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Global Corporations Are Net Sellers Of Their Equity For The First Time Since The Lehman Crisis
JPM's "flows and liquidity' expert Nikolaos Panigirtzoglou, who last week spotted the "most extreme ever excess liquidity" bubble, has just noticed yet another indication that not even corporations believe in further equity upside.
While on one hand it has been well-known that during the entire Fed-driven equity bubble, corporate insiders have been aggressive sellers of equity, either through automatic selling programs or more recently, on a discretionary basis, and locking in profits, it was corporations that, under activist duress or otherwise, had opted to engage in shareholder friendly stock activities such as buybacks. In fact, netting equity withdrawal and injections, in the form of equity offerings, had resulted in a consistently negative print ever since the Lehman crisis meaning companies were net buyers of their own stock.
The simplest explanation is that flush with record amounts of cash, the best "investment" for the corporate world was not investing in long-term growth via CapEx spending or hiring (perhaps because said "growth" never appears to actually materialize, five years into the Fed's grandest of all monetary experiments), and certainly not raising equity to fund such projects, but through (mostly levered) buybacks and dividends, which provided the biggest bang for the near-term buck. Another implication of this is that corporate treasurers, not as investors but as fiduciaries, had perceived stocks as cheap in a low-rate environment, as otherwise they would not have been repurchasing their own equities hand over fist.
Said otherwise, this means that for the first time since the Lehman crisis, non-financial corporations within the entire developed, G-4 (US, Europe, Japan and UK) world, have shifted from net buyers of stock to net sellers, as net "equity withdrawal" have just turned positive.
This has now changed and as JPM summarizes, "The G4 non-financial corporate sector appears to have stopped withdrawing its own equity in Q2." JPM continues:
The latest release of Euro area Flow of Funds for the second quarter allows us to get a more complete picture about the behavior of non–financial corporations across the whole of the G4, i.e. the US, Euro area, UK and Japan. The big surprise in these data was a collapse of G4 net equity withdrawal to zero for the first time since the Lehman crisis (Figure 1). That is, at face value, Figure 1 suggests that for the first time since the Lehman crisis, the G4 non financial corporate sector stopped withdrawing its own equity on net.
This is shown visually below:
JPM's explanation of the chart above:
1) The decline of the blue line in Figure 1 is driven by non-US net equity issuance, which reversed from negative (i.e. from net withdrawal) to positive (i.e. to net supply) in Q2, both in the raw data and our seasonally adjusted figures. The problem with non-US net equity issuance data is that they are typically a lot more volatile than their US counterparts and similar spikes in the blue line in the past were quickly reversed and not sustained.
2) Net equity withdrawal is almost exclusively a US phenomenon. Figure 1 shows that the blue (G4) and black lines (US) are very closely aligned (in $bn) suggesting that the non-US component, although volatile, is on average very small. And the net equity withdrawal by US non financials corporations (the black line in Figure 1) held up well in Q2. In fact it increased slightly in Q2.
Do other higher-frequency data substantiate the above observations? Yes:
- What evidence do we get from higher-frequency data on announced share buybacks? Figure 3 shows a sharp slowing in announced share buybacks outside the US, but in Q3 rather than Q2! And this is the caveat with announced share buybacks: they do not necessarily reflect actual buybacks as there is typically a lag between announcements and actual stock purchases. The other problem is that while share buybacks reduce the share count of a company, they do not capture the equity withdrawal impact of M&A (to the extent that the acquirer uses cash or debt) or LBO activities. Similarly share buybacks do not capture offsetting corporate activities such as share offerings, exchange of common stock for debentures, conversion of preferred stock or convertible securities, as well as stock options and employee stock programs.
- To address some of the above issues and better capture high-frequency corporate equity withdrawal trends, we augment the announced share buybacks with equity offerings and LBOs. Figure 4 augments announced share buybacks with LBOs, which also cause equity withdrawal, but deducts equity offerings, i.e. IPOs and secondary offerings, which increase the share count. The evolution of the red line in Figure 4 is effectively a higher-frequency proxy of the Flow of Funds equity issuance/withdrawal data of Figure 1.
- Consistent with Figure 1, Figure 4 shows that equity issuance turned a lot less supportive for equity markets (i.e. red line increased) in Q2 relative to Q1, and worsened even further in Q3. This is both because of a slowing in announced share buybacks but also an increase in IPO/secondary offering activity in Q2/Q3. Also consistent with the Flow of Funds data of Figure 1, Figure 4 suggests that equity withdrawal appears to have peaked in 2011 (red line bottomed) in terms of its pace across calendar years. This year’s pace is roughly equal on average with that of 2012. In addition, there appears to be still a long way for equity withdrawal to return to its 2007 historical peak.
- The implication of all the above evidence is that, sequentially, between 2012 and 2013, there appears to have been no improvement in the equity withdrawal/buying activity of corporates themselves. If anything, there has been a slight deterioration.
And in chart format:
In other words, thank the Fed's lucky stars for the retail "great rotation" because not only are corporate insiders dumping their stock holdings at a historic pace, but now the very corporations themselves, record cash holdings notwithstanding, have for the first time in the past 5 years, shifted away from being a net buyer of stock to a net seller.
And who are they selling to?
Well, the vacuum tubes of course, and whoever has the misfortune of being suckered into the whole "recovery" myth (after how many years of "growth is just around the corner" will people learn?) and is the last carbon-based "retail" bagholder standing.
But don't worry: because at the end of the day what do companies really know about the potential upside (and thus attractiveness) of their own stock? Nothing that Joe Sixpack doesn't know from behind the comfort of the CNBC, and momentum-chasing, glow. So just ignore this latest telltale inflection point, and keep on ploughing in: after all Mr. Chairwoman's $4 trillion balance sheet has your back and nothing can ever go wrong in centrally-planned, manipulated markets.
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Who the fuck are they selling to?
Muppets as we all know!
It's called profit taking.
Screw the banksters. Keep stacking: http://www.youtube.com/watch?v=_IN6j1UIDcU
Needs to be country specific.
Or it could be that insiders, outside of the US are selling and buying US equities.
Libertarians win the prize of the decade for being the most hypocritical and immature political movement. Radical libertarians make ordinary Americans' heads spin. How can you advocate the abolishment of the Federal Reserve and claim to care about economic stability? How can you advocate abolishing government assistance for the poor and claim to care about an equal society? Learn about the hypocrisy and downright dangerous views of the world's most radical fringe political group in today's article at the Accredited Times:
http://accredited-times.com/2013/11/11/libertarians-exposed/
so, i know your piece is sarcasm, but I don't think it ever bounces back from this:
"The reality is that profits incentivize businesses to destroy the environment and exploit workers in order to extract every last dollar out of mother earth and the blood sweat and tears of working people."
sounds about right to me.
"Accredited" by who???
Rick Perry
sorry but i have to feed the troll..
the stability you refer to is the stability a junkie has when he has just stocked up.... but that stability never last as long as planned... i wonder why
To Chairwoman's cache.
The "I told you so moment" and double deer days, won't be here for a while yet. I'd advise you to IARRABTFATH
urr...Ignore All Rational Reflection And ... well...
I had an "I told you so" moment yesterday.
A friend complained that the McDouble price increased to $1.19 from $1.00.
I also reminded him that the double cheeseburger, which included two slices of cheese, used to be $1.00 and the McDouble didn't exist.
must have made your day. nothing gives me more joy than seeing a touch of pain in my friends' eyes, those fat fux.
Jim Gaffigan on McDonald's
Tasty Sandwich,
Do you realize that McDonald's is a heavily subsidized corporation? Libertarians may love a government-less world, but the carnivorous ones probably won't like the change in their diet.
I never said that it wasn't.
I also didn't say anything about Libertarians.
No one has a magic solution to any of this.
Currency collapse and World War III, probably within this decade.
What does the IARRA stand for?
Oops, wasn't reading carefully enough!
anybody but MDB please help me with this question.
are pension funds benefiting from fed policy? why/why not
thanks
Son, it's all about the government and your relationship to it, at this point.
If you believe the levitation in almost all asset prices the last few years (or much longer, depending on how you look at it) has been raised by Fed "guarantees," banking backstop policies and outright money-printing, despite the real economy still being flat on it's back that whole time, then you bet your ass they are benefitting.
Guessing is not required on this one. There are members of the Fed Borad of Governors itself (past and present) who have said outright that's what their policies are doing as an intended goal.
probably yes. on the surface, people say they are being hurt, because they have large holdings in bonds which aren't yielding much. however, the average pension plan is already massively underfunded, so if the Fed got out of the picture and allowed a nice, healthy economic contraction to take place which would purge all of the crappy businesses out of existence and result in a big decline in asset prices, in the short term, pensions would be even more underfunded. any participant in a multi-employer pension plan would be particularly screwed.
under our scenario today, if you can inflate asset prices faster than the cost of the defined benefit inflates, then you have "helped" pension plans to be less underfunded.
of course, fed policy may crash the entire economic system at some point down the road, which would not help pension plans. it's like supporting Iraq in the Iran-Iraq war; hard to say what the third-order effects will be.
F**K you Durden!
Buybacks function very differently in theory and practice. In theory buybacks increase share prices because it reduces number of shares on issue. Less shares on issue, more earnings and dividends per share, proportionally higher share price.
In reality buybacks directly ramp share prices to a much larger extent than economic theory above predicts, especially for smaller/illiquid/tightly-held stocks or stocks favored by buy-and-hold granny investors. This is never acknowledged but easily proven.
Most share buybacks are not done for their purported reason, ie reduce number of shares on issue, but are done to directly artifically boost share prices over their fair value. So that more shares can be issued at the ramped price.
The purpose is to "please Wall Street analysts"....stock price does what the stock price does...so, no...you are in fact wrong insofar as the Corporation goes and thus you miss the importance and significance of this article namely "if corporations are now worried about return of capital" (in this case "how much free cash am I going to get out of that ten billion dollar project again?" where is the safety play again? It sure isn't in equities....but even more terrifying is the debt markets as well. I see only one safety play...but again I've been wrong most of this year so we'll see.
Stock price does what stock price does, lol? So direct on-market buying by the company itself, that for small illiquid stocks can constitute close to 100% of trading, will not affect the price? You have not the slightest idea what you are talking about.
thanks you guys. i used to eat the red team blue team shit for breakfast lunch and dinner. the past 6 or 7 months that i've been reading zh and starting my austrian education has been the most elightening period of my adult life. the only down side is that i sometimes get a helpless/hopeless feeling of despair. that we are victims of cenuries old conspiracy to harvest the fruits of our labor and steal the value of our lives without us knowing that is even happening. i love this community and hear alot of complaints that zh has been infested with trolls and ignorant people who should not be here. i hope my presence is not felt that way. i only want to educate myself so i can try to prepare. thanks to all who have the patients and kwoledge to help me on my way.
Welcome squid. That pretty much sums it up for me. Dont dispair. It may get raucous a bit here but there a many brilliant people here that give away so much advice and perspective it astounds me at times. Most of the trolls are laughable and aren't too disruptive. You may find reading them just part of the fun. I would work on the punctuation, spelling a bit though. The Grammar Police are to Correct and Serve.
Miffed;-)
WE'RE SO SCREWED! The only question left is "when" in terms of the next collapse.
See: CRAMER'S TERRIBLE STOCK PICKS video below--very funny!
https://www.youtube.com/watch?v=Lhwplunz7-I