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"Obsessive" Buybacks Could Be Big Mistake, "Serious" People Tell Unserious People
Over the course of the last several months we’ve taken every opportunity to point out the fact that undergirding the strength in equities is a wave of corporate buybacks. At nearly $350 billion, IG issuance recently hit a record for Q1 and HY supply hasn’t been too shabby either at $93 billion during the period. The supply deluge has of course been fueled by investors’ voracious appetite for anything that offers any semblance of yield in the face of a credit landscape where risk-free debt slides further into NIRP-dom with each passing month. Unfortunately, companies aren’t using the proceeds from debt sales to invest in future growth and productivity but are instead piling it all back into their own stocks, inflating both their shares and their bottom line and creating a false sense of corporate health. For more on this dynamic, see the following:
- And The Biggest Buyer Of Stocks In 2015 Will Be…
- Here Is The Reason Why Stocks Just Had Their Best Month Since October 2011
- The Biggest Threat To The S&P 500 In The Next Month: "Biggest Buyer Of Stocks In 2015" Enters Blackout Period
- Explaining US Stock And Bond Markets In 5 Easy Charts
And there are many, many more. Here are some visuals that illustrate the situation:
Now, the “very serious people” and the completely farcical people have teamed up to bring you the narrative that we’ve been pushing exhaustively. Here are some excerpts from an interview Christina Padgett, the head of leveraged finance at Moody's conducted with CNBC Wednesday on the pitfalls of re-leveraging to buyback shares:
Companies that obsessively buy back their shares could be making a big mistake, says one Moody's analyst. In fact, it may be time for corporate managers to rethink the popular buybacks and dividend hikes that improve the share price of a company without doing anything for its long-term prospects, she says.
"You have to expect that there's an inherent conflict between creditors and equity holders when it comes to share buybacks," said Christina Padgett, the head of leveraged finance at credit-rating firm Moody's, in a Wednesday interview.
Both stockholders and bondholders "believe in the long term success of the company, but there are certain benefits that go to the shareholder directly in the form of a buyback or a dividend that actually don't support future growth of the company, and so really don't inure to the benefit of creditors”...
Buybacks by S&P 500 companies rose to $219 billion in the first quarter, the highest since the fourth quarter of 2007, according to TrimTabs. Meanwhile, S&P 500 corporate dividends rose to a new record of $376 billion in 2014, according to FactSet…
"I'd like to believe that defaults are still a long way off," she said. "But my concern would be—if you think about how a company should position itself for further growth, you want to think of them as taking the cash they do have and using it to invest in something that generates growth”...
"If you think about the stock market today, it feels fairly overvalued," Padgett said.
"So you see a lot of companies buying back their shares at relatively high valuation, instead of taking that money and putting it into something more growth oriented."
Of course none of the above will be cause for Moody’s to actually make a move and downgrade any of those companies who are buying back their own overvalued stock with proceeds that should have been spent on “something that generates growth,” and while we’re happy to see someone besides us raising the alarm, we still think our take offers the most concise explanation of where we are and how it will ultimately end:
Buybacks also explain why, in the absence of the Fed, stocks continue to rise as if QE was still taking place: simply said, bondholders - starved for any yield in an increasingly NIRP world - have taken the place of the Federal Reserve, and are willing to throw any money at companies who promise even the tiniest of returns over Treasuries, oblivious if all the proceeds will be used immediately to buyback stock, thus pushing equity prices even higher, but benefiting not only shareholders but management teams who equity-linked compensation has likewise never been higher.
To be sure, this theater of financial engineering - because stocks are not going up on any resemblance of fundamental reasons but simply due to expanding balance sheet leverage - will continue only until it can no longer continue.
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25 billion dollars in stock buybacks didn't do pre-Government Motors GM any good.
I ga-ron-tee you it did the GM executives who did those buybacks a whole lotta good.
As far as shareholders, bondholders, and taxpayers are concerned-- who gives a fuck about them??
Gee, and I always thought it was spelled usurious. The root being usury.
As for the buy-backs, well, you just go ahead and try to stop them now that executive compesation is tied tightly with many companys' share price. Will it bankrupt companies when the next downturn happens? Sure. But the execs got their money and they're long gone to their private island by then. They got theirs, the hell with what happens after.
there is no future in corporate america that doesn't involve baby-boomer boards of directors, c-suites, and shareholders cashing out what 'they've built' over the past 40 years. "the future be damned, let's enjoy ourselves now" is the baby-boomer mantra, on full display at this moment in history.
better pray they don't need any support staff when they've completely cashed out, cuz there is a vast army of millenials that are hip to this game, and payback is a bitch.
Oh, weave me a $ 60,000. basket, will ya?
As long as the social media co's and google go to the turd farm I am good with the buybacks destroying the corp's future. And I make some $$ along the way to stack some more PM's
Yet another FED distortion/bubble.
In Other News……..
As the Sheeple continue to graze peacefully in the fields of MSM Propaganda……
The White House And Soros-Backed Open Borders Group Strategize About Bribing Immigrants To Naturalize Before 2016
http://dailycaller.com/2015/04/23/the-white-house-and-soros-backed-open-borders-group-strategize-about-bribing-immigrants-to-naturalize-before-2016/
i was under the (apparently mistaken) impression that pension funds were equity inflow positive every year. Glad to be wrong and bully for them. let's hope they aren't spending it all on junk bond derivatives (i'm talking to you calpers).
That's because it probably is behind the scenes. Wasn't there some Belgian bank that suddenly had a boatload of US bonds...? Lol. Musical chairs, bitcehz.
Yea buybacks r a sign of weakness not strength. It is a sign of even more weakness if the company has no growth, no ability to grow and no future plans to grow.
And yes in an overvalued market even more signs of weakness.
Yeh its all about growth, be it industrial, manufacturing, tech, health, science, education, mining anything, there is very little.. If you look at how many jobs have gone as the cool kids like to put it (Glocal) global/local aka outsourced to asia and india on slave labour wages then you soon realize they have eroded there own market base, own economies..
Instead of keeping the economies strong, they have weakened them by removing large sectors of cash flow in the lower to middle class, and all of this has been done to remain competitive, what we are now seeing is total marketplace monopolies being formed from the parasitic corporates to even survive, they have pushed margins down so low they have done woke up a demon and the race to the bottom is on. They will have to start cutting their own throats because everything else has been bleed dry.
Once you realize the buy backs are being done with inflated dollars, aka each passing moment the value becomes less and less as the spread of money is being sucked dry through utilities, lower wages, limited growth, health care and handouts, they are basically burning dollars on a failed economic system..
We will see trillions of dollars vanish as they are trying to drive growth by forcing more debt, its soo fucking awesome watching this :)
This is what happens when empires turn their backs on their own people, shit goes bad and becomes unstoppable, its like a fucking disease.
What happens when a company buys back stocks and then the value of those shares decline? Doesn't a company have to price that decline in? So don't companies then have to take a hit to their balance sheet or income statements?
look up the term 'Treasury Stock' in your 1st semester accounting class and it will tell you everything you need to know.
realistically, you don't even have to ask, look it up on the interwebz and for most everything short of quarks & the other side of black holes, you'll find the answer to what you're looking for.
But these days the truth is bad news, so they don't really need to do buybacks to get a share price boost.
So what will stop the buybacks? Get money at 0% and buy your stock back. My guess is they have no intention of repaying these loans. Same with QE. What will finally make the FED stop creating money out of thin air. The US dollar does not appear to be suffering at the moment.
Each time the Fed creates larger and more damaging bubbles.
Best if stock buy-backs continue at a hurried pace.And record IPOs of worthless companies as well.
When it pops it should do more damage than the last.
This time it's different because we already have close to 0% rates.