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Record Stock Buybacks: First In The US, Now In Japan

Tyler Durden's picture




 

It was a month ago when Zero Hedge first revealed that as QE was "tapering", a just as powerful and even more indiscriminate force had stepped in to make up for the loss of Fed buying of last resort: corporations themselves, almost exclusively on a levered basis (issuing debt whose use of proceeds are stock buybacks). Specifically, we showed that the total amount of stock bought back by corporations in Q1 was the highest since the bursting of the last credit bubble. In fact it was the highest ever.

This was promptly noticed by both the WSJ and the FT. What the two financial media outlets likely have not grasped is that based on trading desk commentary, according to which the bulk of "flow" now originates almost exclusively at C-suites ordering banks to continue the buyback activity, the Q2 stock repurchase totals will be even greater than Q1, and likely surpass $200 billion. This means that every month this quarter companies are buying back about $70 billion of their own stock: an amount which at this runrate will surpass the Fed's original QE(3) amount of $85 billion within a quarter!

But while the "mysterious, indiscriminate" buyer of US stocks has been fully unmasked now, what most likely do not know is that just this is happening at a comparable record pace nowhere else but the place which is mirroring and repeating every single Fed mistake tit for tit.

Japan.

According to Bloomberg, companies in the Topix index are acquiring their own stock at the fastest pace ever, led by NTT Docomo Inc. and Toyota Motor Corp., with $25 billion of announced purchases so far this year, data compiled by Bloomberg show. The buybacks are limiting losses in the world’s worst-performing developed equity market: Companies using the strategy have gained even as the Topix slid.

Only $25 billion you say? Why that is less than a fifth of what their US peers are doing. Well, yes. But remember that on a relative basis, the BOJ's $75 billion or so in QE is orders of magnitude greater than the Fed's own QE when one factors in the relative sizes of the US and Japanese stock markets.

Additionally, keep in mind that the net annual bond issuance in Japan is already well below half of the amount monetized every year by the BOJ (which means if you think US bonds are illiquid, just try to buy, or sell a JGB - good luck). This means that vastly more of the BOJ's intervention ends up in the stock market: either Japan's or that of the US, courtesy of immediately fungible global fund transfers.

But back to Japanese bond buybacks, which in a far more "concentrated" and illiquid market, are having an impact on stock prices that is orders of magnitude higher than their nominal value would suggest.

Bloomberg then proceeds to give a quick lesson on logic 101: “Share buybacks have the effect of supporting the market when it’s weak,” Daiwa Securities Group Inc. quantitative analyst Masahiro Suzuki wrote in a report on June 10. “Return to shareholders is a big theme.”

Companies’ purchases of their own equity can be seen as a vote of confidence by executives that their stock has room to rise. The buybacks can also suggest a company has run out of things to spend money on, curbing its growth potential.

The problem, whether Japanese corporate executives are merely doing the same as their US peers and cashing out on their equity-linked comp plans at a furious pace thanks to their stocks hitting record highs having used corporate cash to boost the stock price while saddling the company with massive debt which will be some other CEO's concern down the line (a clear conflict of interest if there ever was one), is irrelevant. What matters is that stock buybacks have zero impact on the economy. Zilch. Nada. Because instead of investing capital in projects, either for maintenance or growth, all that happens is the shareholders get rich here and now, at the expense of economic, and certainly revenue, growth in the future (as we explained two years ago).

Even if buybacks continue, companies need to increase investments at a faster pace, according to Coutts’ Calder, a harder choice compared to improving return on equity with share repurchases in the short term. The amount of cash they hold means companies should able to afford both buybacks and capital investments, he said.

While businesses have boosted capital spending for three straight quarters, their investments in the period ended March remained 31 percent below a 2007 peak, Finance Ministry data show.

 

“Buybacks only result in raising ROE and share prices, so their effect on Japan’s economy is indirect,” said Masaru Hamasaki, a Tokyo-based senior strategist at Sumitomo Mitsui Asset Management Co. “Capital investment directly boosts the economy, so I think for now, they should invest more money there.”

 

Since the start of January, 152 companies on the Topix announced buybacks worth 2.5 trillion yen, data compiled by Bloomberg show. The previous high for an entire year was 1.5 trillion yen in 2008. Companies unveiled an average 567 billion yen in annual buybacks over the decade through 2013, the data show.

And here is where it all comes full circle, because the "economic theory" so to say seeking to reward corporations right now is that these same corporations will, out of the goodness of their heart, turn around and share their profits with their non-stock holding employees, i.e. the rank and file. Because the only way an economy can generate benign inflation is if there are real (not nominal) wage increases. Instead, Japan's only inflation to date is in import cost, in "non-core" staples such as food and energy, and of course, the stock market.

This is what is also affectionately known as trickle-down economics. It also doesn't work. Case in point - Japan's soaring stock market has resulted in exactly zero wage increases in the past 23 months, and soon: straight years of declining wages. Of course, to the Keynesians in charge it simply means that any minute now Japanese wages will increase. Alas, they won't. Because corporations realize that this emergency liquidity injection measure is merely confirmation by the central banks that the economy is failing and that companies should either be stockpiling cash for whatever comes after the Fed or BOJ withdraw, or, failing that, hand it over to shareholders who can do the same however without a corporate veil, and the money will simply reside in a personal bank account instead of a corporate one.

“The government recognizes that in order to resuscitate Japan’s economy, there needs to be a cycle where corporations profit, then return those profits to the public,” said Hisashi Kuroda, the head of Japanese equities and chief portfolio manager at Meiji Yasuda Asset Management Co. “Even if public finances are used to help companies make more money, it’ll be negative for the economy if the firms just stockpile the cash.”

Not surprisingly, with the BOJ injecting trillions into the market, some of it makes its way to corporations. Sure enough, "Non-financial firms’ holdings of cash and deposits rose to a record 232 trillion yen at the end of March, BOJ data show. Earnings by Topix companies swelled 69 percent last year as unprecedented central bank stimulus drove down the yen, boosting exporters’ profits. That added to balances built by executives to shield their companies amid more than a decade of deflation and economic malaise."

Alas, as we noted every month, none of that cash is making its way to employees. Instead, in addition to buybacks it also going for other shareholder friendly activities like dividends. "Other types of returns to shareholders are also on the rise. Estimated annual dividends per share for the Topix climbed to 24.4 yen last week, close to the highest since 2008." And while there has been a modest pick up in CapEx too, it is well below the expected, and certainly well below any level that is required to sustain a virtuous economic cycle. Because what idiot CEO would opt to invest in growth that materializes in 5 to 10 years (the typical peak IRR of CapEx) or when some other CEO is in charge, when there is an quick and easy option to cash out now if said CEO holds stock.

In the meantime, everyone in Japan, and the US, is ignoring the reality and sticking their noise in the sand.

Brokerages are touting stock-picking based on who’s next to buy back shares.

 

Societe Generale SA says investors should seek out cash-rich companies with low leverage and valuations. Top picks include regional lender Tottori Bank Ltd. and homebuilder Mitsui Home Co., analysts led by Vivek Misra wrote in a June 4 report.

 

“Many investors don’t realize that corporate Japan is changing,” said Meiji Yasuda Asset Management’s Kuroda.

It's changing all right: in less than two years Japan has adopted all the worst qualities of the US financial system. And just like in the US, when the central bank liquidity music stops, the collapse will promptly follow.

Japan could have avoided this if it had merely continued it slow shallow drift into deflation: painful for debtors but sustainable for most, and most importantly, not some insane Ponzi game where the pensions of the population are being invested in overvalued, social-networking stocks. However, with its berserker rush into stimulating inflation at all costs, the next deflationary shock will be epic, and one whose only "fix" will be for the BOJ to go from mere JPY7 trillion liquidity injection per month, to literally pulling out the firehose and proceeding with creating the hyperinflation that results from a collapse in the currency which we have said since March 2009 would be the ultimate endgame of this entire failed economic and monetary experiment.

 

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Mon, 06/23/2014 - 20:33 | 4887676 SokPOTUS
SokPOTUS's picture

Looks like a couple a tits.

Mon, 06/23/2014 - 21:23 | 4887835 gdogus erectus
gdogus erectus's picture

ehhhh... you need to get out more

Mon, 06/23/2014 - 21:38 | 4887888 SafelyGraze
SafelyGraze's picture

what this analysis misses are the following facts:

FACT. when a company buys back all its stock, then it alone owns the entirety of the outstanding stock.

FACT. when a company owns all of its stock, then it can set its own sell price for the stock. If it doesn't want to sell at 100, maybe it will sell at 200.

FACT. when a company owns all of its stock and sells a share to itself at 200 instead of 100, it has just set the price 100% higher.

FACT. when a company owns all of its stock and sells a share to itself at 400 instead of 200, it has just set the price 100% higher.

FACT. a company can repeat this process, thereby increasing the value of the shares it holds by astonomical amounts. 

FACT. the process outlined above creates Real Wealth and stimulates the Real Economy.

hugs,
the krugman interns 

Mon, 06/23/2014 - 21:42 | 4887902 SafelyGraze
SafelyGraze's picture

I concur with the analysis above.

in fact, when a company buys back all its stock and then drives the price sky high, the book value of the company is what you can use as collateral to borrow massive amounts of money after you buy the company.

and that massive loan can be used to pay consulting fees before the company's employees are laid off and its assets stripped and sold.

hugs,
mitt

 

Mon, 06/23/2014 - 20:41 | 4887698 iPood
iPood's picture

I thought we were mirroring Japan's mistakes?

Mon, 06/23/2014 - 21:01 | 4887767 kowalli
kowalli's picture

Nope, you do more, you bomb other countries for oil and gas=)

Mon, 06/23/2014 - 21:51 | 4887932 hobopants
hobopants's picture

Strange...I don't remember bombing anything except the local Applebee's bathroom lately. Although there was a substantial amount of gas involved.

Mon, 06/23/2014 - 20:44 | 4887710 buzzsaw99
buzzsaw99's picture

imagine how low trading volume would be if they weren't

Mon, 06/23/2014 - 20:45 | 4887712 NoDebt
NoDebt's picture

I intend to be the last person holding the last share of stock in the last publicly traded company on the planet.

Errrrrr.... OK, maybe that's not such a good idea.  But somebody should do it just so they can say they did.

Mon, 06/23/2014 - 20:48 | 4887725 buzzsaw99
buzzsaw99's picture

i miss the old paper shares. at least you could paper your walls with them. imagine the collector value if you had paper shares of every major defunct public company for the past thirty years.

Mon, 06/23/2014 - 20:57 | 4887749 Gamma735
Gamma735's picture

Eron corparate logo would be a good wallpaper design.

Mon, 06/23/2014 - 20:59 | 4887758 NoDebt
NoDebt's picture

You're not the only one, apparently.

About 2 years ago one of my clients says he's got a paper stock certificate for some shares of CSX (railroad) he bought with money his Dad gave him in 1982.  With a little hand-written note clipped to it indicating the share price originally paid.  He thinks it's worth about $20K, judging by current share price.

What he didn't realize was that CSX had nunerous stock splits over the last 3 decades and those shares are now worth over $200,000!  Only time I literally had to help one of my clients get to a chair and catch his breath.

Mon, 06/23/2014 - 21:02 | 4887773 buzzsaw99
buzzsaw99's picture

the old bonds were cool too. no middleman. just clip the coupon and redeem.

Mon, 06/23/2014 - 21:07 | 4887786 NoDebt
NoDebt's picture

Yeah, they were damned cool.  I owned some way back in the 80s.  But when they're paying you 12% you know they're going to call those bonds as soon as rates started moving down.  And they did.

 

Mon, 06/23/2014 - 21:20 | 4887826 buzzsaw99
buzzsaw99's picture

the old free corporate option on interest rates, callable bonds, what a scam.

that's why I love my 2.6% 10Y USTs, they're noncallable. [/sarc]

Tue, 06/24/2014 - 07:00 | 4888583 RhoneGSM
RhoneGSM's picture

No DRS statements recording split shares? 1099's . With dividends each year?  Unclaimed property notice from state? 

Mon, 06/23/2014 - 21:11 | 4887796 Wait What
Wait What's picture

good analysis, TD. no economic theory seems as intriguing as one with an endgame, and Keynesians, in all their wisdom, have pointed us in its direction with a slingshot.

Mon, 06/23/2014 - 21:15 | 4887813 TVP
TVP's picture

"We"re all dead in the end, anyway". 

- John Maynard Keynes, when asked what the end result of a never-ending debt spiral may be.  

Mon, 06/23/2014 - 21:21 | 4887829 Caviar Emptor
Caviar Emptor's picture

Stock buy backs of recent dilutional secondary offerings using money borrowed at 0% (wash-rinse-repeat): it's a game of perma-bailout and a race toward the first one Jillion dollar market cap!

Tue, 06/24/2014 - 00:00 | 4888236 AdvancingTime
AdvancingTime's picture

When you introduce demographics into the picture we see that Japan is stuck with an aging and shrinking population that is evermore expensive for the government to provide for. Adding to its woes the Fukushima nuclear disaster has shuttered its nuclear power plants and forced the country to import more expensive energy alternatives.

Neither monetary nor fiscal policy will adequately solve Japan's problems. Continuing to run fiscal deficits only means that government debt is pushed onward and upwards leading to a variety of possible scenarios as to the what the end game will be. Simply put, the fundamentals for Japan are lousy. More on the downward path that Japan is on in the article below.

http://brucewilds.blogspot.com/2014/05/japan-sliding-towards-abyss.html

 

Tue, 06/24/2014 - 00:27 | 4888278 Spungo
Spungo's picture

The fun starts when China and Japan go to war. Both are demographically upside down. Japanese men and women don't seem to like sex (just watch any Japanese porno), and China had its 1 child policy. If they go to war, you end up with two countries that are 100% populated by retirees. It's like Florida but the driving is even worse.

Tue, 06/24/2014 - 02:42 | 4888423 jmaloy5365
jmaloy5365's picture

Oh, so if the stock market was to crash to zero then the corporations would still at least own themselves. And if that is true then that is why the feds "floated" the system with QE. To preserve American corporations.

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