buybacks when the market is high.
The correct problem to solve is: short term vs. long term profits. Long term profits are old fashioned- having low debt, a rainy day (black swan) account, tangible assets that can run even during recessions to keep business going, etc.
Also, bankruptcy as a disincentive disappears with bailouts.
So, here we are.
What is so infuriating and absurd is that this is not something that had been recognized for years and been a top headline warning of what’s coming. The narrative was that “business is strong” and they are making more and more money but anyone with a head on their shoulders could see that they were not making any more money, just decreasing share count….and for the last few years it was flat even WITH all those buybacks. This crash should have happened without Covid but now all these companies that made all this money … but spent in on lifting their stock price are broke and can’t handle a few bad months and taxpayers should bail them out?!?! This is stealing, criminal …and it was obvious from the start. We need representation that puts an end to a government bought off by corporate America and we have the opposite now with an embarrassing lack of intelligence to boot.
This crash has only brought us down from a ridiculous valuation to somewhere in the offensive to unreasonable range and has a long way to go if the market will ever stop reacting to the nonsense from the Fed.
This lockdown has forced me to look ahead and buy my building materials as I’m afraid my local Hardware store may not be around after a month or two as no one is allowed to work yet.
How this comment is relevant to the subject of the post??
i hear US is running lo on TP
Thanks for the buyback reduction update Wolf. Also note that dividends are at risk of beind reduced and/or outright cancelled. Jeffries had an article today of 60 companies at risk of dividend reductions:
Yes, and plenty of companies already eliminated their dividends, such as Ford, the airlines, Boeing, etc.
“Dividens” … as in EMPLOYEES ?!?!!
The Corpses who got them some senate grift are doin their damnest … to grift & grime somemoarrrrrrrr !
Well … those that arn’t holed-up, ensconced in their maga-YACHT, somewhere, in some enchanted emerald isle, … whilst taking picts of their floating fortress … as they hover from their copter, telling whoever’ll listen .. to be ‘safe’ !!
I’m afraid a, say a two-month long, nationwide general strike is in order … how ’bout Easter … that sounds like a Great moment for a rebirth .. doesn’t it ?
Agreed, Wolf, buy backs are the first to be cut. Then they cut capex and jobs. Only after that fails do they cut the dividend.
If I am cobbling the numbers together correctly, it looks like something in the neighborhood of half the “relentless bid” is likely to go away, according to very early estimates.
That seems possibly low to me, given the size of real world dislocations (the US has never had anything like the current sudden stop).
Given the fact that some very large companies tend to dominate these aggregate buybacks, I wonder if there isn’t a Top 10 or Top 20 Buybacker list floating around on the net somewhere. Or even the list of companies that have already announced BB halts.
In general, there may be a lot of disparate impact and each prior large buybacker probably needs to be examined individually for likely BB capacity going forward.
It would be very interesting to see a breakdown.
Yes, agreed. But there are some companies with stellar balance sheets that can still do share buybacks — companies not asking for a bailout and not engaging in mass layoffs. So I think there will continue to be some buybacks.
Here is the top 10 list in Q4 from my article a while ago. Note that the four banks on this list have already cut their share buybacks to zero:
Lotta banks on that list…they know best that the key part of any bank robbery is the speedy getaway.
Might as well consider AAPL a bank with their credit slanging now, also they have like $120 billion of corporate bonds on their balance sheet, and selling less and less phones since 2015
What??? No Boeing??
Correct, this list is for Q4 2019 (latest data available), and Boeing stopped share buybacks in early 2019 due to the 737 MAX fiasco.
Did you mean to say that Boeing canceled its dividend in early *2020*, not 2019?
My information is that they paid $2.06 per share every quarter in 2019.
That’s not what I said. I said that Boeing stopped its share buybacks in 2019.
Thank you for the correction!
And your explanation in a comment elsewhere crystallized for me why you focus more on stock buybacks than dividends: cash dividends are actually “returns” to shareholders, but buybacks seem to benefit executives and those willing to sell their shares into it rather than long-term shareholders.
CARE gives Mnuchin the ability to waive the no-buybacks rule for anyone he deems worthy. So, couldn’t these folks just borrow from Mnuchin, get a waiver, and keep on buying? He’s got at least 4 trillion to dole out.
Joe in LA – I think I asked almost the exact same question. I think you did it with more brevity. :-)
How are you deriving the $4T figure?
The whole bill was about $2.2 trillion with about $500 billion possible for the large companies.
Are you assuming some sort of leverage? From where?
And, as for oversight,
“• An inspector general would oversee $500 billion in loans that the Treasury Department would distribute to industries affected by the pandemic, and a new, five-person congressional committee would conduct oversight of the federal government’s spending on the COVID-19 response. Both oversight provisions were added to the Senate bill after Democrats demanded them.”
Granted, it is a Post article, so if you have other info, post a link.
I think he added the Fed’s corporate bailout money to it. That’s how I read it.
Yes, that’s what I was referring to.
And I still have my original question. Is there any reason to expect the SPV money will not be used for buybacks?
The problem is, there will be many more bailouts to come. Plus, many politicians have already been complicit using insider information to time their selling and buying.
What will it take to clean up the corruption BEFORE the crime? We all knew this was a crooked game years ago, so is the one-time cash payment with a Trump signature attached the money that buys complacency in Joe Sixpack’s house?
Scoff at Bernie Sanders all you want, and I am also tired of his angry old man rhetoric that does not recognise what is affordable and what is not, but he is right on the main issue. It is long time overdue for a revolution of one kind or another. The only baby steps to change I ever see are the ones to the cookie jar. Money money money really means sick and heartless, and all across the land people have fallen for the myth of exceptionalism and capitalism.
No wonder Mnuchin always has that sick little twisted smile on his face, and now we know why he still has the hot blonde on his arm. He won’t even have to foreclose on families this time around!
Exactly ! That’s $4T in ADDITION to the $2.2T “on the record.”
Still hoping for answers to my (and Joe in LA’s) questions RE what happens to those $4T players post-SPV rinsing.
Wolf – is there a significance to 2012 and share buybacks? What were companies doing prior to that? Did it revolve around a QE? Just curious. I keep seeing the reference to that date.
During Financial Crisis 1, share buybacks fizzled into a mere trickle. This is in part why shares crashed so hard — because companies had stopped buying their shares. Share buybacks started picking up again in 2012, and that’s why I use it as a starting point in this era, the post-Financial Crisis 1 era.
Which will be superseded by the post-Financial Crisis 2 era.
WOLF – your article references:
“….as their shareholders and creditors are getting bailed out to the tune of trillions of dollars created by the Fed or borrowed by the US government….”
Can you clarify the real effects of this $4T “backdoor” bailout of leveraged credit? Does this mean the bad actors get cashed out at par for their debt, thus more or less saving the price of their equity share price (compensation vis stock options) because their debt gets written off and they get to start over without having to file BK? If so, it would seem without having to close their doors via BK, they will get cashed out and can then later buy back (no pun intended) company shares at 20 cents on the dollar (or something like that) after the SPVs are done repackaging and re-selling the debt ?
Yes, a step by step clarification would be helpful, Wolf.
Broadly speaking, I can see how the G/Fed hoovering up crap debt from the banks (at par or close) saves the banks…and then not enforcing the terms of that-likely-to-be-defaulted debt would preserve some equity value (no BK) for the corporate shareholders including insiders.
Is that the stripped down version of the bailout you foresee?
Or are there other big picture elements involved (I’m unclear on the dividing line between the banks’ bad debt buy out and any more direct aid to the nearing-default large corporations).
You gave a detailed breakdown of the individual bad debt backstop programs…a higher level review of the likely gross economic flows (how large company equity actually gets saved, from which parts of the 2.2T bill) would be very helpful too.
This is a complicated question with many layers. We still don’t have all the answers, and some answers we likely won’t get for years. But I will address aspects of it as we go forward. I have already addressed some aspects in my articles on Boeing and the airlines and also my articles about the Fed’s bailout programs. But for know, we’re just scratching at the surface.
Thanks Wolf !! I know you have a magical way of parsing it out as it organically develops. I am just so chomping at the bit to want to be fascinated at the orchestrated explosion of the wealth divide and how the pleebs (incl me I guess) will scratch our heads as we go backwards. I will wait …somewhat patiently. :-)
Everyone having been thru this once (and the bag of tricks not really changing), it is possible that there may be more, faster scrutiny of specific bailout deals/aspects/programs than last time.
The internet is a pretty low cost info distribution/organization tool and even more ingrained and refined than 2009 – opposition won’t camp in some park like 60s hippies…they can organize consumer boycotts online and facilitate competitor switching for bad bailout actors, they can organize lawsuit funding, they can clarify the convoluted program operations for a broader public, etc.
Sh*t, nowadays you can lease broadcast TV subchannels in the largest metros and the swing counties of swing States. You can crowdfund to pay for it.
The point is, this time around there are more tools and less confusion about modes of operation. And likely more immiseration.
Thank you for that recap of possibilities… very encouraging !! I will be a signatory on any such counter-investment / support crusades. I am a politically independent / ecological whacko / pure capitalist with sociological tendencies, but when you piss on my leg and tell me it’s raining 3X in my lifetime, I will direct my own urinary flow back at crony capitalists and their legislative enablers.
To me, the quickest and most likely to succeed counterattacks (if necessary) would involve competitor switching (because powerful, self-interested ally/allies could be involved).
It is interesting to note, though, that despite all the billions spent on ads every year, it was vanishingly rare for competitors to attack competitors for taking gvt money in bailout 1.0 – despite the fact there were banks/automakers/etc who did not. And the bailout was very, very unpopular.
Such “attack” ads were a no-brainer.
(“Ally” still pisses me off based on the name alone…)
My guess is that the G leaned heavily on those thinking about such ads…the G doesn’t want distressed companies to hesitate too much when thinking about asking for bailouts (so long as “everybody” is asking for them – note that the G let hundreds of energy companies go BK post 2014).
Still, competitor switching campaigns strike me as the first thing to try – they leverage self-interest and existing capacity to perform.
The $4.6 trillion spent on stock repurchases didn’t just evaporate. The shares were bought from “someone” with the excess cash from these corporations.
Well, not right away. But a goodly chunk of it did indeed evaporate over the past 6 weeks.
A falling stock market does not disappear cash.
Yes, that’s precisely why shareholders need to pay the price when companies fail, not taxpayers or the Fed. When a company is restructured under Chapter 11 of our bankruptcy code, shareholders generally get wiped out. That’s how that should work. They got the $4.6 trillion, and now it’s time to pay for it.
But in terms of the company, that money DID vanish. It got nothing for it because a company’s own shares are worthless for the company. They usually get cancelled or get carried on the books as Treasury Stock. They’re worthless to the company because the company can print an unlimited amount of its own shares. Those shares only have value to others.
When a company spends $1 billion to build a high-tech plant, it gets something of value for its money. When it spends $1 billion on share buybacks, it gets nothing that is of value to the company.
But didn’t those selling shareholders (who got the cash) by definition already exit the shareholder pool (at least partially, if not entirely).
BK’ing the corp now, hits those shareholders who stuck around…who were okay living with the hiked leverage.
My guess is that you would prefer a clawback (from those who sold shares into the buybacks) but that being operationally/legally impossible, you will settle for zeroing out the dolts and insiders who stuck around at the higher leverage ratios.
Me n Cas127 have had the Vulcan mind meld. I want to know if you (Wolf) agree with Cas127’s proposed Utopian justice for the Buyback abusers….and secondarily, if you believe such justice could manifest in a post GFC-ovid world ??
Actually, as has been suggested here, the best solution would be for companies when they still have a fairly high stock price, to sell a whole bunch more shares to raise many billions of dollars. This will dilute existing shareholders.
Boeing could do this at $100+ a share. But the gig is up once the share price drops too low because it would have to sell so many shares to raise small amounts of money that it would be a sign of last-minute desperation, and buyers would be hard to find.
Thank you for lesson # 1 (of 3 or 4 I am guessing) as to how the $4T “backdoor” buyout/bailout will manifest.
How many of those shareholders were executives pumping up the price of their stock to enrich their stock options? Criminal.
With respect, your last paragraph is surely, incorrect? Anyone buying anything for a sum of value, particularly a company, has to retain that value; the fact that the value was shares makes no difference. You buy a ton of steel and bring it into the works, the books must show that value as stock; so why can any company buy shares, yet the moment they arrive, they can have the value destroyed? it is surely the companies shareholders money; not the companies directors? And, in which case, how do the auditors justify the right-off of the value.
If it is legal, then any company director can close down any company at any moment simply by stating that they have valued everything at zero? Does not make sense in any measure; particularly in law?
Nope. The equivalent would be buying a ton of steel, sticking it in the warehouse *that also contains a replicator requiring no energy or raw materials, capable of pumping out more steel, free, whenever required.
People really need to come to grips with how different share buybacks are from other transactions. You cannot compare share buybacks to buying steel or anything else a company buys. You need to understand that a company can create at no cost an unlimited number of its own shares. It gets cash when it sells shares — and it pays cash when it buys them back. The only thing that matters to the company is the cash: it gets it when it sells shares, it burns it when it buys its owns shares. The shares themselves have no value to the company.
Yes, some are probably thinking about having the cash now for real project investments and future expansion…
As far as I can tell, the buyback programs were not/cannot be discriminatory (ie, buying insider shares specifically) – so the trillions spent on buybacks over the yrs went to those shareholders who chose to sell at a given price.
Those selling shareholders got the trillions – the money did not vanish.
Yes This is why the only response should be a shareholder rights offering to raise new capital irrespective of price. Equity was removed from the buyback companies & now it is desperately needed…not low interest loans or guarantees. I think people would be surprised how much money would come out of the woodwork if Boeing, for example, would raise $50 billion at , say, $10 a share.
Most likely to come out of woodwork…those previous shareholders who sold out in the multi-trillion buybacks.
They have the cash (from the buybacks).
They know the company (they used to own it).
They do this a lot (sell as leverage hikes, buy as leverage implodes).
My guess is that there are PE firms that specialize in this.
Watch for when PE firms exit…that is the signal to get out.
Agree with Cas127. In an open market, you can only mirror what the big boys are doing. They dictate, we follow. If you follow quick, you win. If not ???
Money did not vanish, but if inflation or other devaluing actions occur, then the nominal and absolute values change.
The ones who PAID for them though were workers and retirees.
And customers too – if you don’t die on hold, they’ll kill you in a plane crash.
Now would actually be a very logical time for stock buybacks.
With money socked away in corporate reserve accounts.
DOW 3,000 would be a better time but the market never seems to fall to its true intrinsic value.
ZIRP distorts the hell out of equity values…almost everything in one way or another gets priced at a spread to “riskless” treasuries.
Zero out Treasuries and investors get shoved into the equities charnel house.
At a macro-level Wolf, do you foresee inflation/stagflation or deflation? I’m hearing conflicting messages from different places. With unlimited QE, I can’t see why there won’t be inflation long-term but are we looking at deflation in the short term? Where do you stand on this?
As the 2009 bailout illustrated, maybe “inflation/deflation” has to be defined distinctly for the real goods mkts (goods, RE rents, etc) vs. the “assets” mkts (equities, RE valuations, etc.).
The truly toxic inflation comes in the real goods mkts (because lower income people have inelastic demand for food, shelter, etc.) – asset mkt inflation blowing up into deflation hurts people with savings…who sorta by definition have/had a buffer.
Big Bailout 1.0 fallout was mostly manifested in asset inflation (with second order impacts on rent costs). Likely because the world was awash in low production cost real goods (mostly from China).
Big Bailout 2.0 inflation might turn out to be more horrific…the supply of real goods may shrink with US C19 dislocations, China offline or at knife pt, intl trade diversification still embryonic, etc.
But that is the ruin the Fed has always been flirting with for the 20 yrs of ZIRP, almost literally papering over America’s lack of productive competitiveness vis a vis China – which the Fed engaged in for political purposes.
And isn’t like people were not warning about it…but DC (as usual) preferred the heroin of ZIRP.
Can’t disagree with that. Thanks for the perspective cas127.
Ditto. Cas127 and will need to have a WolfStreet mug brew soon !!
So, when a company has bought everyone of its own shares, does it then own itself?
So I’m guessing yes. The question is how did they get the money for the stock buy backs?
– did they borrow the money
– did they spend their rainy day fund
With either of those cases the company is either in dept or they blew capital that could have been used to make the company stronger or better able to withstand times like we are experiencing now.
See my post above…it is called Treasury Stock and is a direct reduction of equity as a company cannot own itself.
Doesn’t an owner of all the stock own the company?
It is established that a corporation can be an owner; look at subsidiaries.
Citizens United says corporations have constitutional rights.
You basically have it, Harvey.
Trin’s explanation is true but more technical than economic.
Yes Cas127, techinical because my background is that of a CPA …however, from a economic perspective share buy backs are the last thing a company should do and only with any leftover funds. Don’t borrow to do this, what insanity !!! Investment in its people, property and equipment, R & D, etc comes first. Amazing what Wolf posted above…I had no idea that Apple purchased over a quarter trillion of it’s own shares. This is abusive plain and simple. This is malfeasance and constructive fraud and the shareholders should level a lawsuit against all these management evil clowns. These clowns will usher in socialism as more and more people will loose jobs and then will have nothing to lose. There are no words. These clowns and the political clowns have completely betrayed America, its founding principles and the many hard working honest people that have build this country. Sorry for rambling, but upsets me to no end because as an immigrant to this country from Italy as a baby in the late 1950’s I grew up to believe in the american dream. Fortunately, I am in good shape only because my parents taught me to be an “ant” in a world where the grasshoppers kept multiplying by leaps and bounds. But, I feel absolutely horrible and angry how the younger generations have been robbed of opportunity!!! I will shut up now.
The mostly borrowed it.
As a real world example, you might research Wisconsin Physician’s Service. It’s basically a health insurance company that does a lot of government Medicare and Tricare processing. The Wisconsin Physician’s Society (or whatever it was called) spearheaded the creation of WPS as a department of Wisconsin state government back in the 50s. WPS was later spun off as a private company. But there are no shareholders. The best I could determine Wisconsin Physician’s Society are known as the benificiaries. If WPS was ever sold off the Society would be the people who benefit.
Crazy world we live in, huh?
AAPL was buying $240M a day in it’s own stock in the 3rd Qtr. That’s about 5x the budget if NASA.
About time for it to end. It only increased systemic fragility.
As long as a company has tons of cash like Apple did, stock buybacks make (somehow) sense.
But in FY2019 (no pandemic) Apple’s revenues grew by just 2% in US dollar terms: adjusted for inflation their revenues went exactly nowhere. The company is still comfortably profitable but it’s obvious the high water mark is long past them, and I am saying this as a faithful Apple customer.
Asus has been eating their laptop business for lunch since 2018 and the whole smartphone business needs to be completely overhauled: while the top of the line ultra-expensive models are fine and good, Apple has long made a ton of money on “legacy models”, meaning the cheaper models. The present legacy model is the iPhone 8, which compares rather poorly to its direct competitors from Huawei, Xiaomi and other Chinese brands. That’s where Apple should sink some of their cash right now: make a brand new good iOS phone in the €400-500 price range.
The corporate spin about “a pivot towards services” is worse than useless: unless Apple starts licensing the iOS to other smartphone manufacturers their services offer absolutely nothing over those offered by Amazon, Alphabet and a host of other companies. The reason Apple is so profitable is because it offered an alternative to the dominating product (DOS, Windows, Android etc), not because it offered the same stuff as everybody else.
Were did the money come from for the buyback? Was this the result the corporate bond market being used to buy back stock?
Much of the money came from CDOs. And the banks were informed of the purpose upon application for the loans.
Making the banks complicit.
If the companies borrowed to pay for the equity buybacks, the lending banks may have/probably did package a number of loans into CLOs, which were then mostly/entirely sold to other investors, shifting some/all of the loan default risk from the “lending” bank to the CLO investors (likely starved for yield due to 20 yrs of ZIRP).
On the other hand, equity buybacks could also just be paid for with the retained earnings of the company.
Randall Hooker – so I think you answered a lot of questions. Big banks (not Investment banks) are the ultimate Baolout backstop. Buying XLF tomorrow.
Lower wages, no healthcare, no pensions.
What should I look for in a company earnings report to detect if share buybacks were utilised? What’s the easiest way to find companies that didn’t abuse this?
Share buybacks are disclosed. Go to the company’s quarterly 10-Q filing and with the browser search function, search for “repurchase” and/or “buyback” and/or “bought back”
The easier way is to look at a company’s balance sheet. It will tell you. A company with a negative or small positive tangible net worth should be toxic. Boeing fell into this category for the past few years.
“Share buybacks are disclosed.” That can be fixed. Now that buy backs have a dirty name instead of bragging rights, it wouldn’t surprise me.
Go to a site like gurufocus. Type the company’s ticker in the search box. Then on the right side under “Dividend and Buyback ratio” see “3-year Average Share Buyback Ratio”. AAPL has 5.9%. Some companies have a negative ratio. It means they were giving away cartfuls of stock options.
Then look at the Debt/Equity trendline to see how they were paying for those buyacks.
If you are going to promote a site, you might mention that it is a paid subscription site. They start with a squeeze sheet to trap your contact information, then they promote their paid services.
And companies with high debt/equity ratios are just risky period…regardless of how they got there (debt financed buybacks, perpetually cash losing companies kept on life support from loans, etc).
High levels of debt still have interest pmts (even under ZIRP, well, sorta) and, gasp, the loans do come due some day and have to be paid off (ha!) or rolled over to another sucker bank…and sometimes the sucker supply dries up during panics.
In either case, low equity companies have low (or essentially fictional) surplus assets that can be sold off to handle the interest pmts/debt maturity.
If they come up short, the lenders push them into BK (or the debtor company jumps into BK) and the shareholders almost always lose everything – the stiffed lenders become the new shareholders in exchange for reducing the amount owed to them.
The actual company continues to operate thru all this, so long as they can turn a profit at the transactional level (ignoring debt pmts).
An over-simplification but the econ gist is right
No need to buy back shares anymore since the Fed and their PPT are doing it for you :)
A side story I’m following is the collapse of AirBNB.
There are many annecdotes of people taking out 10 mortgages like 2007 and creating “passive income” by listing those properties on Airbnb. Such schemes seemed primed to explode in that person’s face at a time like this. Could impact both home prices and those precious mortgage securities if it’s big enough.
Wolf, is there any data on how many mortgage loans are tied to Airbnb “family businesses”?
I have not seen any data on this. But this is going to be an issue for the housing market and the lenders.
AirBnB has announced it has set up two funds to help out their hosts: a $250 million one to partially reimburse cancellations and a $10 million one to help out with mortgages. You read that right.
The scary thing is in many prime markets (Barcelona and Florence to quote but two) AirBnB is intimately tied to crazy real estate valuations and you are absolutely right in expecting a big impact on the mortgage sector which will send ripples everywhere. But I feel that impact will start to be felt months from now.
I wish we had some data on what % of home sales or mortgages are tied to Airbnb. Or if there’s data on how many households have more than 1 loan (if it’s above the long term average that probably means it’s Airbnb).
Hopefully something good comes across Wolf’s desk and he can write up an article about it.
Airbnb has over 7 million hosts globally. So that $250 million in aid would work out to be about $36 per host…. More realistically, if this is spread over only 1 million hosts, it amounts to $250 per host.
This is designed to soothe the pain of lost cancellation fees on reservations that were cancelled due to “Covid-19 circumstances,” nothing more. Hosts charge a cancellation fee to the guest. But Airbnb waived that cancellation fee, and hosts got nothing. So Airbnb is offering to pay 25% of the cancellation fee that hosts would have received had Airbnb not waived it.
Here is the original announcement:
The solution is obvious: 1). Fed sets up Repo Desk called “Stock Buy Backs” so anyone can borrow to buy their stocks. 2). Fed penalizes anyone who does not use the newly created Stock Buy Backs desk banning then from SWIFT.
@ Social Nationalist –
So if the FED/Banking system doesn’t create money, where did the money in the system come from?
When I worked at JCP, they did a billion dollar stock buyback. There was a propaganda blitz launched at the employees with the message being it would “enhance shareholder value”. This was to keep all the employees with company stock in their 401Ks calm. There was a pump in the stock price, but the dump came about 9 months later. What a waste of a billion bucks! They could have given every employee $83,000 dollars.
Lets note, after the 57 crisis heavily driven by the swine flu pandemic, the economy suffered a recession in 1960 and didn’t fully recover until the 2nd half of 64. The dislocation will take years to recover from. There will be periods of pent up demand. Periods of bleh.
Executives in the USA are so overpaid that if one were to compare their pay to their true worth it would be like comparing the flame on your stove to the sun.
Of course since they are all daddies sons and daughters this will only be corrected when the entire rotten mess collapses.
These guys, and they’re still mostly guys, were paid a lot less in the golden age when dividend yields were 8% and union membership was, what, 55%?
So we waited the last few years out in anticipation for the market to ‘correct’ itself, whatever the trigger for the correction, resisting massive FOMO in the process. Now, we don’t even get to play ball because stock prices are unlikely to reach previous highs or even come close to it. Bummer!
I would disagree. With BK off the table for anything FANG / MAGA sized, DJIA will soar past 2019 levels in 2021. The trick is picking the chosen ones (by following Wolf), or take moderate returns in sector ETFs.
Under what penalty or statute would buy backs be inforced? The media will report it as ” company X is being probed for stock buy back violation of the bail out bill , and quickly forgotten in order to pivot to the the next eye-ball grabber. Zero percent interest will insure stock buy backs will continue. Wall Street runs the Fed and owns Congress and writes its own laws and sets its own punishment when caught. Bank of America made out like a bandit in its account creation fraud. HSBC was too big to prosecute for money laundering. The DOJ is great at setting up a hillbilly loser for day dreaming on the Internet about striking a blow at their perceived oppresser. Enforcing a law against the revolving door that exits to the private sector is rich.
So, how is Tesla doing these days?
But the company still exists and will probably get government help.
Remember that Tesla swam against the buyback current and on February 26 issued about 3 million new shares at $726 apiece, raising over $2 billion in fresh capital. This was two days after the first Covid-19 fatality in the West, when the first limited lockdown was already in place in Italy and Korea and Taiwan were already scrambling to contain the epidemic.
Since then TSLA has lost about $200, roughly 27.5%, which is literally nothing considering car sales have ground to a virtual halt around the world.
Yeah, I get it: people are betting on a bailout for the car industry, but over $500 for an automaker right now is not a bet. It’s ignoring reality.
I haven’t read anywhere that Tesla dealerships have been allowed to stay open or that driving a Tesla will automatically exempt the owner from the lockdown. But stock market jockeys (and in TSLA case they are mostly retail investors) seem to think so. Let’s see how long they can ignore reality this time.
Looking at your Tesla through your living room picture window will make you feel virtuous.
Sorry if I missed it, but have any CEOs or their crony boards said “doing this was bad and we fouled up?”
lenert, let’s break your question into two parts.
1. Do they say “doing this was bad”? No, because they are, for most part, psychopaths with total disregard for others. Psychopathic brains are anatomically and functionally different. They are incapable of considering other people’s pain.
2. Do they say they fouled up? No, it all went according to plan. As psychopaths, they breached their fiduciary duty to shareholders and rigged the game to hit their stock options. They exercised the options and sold the inflated shares.
These are people who think rules and morals are for chumps and suckers. When you deal with them it’s like playing tennis with a bowling ball tied to your leg. The bowling ball comprises your morals, ethics, compassion, etc – things that do not encumber psychopaths.
Mike….You must have read the same evaluation of CEOs by the psychologist that I read a while back. If I remember correctly, 30% of CEOs showed the same psychological profile as psychopaths.
Amen. However, the more worrisome fact is that so many show most characteristics of high functioning sociopaths which are still bad enough. This is how the Enron type frauds are now so normalized.
Now do politicians
Trumponomics in action
@ng: Maybe you missed the part about how buybacks boomed starting in 2012…
Buybacks have been going on for the last 35 years and really started accelerating 20 to 25 years ago.
None of this is that new.
“Share buybacks – until 1982 a form of illegal market manipulation under SEC rules – have had a massive impact on the stock market on the way up. ”
Are Share buybacks now the norm in all the major stock markets of the world?
They’re happening in some of the markets around the world, but to a much smaller extent. The US market is the big leader by far.
The US is part of number of legislations where share buybacks can be approved by the board of directors alone: these countries include, but are not limited to, India, Thailand, Australia, Canada and Taiwan.
However in countries like Italy, Korea or Sweden share buybacks, while legal, require the approval of the shareholders’ assembly.
In short share buybacks tend to become commonplace where “governance quality” (the speed of decision-making) is higher.
Calling out a shareholders’ assembly is time-consuming and the assembly itself can turn into a fiasco: there’s no way of telling how small shareholders, those without a seat in the board of directors, will react, and if they control over 40% of the shares things can turn hairy and quickly.
post-Financial Crisis 1 era…. post-Financial Crisis 2 era
The arrival of wisdom Wolf. You’ve started numbering them.
Bring back Sears so I can have a go at it now that I understand how to strip-mine a company.
Behaving rationally in an insane asylum will cause many to criticize you. The fault is the credit policy, not the corporations. The US energy industry is far more important, still pumps more oil than needed. Why doesn’t the Fed raise rates?
Here in UK, many companies have cancelled their dividends, one (there may be others) in particular after allowing the share price to go xd. The PRA has also succeeded in getting the banks to pull their divs too. Frankly I think it is morally reprehensible. As I understand a divi reflects past financial achievement so really the money to pay should be ring-fenced, not to be used in daily cash-flow.
Long term dividends make up a sizeable proportion of the reason for investing in the stock market. Also provide thousands of shareholders direct and via fund managers and pension funds etc with return for the risk. Snag is the directors of too many quoted companies are more interested in preserving their jobs and thinking the company is theirs. Investors that forget the stock market is a casino where the main players gamble with other people’s money have only themselves to blame when they lose out big time.