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Why Stocks Just Won't Drop: "Companies Spend Almost All Profits On Buybacks"
Back in May we revealed that the "Mystery, And Completely Indiscriminate, Buyer Of Stocks", obviously a key player in a time when the Fed's own indirect monetization of stocks was fading, was none other than corporations themselves, gorging on cheap debt and using the proceeds to buy back their own stock.
A subsequent look in Q2 buybacks showed something troubling: after soaring to an all time high in Q1, stock buybacks tumbled in the second quarter to the lowest level since Q1 of 2013, perhaps also a reason why the stock market has gone very much nowhere in the past quarter.
And while we explained that the vast majority of companies are using up as much leverage as they can to fund said buybacks, with both total and net corporate debt levels having risen to new all time highs refuting misperceptions that corporate debt is actually declining...
... something even more disturbing was revealed today, when Bloomberg reported that companies in the Standard & Poor’s 500 Index, are "poised to spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings!"
And a reminder, when a company tells Goldman's desk, for example, to buy back X shares, it almost always has no price preference, i.e., it is indiscriminate what happens to the resulting stock price because it has to fill a quota in a given time period. Needless to say, buying without regard for price tends to be strongly "bullish."
For those who don't grasp the implications of this staggering number, we will just say what we have said before: corporations are undergoing a slow motion LBO/MBO of the entire S&P 500, courtesy of ZIRP and in Europe, NIRP only without any concerns about resulting IRRs and leverage. Those will be some other management team's problems.
Money returned to stock owners exceeded profits in the first quarter and may again in the third. The proportion of cash flow used for repurchases has almost doubled over the last decade while it’s slipped for capital investments, according to Jonathan Glionna, head of U.S. equity strategy research at Barclays Plc.
Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300 percent since March 2009. Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start plowing money into their businesses.
While not news to Zero Hedge readers who have known all of this since 2012, more and more are figuring out that you can't have growth (i.e., CapEx spending, i.e., real employment), and soaring stocks during an ongoing depressions and Fed-induces market levitation:
CEOs have increased the proportion of cash flow allocated to stock buybacks to more than 30 percent, almost double where it was in 2002, data from Barclays show. During the same period, the portion used for capital spending has fallen to about 40 percent from more than 50 percent.
The reluctance to raise capital investment has left companies with the oldest plants and equipment in almost 60 years. The average age of fixed assets reached 22 years in 2013, the highest level since 1956, according to annual data compiled by the Commerce Department.
But who needs capex when you have financial engineering.
That said, some are finally wondering if financial engineering, which as we showed over the weekend, has become the primary source of global "investment", eclipsing such barbaric relics as trade...
... may have gone too far:
“You can only go so far with financial engineering before you actually have to have a business with real growth,” Chris Bouffard, chief investment officer who oversees $9 billion at Mutual Fund Store in Overland Park, Kansas, said by phone on Oct. 2. “Companies have done about all that they can in terms of maximizing the ability to do those buybacks.”
Bzzz, wrong: you can always do more financial engineering just ask Goldman Sachs. Case in point, the spin offs of PayPal first and today, Hewlett-Packard, both following the sage advise of Goldman Sachs to maximize "shareholder value", if not jobs, as per today's announcement that another 5,000 HPQ workers will get the boot.
Others clearly see this and are urging management teams to do even more:
While the ratio to earnings shows how buybacks and dividends compare to past economic expansions, it doesn’t indicate companies are struggling to fund them. Five years of profit growth have left S&P 500 constituents with $3.59 trillion in cash and marketable securities and they’ve raised almost $1.28 trillion in 2014 through bond sales, headed for a record.
“Buybacks are something corporations can take control of and at low borrowing costs, they’re a viable option,”Randy Bateman, chief investment officer of Huntington Asset Advisors, which manages about $2.8 billion, said by phone on Oct. 1. At the same time, he said, “If management can’t unearth future opportunities for growth, as a shareholder, I lose confidence.
The bottom line: "S&P 500 companies will spend $565 billion on repurchases this year and raise dividends by 12 percent to $349 billion, based on estimates by Howard Silverblatt, an index analyst at S&P. Profits would reach $964 billion should the 8 percent growth forecast by analysts tracked by Bloomberg come true."
Or, said otherwise, all US corporate retained earnings are now fully unretained, and go straight to shareholders, leaving increasingly less, and in many cases nothing, to fund top line growth (and even maintenance), and with that, the economy. Just in case anyone needed something else to counter Obama's wild propaganda that things are getting better of course...
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In his world they are getting better, the rest of you, not so much.
I better hurry up and buy some stawks before there aren't any.
no shit.......its gonna be more rare than gold to own a stock
They have to do this, otherwise when the currency actually implodes they will be wiped out.
No worries, it will all be over soon...
https://www.youtube.com/watch?v=txSN2OazY6k
No way in hell we're letting you off that easy.
Hey Tyler,
You make fun of inconsistent Bloomberg and CNN headlines that pops up simultaneously but this morning, dont you think these two headlines, one after another, are contradictory???
Why Stocks Just Won't Drop: "Companies Spend Almost All Profits On Buybacks"Submitted by Tyler Durden on 10/06/2014 - 08:06
Dancing Without A Floor - "Sooner Or Later A Crash Is Coming... And It May Be Terrific"
Submitted by Tyler Durden on 10/06/2014 - 08:33
You missed one
http://www.zerohedge.com/news/2014-01-12/great-buyback-surge-over-corpor...
More interestingly is seeing automatic earth on here last night. The ultimate deflationist blog. Anyone around here long enough to remember kito 2010 screaming everything that zh is now posting probably owes him an apology. I don't know what to make of seeing rthat blog on here, other than it is some sort of admission.
That explains why companies cannot "afford" to give their employees raises. The CEO's and mgmt are stealing it all.
I remember Kito...hes the only Jew I actually wouldnt mind having a beer with...
He owes me a bar mitzvah invitation too
since I am him I will let me know.
What you mean, Fonzy Corp and Kito Inc merged to become a more efficient company and in the process laid off thousands of people and using the money saved to do share buybacks???
a few people on here think that he and I are one in the same. Obviously that is not true. He was against gold before he was for it and then against it and I was for gold before I was against it and for it and then against it.
You guys seem to be more complicated than most women.
I put that on a tee for you but I still give it 7. Zh is the one pitching deflation. Good luck reconciling that one.
ZH is the status quo's last stand to keep you interested in the "markets."
This is caus' Corporate Taxes are higher than personal taxes. And not just by a little bit either. This is about the stupidest thing you could ever do.
im baaccccckkkkkk..........
glad to see the dollar still reigning strong. just wait until interest rates get bumped up early next year. the world will be begging for dollars........
Quite possible, but what about the interest on the national debt and the wholesale private and corporate defaults?
We are talking about the fed gently lifting rates off the zerobound here. Not Volker. The fed can do this because they own the bond market. They control interest rates. That does not seem to sink in onhere. Ask Putin over there who is currrently getting a telephone pole jammed up his ass by the fed and he will tell you how it's going for countries with little link to the dollar.
Rates can rise,and not by that much, and when they do stocks can continue to go up. This has been the case and most likely will continue to be the case.
the fed works the entire yield spectrum to ensure that any bump up will have nil effect on interest owed on debt. look around, the entire world is investing in AMERICA. real estate, stocks, bonds, technology companies, etc. even if there is some effect on how much uncle sam owes, it will be offset by the growth and revenue brought in through said investments.
One other reason stocks are rising is that the value of the dollar is falling. International investors sitting on U.S. dollars are looking for well run Americamn companies that have diverisified into international markets. Why wouldn't I trade my U.S. dollars for companies that are adding value and growing globally. Most of these types mange through EVA criteria and will be attractive to anyone who is looking for solid CFROI
These kinds of companies will survive the dollar collapse because they are already prepared for the changes coming.
"the value of the dollar is falling"
https://www.youtube.com/watch?v=Dh402owua4o
I think this is what the UK did after WWII, they just spent on Food & Beverage pining for the gold old days when poor people became criminals in order to survive.
- Exporting Criminals to Australia
- Ferguson
- Federalization of Police
- Private Prisons with minimum occupancy rates
- Zero Tolerance for minor violations
- No free speech in cities, on Wall Street, near government buildings
- Endless wars proving leaders have no value for human life
- ZIRP, NIRP, assault on Fix Income & Retired Persons
The difference is in the scope.
The first headline re the short term. The second one on a long enough timeline.
And the currencies will implode! Currencies are IOUs, glorified and pretty pieces of paper printed and handed out by governments. Whether because of modern printing options or in an effort to thwart counterfeiters most of us will admit countries have raised the bar concerning the appearance of their currency.
This has almost become a full blown beauty contest and taken our minds off what is really behind these pretty little tokens. A piece of paper with great power, based only on faith, they are mere promises of stored value and wealth, and the value of these promises can change in an instant. With this in mind currencies may not be the best place to store your wealth. The article below delves deeper into currencies as a great "Trojan horse" for governments to fleece the average citizen of their wealth.
http://brucewilds.blogspot.com/2014/10/currencies-are-ious.html
They have to do this, otherwise when the currency actually implodes they will be wiped ouT.
----
So, in their own way, they are buying physical?
What could possibly go wrong?
Elsewhere: HBO's Lena Dunham- ‘mustachioed campus Republican’ raped me http://tinyurl.com/nh664nb
http://www.the-spearhead.com/2013/03/04/wrongful-conviction-rates-and-fa...
Who is she and why should we care?
"His world" being the American Stock Market. let me guess: we europeans should nevertheless build a superstate, spend trillions out of borrowed money, have the ECB to monetize everything in sight, etc. etc. so that... stock-listed companies can spend almost all profits on buybacks /s
at least, this is what we are being told, full blast in various channels, including the FT today. failure to do so makes us resemble... US Tea Party cranks
Freakin Tea Party.
Those responsible jerks are going to be the death of us all.
What specifically about the idea of "Taxed Enough Already" makes them cranks?
Or, are you just an unthinking sheep, completely swallowing the outright lies, propaganda and distortions of the international LeftMedia?
Companies still have profits?
Is this article a psyop or just plain mind fuck?
If it makes you feel better, they get dividends on owning their own stock. :-P
With option to "reinvest" dividends back into the stawks? ;p
More criticla question is, these businesses are healthy and profitable, why do they need to buy their own stawks?
Fits as a strategy for Extracting Wealth from USA & US Households...
- Subprime Bubble & Crash, Debt, Foreclosure = Enslavement
- Financial Crisis, Extracted Retirement Savings, Extracted Funds from Municipalities & Universities
- Now that households are out of the stock market, they make big dividends for the wealthy & the elite
If they don't when the currency implodes, so do they.
How long has this been going on now? And how realistic is it that it could potentially continue for years???...
Wouldn't be going after the most important energy giant Russia with sanctions and war drums if this could continue for years! You will just wake up one morning and it will all be a very different World!
Any minute now!!!
breath, dude. take bear, oil gun, just relax & prepare smoothly, no need to hurry, it will happen when it will happen, no need to hurry in the eternity of the void.
Progress!!!!! BTFD
Forward hoe.
Accounting? Capital reinvestment in hard assets? New equipment? New hires?
So last century. Join the FSA and see the USA from your Chevrolet!
gold and silver tanking while government debt and money printing are at all time highs. fake terrorists everywhere. massive debt-financed stock buybacks and unlimited QE propping up share prices. completely fabricated economic numbers. proxy war in syria and ukraine. droning everywhere else.
more and more recently i wake up and think to myself: the entire fucking world is crazy. how is it that 99% of people cant see through the bullshit. it's madness.
thank god for whiskey and marijuana. temporary blue pills.
No one sees it because they don't want to. Admittedly the planet is not populated by geniuses, but most of us have enough smarts to know fact from fiction, but we have professional fiction sellers who enable us to believe the lie with some credibility. The best liars win and we obviously like it that way.
anyone know of a good psychology book that covers this type of widespread group think cognitive dissonance? besides the writings of hitler and goebbels
http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Mad...
Bro of the Sorr..., you ask yourself "How is it that 99% of people can't see..."
...and then you answer your own question.
nono, sorry, but, you dont get it, i mean, i think you know but part of the problem :
- ppl know what the fuck is going on
- having willing to fight to change is dangerous, you MAY loose ALL what YOU have.
- so ppl do not move, they just want sustain of what is actually ON.
- after so many years without war inside big nations, no one want to fight. they prefer to sing songs around firecamp , booze, pots n ass fuck...
the fact is the financial system found the way to enrich to infinite the elite, and maintain at low level the ppor & keeping pushing heads under level of intelligence.
1984 was clear :
- hierarchized societed can only be sustained by the base of poverty and ignorance.
- shortage maintain importance of privilege over classes, help keeping magnified difference one group ( rich-elite) to others - (mid class-poor)
------
have oyu seen the evolution of technological progress this years, even a shitty chevy can get personalized just like bentley or rolce royce.
poors are gaining position (ie: mid class, not tent ppl, those do not even fucking count they of full transparent ) what remain to the very elite now...? hmm ?
still 1984 : general wealth growth threat to lead to the destruction any hierarchiezed society.
....so..... ?
Better than WW3
Is this akin to Joe Bob, who runs up credit card debt, and can't afford the payments, and is about to have collections agencies come after him, resolving the situation by getting ANOTHER credit card to pay off the first one?
It's more like getting a hold of every introductory low APR credit card they'll approve you for, running all of them to the limit with cash advances, pointing to the cash and saying "see, I'm rich!"
Just wait until the APR comes off the "low introductory rate period".
keep an eye on HY credit, Tyler has shown that the trend forcasts this eventuality. what happens when these businesses, which leveraged up on cheap debt to finance these buybacks, have to roll their debt in a no-bid market? or will their debt be the new "collateral" bid by the central banks?
95% eh? Quickly reaching a breaking point then.... cheap money being used to buybuck created a leverage effect on that money. Once the rates change from the current 0%, it all goes to shit really fast. That magical moment when there's not enough cash available to buy back enough, and *poof* it all implodes.
Lure companies into debt with cheap money, raise rates making them bankrupt and then buying on the cheap?
Who controls the debt, controls everything?
Its the war on our wealth. Bankers can seize our assets much easier than using force by simply creating the opportunity of indebtedness with fiat money. Corporations creating huge debt liabilities while destabilizing their stock valuations. When this sucker falls, who do you think will be standing there, hands out, demanding the keys to the levered assets. Racheting, with each collapse allowing greater asset accumulation, creating new opportunities for leverage. "Let me loan you the money to grow your way back to prosperity". No different than what our government tells us about national debt. The game is to ultimately own all of the assets without ever firing a bullet. Herding us towards the packing house.
The Looting of America
- War on the Middle Class
- Loot the Assets of Corporations & Everyone Else
- Extract the Wealth of the Richest Country on Earth
- Then Bail-Ins & Bail-Outs & Private-Public Government Partnerships to guarantee loans and profits & Further Privatize Utilities, Bridges, Highways, Ports, Parks, Libraries, Internet, Spy Agencies (like Google, Microsoft & Yahoo), and our Military & Police
There can be only One!
You're on the Right Track...Apply it across the Board and World Wide....
"Once rates change from 0%....."
Lol, good one. You damn near made coffee fly out of my nose.
Less shares on the market means less dividends have to be paid out. They have to buyback more shares to create scarcity and increase prices and also so they can pay less dividends to outsiders. They need the capital gains to justify the high share prices to allow the high market caps that justify more borrowing. err, now I'm feeling dizzy.
In the future, a company will have a billion shares and own 999 999 999 of them. When that one share on the open market is not worth enough, they'll do a 100 to 1 split and buy 99 of them. See! It CAN go on forever.
???Is that how it works??? I need a pen and a piece of paper.
the shares don't just vanish...they are reissued with employee stock options that get handed out to the top execs in massive amounts. it's a backdoor way to transfer massive amounts of cash to the top with minimal tax implications for them. it's a revolving door if you're not blind.
"You take a two hundred dollar case of booze and you sell it for a hundred. It doesnt matter. Its all profit. And then finally, when theres nothing left, when you cant borrow another buck from the bank or buy another case of booze, you bust the joint out. You light a match."
.
A Classic......
I get this feeling after the 9th FPA phase of my career that no one at a corporate holdco level can do a bottoms-up of their own businesses. And I don't mean add up all your business units. I mean actually do a bottoms up forecast of sales and costs at the business unit level. I've only ever seen the "here's the number, make it work" bullshit. Re-forecasting the holdco/top-down number might as well be an act of congress. They just write it off as sandbagging. I'm beginning to wonder what they've committed to.
Scott Adams, line three.
Apparently numerous well advised boards of directors have determined that there is no better deployment of corporate cash.
My call: "Get on the train, but stand near a door."
"Get on the train, but stand near a door."
I like that Bob......can I use it?
Sure. (He says, as he shorts a few in the pre-market.) :)
Thanks!
"Standing near the door" is what everyone can do with a simple few mouse clicks.
But that isn't enough, because there won't be any warning.
When it comes to a "Crash": Better to be a year early, than a day late.
If you love buybacks on credit at the top, you will love secondaries to pay off debt at the bottom.
Exactly.....
The "Buybacks" Represent the Terminal Phase of Leverage.......
Money has become so cheap to borrow that many people are now arguing that you must take it even if you don't know what to do with it. It is hard to imagine how much this is distorting the economy, markets, and reality in general. A total disconnect between life on main street and the financial world is occurring and it is putting the economy in a very dangerous place.
It is often hard to determine what is true, but a report on Bloomberg that 32 Trillion dollars in funds were held in offshore accounts around the world made me shutter. How safe is this money, and what exactly is it doing? Can you say Cyprus? More on this subject in the article below.
http://brucewilds.blogspot.com/2013/05/cheap-money-more-and-more-and-mor...
the old advice about "money becoming cheap" was to catch the chance of paying back debt
like the even older advice to spend gold when everybody wanted it and save it when nobody wanted it so much
as such, companies buying back their stocks are, in a way, following up on this old advice. in a way
"Don't worry about money. All you need is a good idea. The money will follow." Yes, it was from some kind of weirdo get-rich seminar. Whenever I read articles like this one, or reports about companies with no earnings, I wonder about that set of words.
Money has become so cheap to borrow that many people are now arguing that you must take it
----
I'm considering buying a new motorcycle; 1.5% rate is about 7% below the actual cost of inflation.
I'm looking at around 15 dollars per K on a six year... Finance it all and if I at some point cannot pay - come get it.
No big deal.
That reminds me of one night at this strip club...
Relative to the month of October, Big POMO today. So up we go until around noon. Then we roll over.
This is how it works, right yellen?
So what happens when the corporations have no or very little profits to spend on buy backs ? and the stocks deflate?
they keep doing buybacks yet the number of shares outstanding remains the same. funny how that works. Same as it ever was... [/Talking Heads]
You can bet the stock options keep flowing to those at the top....buy on the bottom of the pile...fill at the top with options........quite a game
So, what goes up...Must keep going up!
Now I finally understand. Thanks!
Welcome to the TitanicII.....we've worked out the bugs.
If you can borrow at 5% and buy back your stock which makes it go up 20%, why wouldn't you?
QE.....it's totally free!
It's like EBTs for Fed shareholders.
Umm. Because there is a 100% chance that it will eventually lead to a bankrupt company. That's why! But I do understand the business school culture of slash and burn. Get mine and get out fast. Fuck you all!
I wouldn't even mind so much if it was just "profits". But the idea of taking on debt to buy company stock is the most fucked up thing imaginable. And none of you financial engineer cunts dare defend this action as prudent.
Tell him the good part.
The good part is that no matter whether our clients make money, or lose money, Duke & Duke get their commissions.
Well, what do you think, Valentine?
Sounds to me like you guys are a couple of bookies.
I told you he'd understand.
He won......and I lost......one dollar.
Has anyone seen Beeks?
All that matter's is that Obama's party wins the election in November so there is much of the same again.
A furniture store I purchased a number of pieces from that's been in business for 30 years is closing. It's sign of the times. Continued grind of the small guy.
All brought to you with the AAA stamp of approval from the lying, demon-cat ratings agencies. Yes, the same ones that misrepresented last time.
In other news, bartering the solid earth for water may result in drowning.
your own chart is showing net debt flat, even falling in the past couple quarters...
If history has taught us one thing, stock prices, over time always go up. So why worry? What could ever go wrong? Trees do grow to the sky, took us a long time to recognize this bit of crucial information.
Stop complainig and moaning, Fed this, corporate repurchases that - you can always find a number of reasons not to buy stocks and would have been wrong and remained part of the 99%er's. Why even wait for the dip. Look at all we made it through and all those folks with their nickers in a wad have lost.
The market's theme song has been for years, Sly and the Family Stone - I wanna take you higher. If you are having trouble with this concept, come on out to the great state of Colorado where many things are, well, higher...
Trees only grow so tall
If goods do not move, then armies will
It is that simple
says the merchant's lobbyist in the ears of the senator
like the Wine Lobby that sent Caesar to Gaul when the chieftains forbade their warriors to sell their sisters and daughters as slaves against amphores of delicious wine, cultivated in Big Biz latifunds by Gaulish slaves
if goods do not move, Big Biz becomes angry. then it starts to lobby. and only then armies start to move
the middle part is important, leaving it out hides many interesting details
The middle part has already been crushed since early 2000. They no longer matter at this point, as far as power.
This is Bank Lobby vs Pentagon
This story would be highly amusing if it were not for the sleight of hand that is quite evident.
The share buy backs are like the owners of the Titanic carrying out a complete re-fit while the ship is sinking.
Nevertheless you have to give full marks to the shysters who manage to come up with one trick after another to hide the growing cancer.
https://www.youtube.com/watch?v=IjGHwGkFIFw
The companies are using profits and leverage to buy back stock through the front door to boost the stock price while the CEOs quietly unload their shares.
Ok, You posted before I finished mine and I thought of that but can you leak that much stock into a low volume market without the sharp guys getting wise?
Someone is always watching the sells as much as the buy signals.
I know this sounds crazy but, at the end of the day, don't these companies have to generate something called sales to make the buybacks viable ?
By gutting employees and cap-ex, isn't this just nothing more than a strip-mining operation?
So we're seeing the pump but the profits aren't taken until the dump.
Looks like a risky business to double down on the greater fool theory and rely on the big players who have to be in the market. The timing has to be just right to make this work.
I'm sure I'm missing a few angles here because I'm running off the top of my head so what am I missing?
No country for old men.
No, you are right. Looting is going on.
The bottom line we are looking at a kind of Nepotism where investment is to those in the cartel.
Why work when you can BTFD.
Big POMO today - works well with a touch of share buyback.
No need to focus on revenues/profits.
Oh wait, POMO is done on Oct 28. That's not good. LMFAO!!!
If I'm a CEO of a real "profitable" company that makes money, why wouldn't I want to borrow long-term "cheap" and use the proceeds to buy our stock back? With interest rates low, and if we're profitable, that money can't be reinvested in a better place than our own company - and it makes me [the CEO] more money because it raises our EPS. Seems like a plan to me.
www.traderzoo.mobi
if you're profitable, why are you borrowing money?
to pull it forward
Musical chairs. What the algo boys haven't realized is that the chairs have been nailed to the floor and all teams are bringing in pinch hitters: they will soon be expected to participate in bloodsport amongst themselves for the right to sit when the music stops. Tie their left hands together and put knives in their right; make it snappy bitches, we got new European war to roll out.
All bullish to me. Just keeping buying camera on a stick.
Can we start a poll who like to see the next FOMC meeting being broadcast via a Hero4?
Indiscriminate buy backs via cheap credit inflates corporate share price.
Corporate insiders benefit mightily by dumping their personal shares into the inflated pool of shares and buy gold bars
with their 'earnings'.
"But who needs capex when you have financial engineering."
It's the caped Superhero Financial Market Utilities to the rescue! We're saved. We're saved.
http://www.chicagofed.org/webpages/publications/policy_discussion_papers...
All you have to do is dream it and it will come to be. Especially value and liquidity.
Every MBA course teaches you that :
"Debt is cheaper than Equity"
So these banks & corpns are blindly following this
like a dog chasing its tail
But when fundamentals are wrong
when businesses no longer serve the people
there would be no business left
to do.
Imagine when there is no more business to do...