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CEOs Darken Outlook, Slash Hiring and Cap-Ex Plans – Hope Now Focused on Share Buybacks (which just Plunged)
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
The word “gloomier” inconveniently showed up in a Reuters headline that described how the CEOs of the Business Roundtable – one of the thermometers into the brains of corporate America – felt about sales, employment, and capital expenditures. Yet, “gloomier” or not, these CEOs run companies that have been spending near record amounts, not on productive uses such as capital expenditures or hiring more people to push revenues to the next level, but on buying back their own shares.
The Business Roundtable is an association of CEOs of the largest corporations in the US that account for “more than a third of the total value of the US stock market,” according to its website. On its agenda: lower corporate taxes (tax credits!), more immigration of cheap labor, and trade – the big trade agreements currently being negotiated in all secrecy [my take from late last year, though resistance has grown since.... Coming Soon: Corporate Tools To Hollow Out National Sovereignty].
Or, as it says so eloquently, “working to promote sound public policy and a thriving US economy.”
But the BRT results didn’t speak of a thriving US economy. “CEO plans for investment, hiring and sales over the next six months decreased, with employment plans declining the most,” the survey stated. It wasn’t pretty:
- The least bad was the sales index, which dropped 4.5 points to 116.4, with 20% of the CEOs expecting sales to stagnate and with 7% expecting sales declines.
- Capital expenditures looked worse. They would increase at only 39% of the companies, down from 44% in the prior quarter; they’d stagnate at 51% of the companies, up from 41% in Q2; and they’d get slashed at 10% of the companies, up from 8%. It dragged the cap-ex index down by 6.8 points to 79.1.
- And US employment? Only 34% expected to increase employment in the US, down sharply from 43% in Q2; but 20% would slash payrolls, up from 14% in Q2. And the sub-index plunged 15.7 points to 63.5.
What would it take to reverse the slide? At this point, BRT becomes a lobbying group. “We believe Congress and the Administration must focus on policies that drive economic growth, including tax reform, immigration reform, trade expansion, and long-term fiscal stability,” BRT Chairman and AT&T CEO Randall Stephenson said in the statement, directed straight at Washington.
But what are these CEOs doing instead of hiring and training people and investing in capital expenditures, crucial and sorely missing ingredients in the economy?
Turns out, 740 corporations have authorized share buyback programs through August, the most for this period since 2008, just before the whole construct collapsed. And according to research cited by the Wall Street Journal, they spent $338 billion during the first half on buying back shares, the most since 2007.
As overall trading volume is getting more and more anemic, these buybacks make up an ever larger proportion of total trading.
IBM, the second most prolific buyback hero after Apple, spent $8.2 billion to buy back 45.2 million shares during the first quarter, or over 13% of IBM shares traded during that time. It had its reasons; it needed to prop up its stocks as it was wearing investors ragged with its declining revenues. And it worked. Share price during the quarter rose, despite the dark clouds hanging over IBM, by 2.5% while the S&P 500 rose a mere 1.3%.
The buyback program of Illinois Tool Works made up 18% of the volume of its shares in May and 15% in June. In late February and in March, Oplink Communications bought back enough shares to account for over 30% of the trading volume.
And it worked. According to an analysis by Barclays cited by the Wall Street Journal, companies that spent the most on buybacks outperformed the stock market by 20%.
And now we know who has been buying every tiny dip: companies! When their shares head south, “companies get more aggressive,” explained Chip Gibbs, head of the buyback business at Bank of America Merrill Lynch.
In this environment, buybacks have outsized impact on volume, and therefore on price. Companies are blowing real cash on manipulating their own shares. Sure, stockholders might be happy in the short run. But unlike investments in productive assets and in people, the effect of this corporate “relentless bid” fades as soon as the buybacks fade. They’re a vicious treadmill, gobbling up ever larger amounts of real cash as stock prices rise.
A very capital-intensive way of financially engineering EPS, which is what every analyst on Wall Street is genetically programed to look at. But only part of the buybacks end up reducing share count. The rest are used to hide the dilution from executive stock compensation plans and stock-based acquisitions. Buybacks are a way to pull a bag over investors’ heads.
In the end, they accomplish nothing for the company’s operations – nor for the real economy. And when the cheap cash runs out to do these buybacks, a vacuum opens up under those shares, and under the market in general. That’s one of the things that happened in 2008 after all the craziness had peaked.
Oh, and FactSet just released its report on buybacks for Q2: share repurchases plunged 23% from Q1 to $124 billion, the worst such decline since Q4 2011. But it was still a lot of cash, and down only 1.1% year-over-year. Given the surge in past quarters, for the trailing 12 months, buybacks still rose 29% to $539.3 billion. Alas, free cash flow declined 0.5%, and the ratio of buybacks to free cash flow continued to rise, hitting 82%, the highest level since, well, Q3 2008. But this time, of course, it will be different.
At this confluence of excess and exuberance on one side and the spreading sub-surface carnage in smaller stocks on the other side, even venture capital begins to fret. Read… “Excessive Amounts of Capital” Doom Startup Bubble
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Yeah, sorry, not seeing it. Business looks good.
Based on what our business is seeing, if there is going to be a downturn it will be a 100% financial manipulation by the banks. They can do nothing to make the economy more sound, but they sure as hell can kill it.
Nice article Wolf. Got to figure out how to turn the clock back before it is too late.
If buy backs are bad, are stock issuances good? Issue stock to buy debt is right and healthy? The market is run by machines. Corporations are like retail, buying stock high then selling it low when the debt market dries up. THAT is the game being played...the "bubble." I am not sure this is right, but that is what I have been thinking lately.
Of course shareholder capital is better than debt, if the company can manage it. Debt carries servicing cost that doesn't exist for shareholder capital. Stock buybacks are an admission that the company is doing poorly, has a poor outlook for the future and about the only way they can shore up the stock price is to reduce the outstanding volume in the market.
They shouldn't feel bad. I've been gloomy since Sept. 11, 2001.
I've been gloomy since Nov. 1963; and I got gloomier in 1971 when Nixon shocked everyone in the civilized world by anouncing that the dollar was no longer "as good as gold".
"Nixon's the one" was I beleive a legitimate campaign slogan at the time.
ranks right up there with blonde republican women wearing buttons that proclaimed "I Like Dick!"
The sixties - you can't make that shit up.
It was never Nixon or any president. It has always been the bankers and those behnd them.
And.... POOF! It's gone!
This makes me wonder how the 539 B of buybacks gets factored into the GDP. That's a lot of money and, on its own, would be equal to about 1.5 to 2 x the total GDP growth of the entire US economy. The rest of the economy could be in negative growth terrain if this is being booked as national economic activity.
Don't know, just wondering.
why not, soon the drug trade and prostitution will be counted as GDP like they do in France.
The economy is definitely in negative growth territory. The only reason for the positive GDP numbers is the completly crooked and delusional correction for inflation. Corrected for actual inflation, we see GDP numbers that resonate with what we see around us every day. "When it gets serious, you have to lie".
We should understand that demand drives investment, confidence is not the real driver. Lack of real growth is about lack of real demand. Much of the demand we see today is driven by artificially low interest rates and QE that distorts the markets.
We must differentiate the kinds of economic growth and understand that all growth is not created equal. If you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category. More on the kind of growth we need in the article below.
http://brucewilds.blogspot.com/2014/01/false-demand-fuels-wrong-kind-of-...
Did i ever mention that resources drive demand? Without resources demand exists but is unmet.
Fer instance in the desert they desire water, they demand water, however the earth is not forthcoming and the water does not apppear despite tremendous demand. The Sahara remains mostly sand, despite demand for freshwater lakes and long green lawns.
So resources like oil and gas can only meet some of the demand and as prices go up and wages go down, demand whithers on the vine.
We are dancing on the plateau of the limits to growth, is there any wonder the cannibal capitalist are eating their markets by stuffing them full of non-existent, made from air capital, a bubble if you will composed entirely of dreams,horseshit and statistics.
Propped up by manipulation by everyone from the head of the central bank to the ceos to the investment brokers. Should anyone notice we are all really broke we might all die of cardiac arrest, the game must go own.
try not to get killed when the corpses fall from on high.
Sell more to the corps....let them hold the bag.
This article pisses me off.
Not that it's wrong, it's completely correct, but these excessive buy-back programs need to be called what they really are in order for the article to be truthful:
LOOTING
It's Looting plain and simple, load up on debt, buy shares, shares go up, sell personal supply of shares and get rich, eventually the company is left with unpayable debt and collapses in the next downturn.
@Peak,
Don't listen to these from a Pulitzer Prize winning author or you'll go apoplectic.
Sincerely,
Ben Dover
http://www.youtube.com/watch?v=QAJKE77uxgA#t=86
http://www.youtube.com/watch?v=VR1LiB-_5nU#t=100
http://www.youtube.com/watch?v=k2vusJmjK24I went apoplectic when the guy in your videos credited "President Obombya, and Paul Krugman for their contributions to his book which tells me it's just another screed about "fairness" and social Just Us or as reality describes it; DemoCrazy; hiring the government to steal your neighbors shit to give it to you.
I think you took that the wrong way. You got a knee jerk condemnation there for someone that wants to do away with EBT & return to full employment, but goes on to explain how 58K manufacturing biz's have been off-shored. Did you get far enough to understand how these corporate mongrels are the ones that receive the STATE tax taken out of your pay check?
Corporate taxes, no problem. We all know it's allegedly off-shore. NOT. Paper pushing shell game. Bastards turn around & buy treasuries for a tidy profit & more ass rape for the pleb's thru taxation. The corruption he exposes with the laws they've passed are unbelievable & unknown to most.
White collar looters...there's no justice...
"But what are these CEOs doing instead of hiring and training people and investing in capital expenditures, crucial and sorely missing ingredients in the economy?"
They are stuffing pantloads of corporate dbt funded stock buybacks in their pockets, after cashing in multiple rounds of option grants. They are getting while the getting is good.
Bags all around for the common shareholders.
For instance, Intel has spent enough on share buybacks since 2000 to buy every public semiconductor company in the world.
"...hire and train..." Good, God, man! Don't you know that education, training, and skills development is somebody else's responsibility?
/sarc
Robot teachers don't buy sneakers, or cat food or houses or cars.
WE ARE SCREWED!
Ongoing recovery - surprisingly weak- green shoots appear to have been brown all along and merely covered with green water paints.
Central Bankers teach wall street how to cheat the numbers. Corporations cheat the street and we get fleeced.
America the bastion of bullshit.
When shit gets real its time to lie.