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The 3 Reasons Why Stocks Have Skyrocketed Over the Past Couple of Years
Stocks have soared since 2009 because the Fed's quantitative easing has - intentionally - pumped them up.
They've also skyrocketed because central banks are directly buying stocks.
NBC News reports on a third major reason that stocks took off ... corporate buybacks:
It's the narcissist rally.
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You may want to spare a thought, and a healthy dose of worry, for what is one of the biggest, and least appreciated, reasons for the rally: buybacks.
Flush with cash and a world of opportunity at their doorstep, companies have decided there's nothing more attractive than themselves. So, they're offering big money to buy back their own stock. This year, big U.S. companies have given the go-ahead for $286 billion of buybacks, up 88 percent from the same period last year, according to Birinyi Associates, a market research firm. If the pace continues for the rest of the year, the tally will exceed the record set in 2007.
Every manner of company is caught up in the buying binge, including home-improvement chains, makers of farm equipment and jet engines, airlines, sellers of soft drinks and of hard liquor alike. Not one to miss a hot trend, Apple recently authorized as much as $50 billion of buybacks.
Investors like buybacks because they suggest companies think their stock is cheap. They also help reduce the number of shares outstanding, which automatically increases earnings per share. And higher earnings per share often, though not always, lead to rising stock prices.
But buybacks are also crucial to the rally for a reason that's not widely known. Companies are one of the few big stock purchasers nowadays. Nearly every other big player in the stock market has been selling more than they've been buying.
Pension funds have been selling. Local and state governments have been selling. Investment brokerages have been selling. And, yes, until recently, even Main Street investors.
You can see this in the data released by the Federal Reserve each quarter, and it's a sea of red — save for corporate buying, that is, buybacks plus purchases of other companies. In total, U.S. companies, not counting banks and other financial firms, have bought more than $1 trillion of stock in the five years through 2012, net of stocks they've issued.
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However much they spend, each dollar of buybacks appears to be having a greater effect on raising the prices of certain stocks. That's because fewer shares are changing hands each day. On Wall Street, it's referred to as a "drying up" of liquidity. And like in any market, a purchase or sale when fewer people are trading can push prices up and down much more.
DirecTV bought $1.4 billion of its own shares in the first quarter, or 7.8 percent of all trades in the company's stock, according to data from Birinyi Associates. DirecTV rose 12.8 percent in the same period, two points more than the Standard and Poor's 500. IBM bought $2.6 billion of its shares in the first quarter, or 5.6 percent of what was traded. It rose 11.8 percent.
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Companies that do buy back their own stock are seeing prices soar, and almost immediately.
On Friday, Northrup Grumman jumped 4 percent after announcing it had authorized $4 billion of buybacks. The military contractor said it expects buybacks will cut its shares outstanding by 25 percent by the end of 2015.
Another big share buyer, Home Depot, rose 5.7 percent on Feb. 26 after it announced a $17 billion buyback program. The S&P 500 rose 0.6 percent that day. If the retailer spends all the authorized in its plan, it will remove 18 percent of the shares outstanding at current prices, which will make the impact of a next round of purchases even more powerful.
Stocks of companies that have authorized the 10 biggest buybacks so far this year have risen 2.2 points more than the S&P 500 in the week after their announcements....
Gregory Milano, CEO of consultancy Fortuna Advisors, has run studies showing that companies that spend the most on buying back their own stock tend to underperform because they don't spend enough on opening new factories, research or otherwise building their business for the long term.
Andrew Smithers, who runs a London-based investment consultancy, thinks buybacks have pushed stocks more than 40 percent higher than they're worth. In his book "The Great Deformation," former U.S. budget director David Stockman says Corporate America is drunk on buybacks and that they've helped push stocks up too far, too.
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Forty percent of the increase in the earnings per share of S&P 500 companies in the past 12 months came from reducing the number of shares through buybacks, estimates Barry Knapp, chief U.S. stock strategist at Barclays Capital.
Postscript: Max Keiser points out that quantitative easing and corporate buybacks are related.
Specifically, the Fed's easy monetary policy means that big corporations can borrow cheaply ... and then use the money to buy back their own stock.
The bailouts and easy money aren't going into helping Main Street or stabilizing the economy.
Of course, most of the trading is done by high frequency computers these days.
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See my replies above and below.
CTG. It's irrelevant whether the Fed is directly buying stocks or simply facilitating the purchases. It's a simple game: the Fed swaps liquidity onto the TBTF banks' balance sheets in exchange for toxic MBS "assets" or to reimburse Treasury purchases. Those yield-chasing banks, unwilling to double-down on new lending, have no choice but to invest those surplus reserves in something that can generate a higher yield. And since junk bonds are not producing those yields (and are way under-recognizing the risk), the banks simply gobble up stawks. That's it.
So the TBTF banks are simply the Fed's agent, but make no mistake who the buyer is - keeping in mind that the Fed is an extension of the banks in the first place.
mayhem_korner:
My comments:
Yes, that´s true. The result is probably approximately the same. Zerohedge has covered this topic frequently ever since I began visiting this web site. But the wording of George Washington´s article may still impair his credibility.
If it walks like a duck and talks like a duck and looks like a duck then it's probably a duck.
I'm amazed that people are amazed at all of this. Really, this is CORE US business. This is the System trying to hang on. Yes, there will be big "insider" plays, but there is nothing abnormal about this (happens all the time during any part of any cycle).
These people have been charged with protecting the System and that is exactly what they are doing.
Based on the countless postings here on ZH it's pretty clear that MANY folks would love to have access to cheap money so that they could buy PMs (or land). I'm not saying this is bad in and of itself, but this will only lead to certain collapse of the existing infrastructure, an infrastructure that all of these businesses require.
I see it all more as a retreat. And, if you see things as I do, that this is the END of the System, then the storyline would more resemble one born out of desperation than out of the anticipation of capitalizing on an up-turn in the markets (an UP growth cycle).
This is all hand-and-glove stuff. I think it's less "conspiracy" and more common sense.
What if it's a platypus in disguise?
How would we know ?
Look what happened behind the curtain in 2008.
$28 trillion created by the FedRes, and handed out to their friends.Took two years
and numerous FOIA requests for the truth to come out.
to bail out European banks (Dexia of Belgium being be number one on that list. which had to be bailed out again only this time "by France and Germany" (or was it Luxemborg?) anywho THAT'S where the Fed money has been spent...not on "buying shares in Boeing." i agree...there could be an "information exchange" going on here...helping to time the buybacks when the Fed is in fact announcing and/or in fact doing massive treasury purchases. talk about "bang for the buck." having said that "you still need final demand." that's the American and Chinese consumer. you must SELL into these markets...which is a nice way of saying you must BUY into these markets first. that means moving production and distribution facilities "over there" in the hopes that "there will be profits of some size somewhere in the future." in the case of GM...they've been huge actually. if China decides to return the favor and start creating production capacity in the USA to launch a "combined assault on world markets"...or at least try and keep expanding the US and Chinese consumer "to maximum effect" then indeed...you could see a lot of moullah being made. a "Yin and Yang" effect indeed. they'd have to sign off on a massive naval presence in the Pacific...something the USA is already building up actually. the new capital of NATO would have to move to Berlin as well. hmmm. we'll see on Tuesday. I wouldn't want to be long JGB's here. "smacking the pinata time."
Well, I am no expert in these matters, but I think it would be interesting to see whether the top execs of the leading buy back companies are starting to dump their own personally owned shares. If the answer is yes, that would add a whole new twist to the Martini.
Ice & Slice as in Hang & Chop ( no koolaid or refreshments required).
Top execs like john corzine you mean? charles ponzi package and aaa moody stamp sell chinese. goldie muppetsRus. uprich murdoch&warthog buffetSay JamieDaMan top excellsMafiosoBuyBuy
I'm sure you should assume that the twist to the Martini exists and is functioning; Surely one of the delightful aspects of this kind of feed-back loop for the Execs. is the increase in their own stock holdings value. I vaguely remember reading about some ways that such people can obtain spendable money from such increases without selling their positions.
They can and do sell directly back into the ramp. In Autralia they no longer have to disclose their intention to do so. Check out ITD.AX, the director gave himself shares at $0.16, ramped the stock to $0.30 with buybacks, and sold back the shares at this higher price he set himself.
There are several other way to do this. If you hold the ramped stock through an intermediary company or fund, the intermediary can book unrealized profits on its holding of ramped stock, and then pay cash dividends based on the unrealized fake profit. Executives are also sometimes awarded 'nominal' stocks and options in executive share plans. This means they can opt to get cash up to the nominal amount as if they sold the awarded stock. In Australia, fuel is added by allowing directors to take non-recourse loans to margin buy their own stock. Yes, seriously. Complete and utter fraud.
Pump n' Dump. Very Bullish!!!
But really, isn't this the sort of thing that could go on for quite awhile? I'm certainly not interested in the stock market; but it seems like this sort of thing could continue for another year? I sort of need to remember things like this, because I'm sometimes tempted to short the S&P500 when it makes silly looking leaps up in price; I lost twice doing that this year, I'm trying to remember to just not pay any attention to the damn thing and let it do whatever it wants.
There will be a tipping point. We've been leaning for quite a while. At some point there will be critical mass, and that will become when there's insufficient number of people "enrolled" in the System. More and more people are cashing out: some in order to facilitate future plans/expectations, others (most) just to survive. As volume drops margins will get crushed, which will only force price increases, thereby ensuing more volume loss until production isn't viable anymore. This is what economies of scale in reverse looks like.
I don't expect any "returns" other than on productive work.
The horse is DEAD. Don't beat on it.
It happened slowly and then all at once...
The horse is dead, yes, but it is going to do some violent twitching for quite a long time. Stay out of the way.
The horse is not only dead it is stuffed. That is why it looks so lifelike and can't fall over.
It won't be Hank Paulson asking for $700 billion, it will be Bernanke asking for $7 trillion secured by all the private sector US assets and cash flow, to "save the system". The "system" meaning his elitist buddies.
Thus, the "bail in" provisions already in place in the US, UK and Canada.
I followed the links and I follow the Fed. I see no evidence that the Federal Reserve is buying equities. The article that you link here does show that a number of central banks--nearly three dozen have indicated they have bought equities or plan on it for reserve purposes.
A strong claim requires strong evidence. Point me to it.
http://www.usdebtclock.org/
its in their charter. they can buy any sort of asset, including foreign. most of what was once listed as their emergency measures is now working policy.
but where is the evidence they are doing that? GE is an interesting case...but i doubt it's the equity...same with all the banks actually. as with Banks who don't want to foreclose on the house because they don't want the issues of ownership so it is with the Fed, Government and business...they don't want an ownership stake in that thing. that's your job Mr. Management Dude. "hopefully you succeed." that's what all the low interest loans are for. if capital begins to ENTER the USA (via Europe, China, Japan...pretty much everywhere but Germany right now? Even Britain???!!!) you could really see some massive PRODUCTION gains...and through that hiring, wage growth, big increases in tax revenues, etc. we'll see...but i really believe if that deficit comes down massively and the Fed decides to go Pedal to the Metal on QE dropping rates themselves to at or near zero then obviously this opens the possibility of the Fed's to give what the military has been demanding since day one of 9/11...the namely the manpower to actually effect a policy result from all those "pointy head types."
In the 1987 crash then VP GHW Bush walked down to the floor of the NYSE on about day three, and pledged USG (money,capital,reserves, and liquidity) to the stock market. that was the game changer, after that they formed the Presidents Working Group on the Financial Markets. the Dow recovered its losses within a year, and took off on a bull ride that didn't end until 2000. after 2000 many began talking about the secret Fed buying of securities, or stock market index futures, usually at critical points in a selloff. the accusations were routinely dismissed by officials, and some, who demanded to see the trade confirmation thought so too. then of course we had 2008 and the government bought the whole show, which made the PPT seem like childs play. we're pretty deep into a process which is open ended and has no reasonable limit to what they can do, other than confidence, as Bob Precter says. to my thinking confidence doesn't figure, do you lose confidence in electricity because the power company has an outage? its the only game in town, of course you can opt out, but they still run things.
"Production gains" can only really come from physical resources, through sufficient natural resources (one word: oil). All the stuff that you're eluding to is just chair-shuffling on the deck of the Titanic- it might look like stuff is being/getting done, but the net says otherwise...
"this opens the possibility of the Fed's to give what the military has been demanding since day one of 9/11...the namely the manpower to actually effect a policy result from all those "pointy head types.""
Policy "result?" LOL! Really, WTF is That supposed to mean? This is a finite planet- there's no longer any available organic growth left (not unless the "policy result" is massive population reduction (maybe this is what you're saying? kind of hard to tell because the words you used were pretty ambiguous).
don't want to foreclose on the house because they don't want the issues of ownership...
Of the 85N per month, 45B goes to redeem freddie / fannie type crap that gets these illegal documents out of the government's possession and onto the "ownership" of the privately held fed's partners, i.e. the tbtf financial institutions. The other 40B per month is going to the affiliate cbs on the other side of the pond to keep the can kicked further down the road.
The muzzies in the UK are living up to their charter and are beginning to rile the native UK citizen with that gross display of criminality and their "leaders" are expressing "surprise" that there is a backlash from the native populace the media have resorted to calling "far" right wing. The flame of violence is being fanned by these oligarchs whereas if these "peace" loving muslim fundamentalists would've / could've stayed in their own geographic confines, the rest of the world wouldn't be fighting Israel's enemies in our own backyards.
jmo.
Lets keep it simple. Who wants to own the cow, and who wants to own the milk (money)? I want just the money, but I seem to have to own the cow for a while, to milk it.
"The flame of violence is being fanned by these oligarchs whereas if these "peace" loving muslim fundamentalists would've / could've stayed in their own geographic confines, the rest of the world wouldn't be fighting Israel's enemies in our own backyards."
So, "they" should have stayed put but "we" don't have to?
From 1996:
Arab rebel leader warns the British: 'Get out of the Gulfhttp://www.independent.co.uk/news/arab-rebel-leader-warns-the-british-ge...
More stuff here:
http://www.cfr.org/terrorist-leaders/messages-interviews-osama-bin-laden...
More terrorist activities:
Car Bombs With Wingshttp://www.lewrockwell.com/engelhardt/engelhardt180.html
Fucking piker...
Let's make a deal. Pull out all Western troops from "Muslim lands" and return all the Muslim freeloaders in Western countries back to their wonderful homelands. Let's get on with it.
And the "Western freeloaders" (not military; businesses in cahoots with Western-backed ruling puppets) should also leave the "Muslim lands" (isn't it [also?] "Arab lands?).
Thus we will find out the true price of oil...
Arab is virtually the same as Muslim with the last exodus of Christians, Jews, Baha'is and others from Arab lands. Today, unlike in earlier times, there is zero pluralism thus, Arab and Muslim are synonymous in this case.
the end game in share buybacks is to ultimately take the company private. the number of public companies in ten years will be dramatically smaller. once you go private you rid yourself of the scrutiny, shareholder revolts, but you also have trouble raising cash. so there will be greater demand for private equity. large corporate dinosaurs, like conglomerates, are facing headwinds. how these new smaller private corporations are treated by government (pension fund investments, or access to corporate welfare, taxpayer subsidies) remains a question. currently state and local government prefers public corporations, franchises if you will (backed by the full support of USG) to personally owned small business. also what sort of tax breaks will the privates get? either way the wall street we know will be gone, in that means a publically responsible and regulated agency.
I believe you are correct.
Not sure if it's an all-out-strategic goal or not. Clearly this is self-preservation.
It's quite possible that concentration of ownership would make it easier for larger entity such as the govt to take over: perhaps through some declaration of "national security."
I also believe that this is all bearish for Wall Street.
Executives take large blocks of options for themselves and then buy their own stock to drive the price up and hence their profits in exercising the options. At the same time interests rates are so low there is no advantage in having cash in the bank. This goes especially for companys paying dividends over the bank yield. If the company is paying 4% dividends then it only makes sense to purchase the stock with cash - it pays better.
All in all we're in a financial world absolutely screwed by Central Banks.
You are 100% wrong. The game is to ramp the stock with buybacks, then issue shares to granny investors at inflated price.
That's what makes buybacks such a blatant open fraud: they are almost never done to reduce outstanding shares (ie the stated purpose), they are done to effect short term price ramps at the detriment of long term investors. These short term price ramps justify payments to executives and create unrealized fake profits for fund managers.
Perhaps the best reason for buy backs is perception - the expectation that prices will be higher in the future AND no better place to park their cash. Those experienced in the ins and outs of securities realize that history DOES repeat itself. Stocks that go up will come down and stocks that collapse in a general collapse eventually rise. It's as simple as that and the only difference in outcome is timing it right.
Yep its complete fucking bullshit. The stock "analysts" are much like the corrupt rating agencies related to the housing crisis. The buybacks boost EPS and boost analyst ratings. Keeps the story going for the short term.
"also what sort of tax breaks will the privates get?"
I don't mean to be a jerk, but I bet they'll get even better tax breaks than now since there will be less 'scrutiny'.
"The 3 Reasons Why Stocks Have Skyrocketed Over the Past Couple of Years"
QE1
QE2
QE3
... but what is Boris know about money and stock?!
afternoon delight