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Goldman Warns Companies To Halt Buybacks At Record Valuations, Reminds What Happened In 2007
One month ago, Goldman warned that the biggest risk for the market was the stock buybacks hiatus due to earnings season, which in turn resulted in what was almost a modest market selloff, before someone stepped in to buy: we say someone"" because we know for a fact it wasn't retail or institutional flow, which has been pulling out of the market at the fastest pace in years...
So, yes "someone" - call it BOJ taking advantage of the CME's "Central Bank Incentive Program" to buy E-minis, or call it Citadel spoofing the ES higher with the explicit blessing of the NY Fed's Chicago office, it doesn't matter. Point is stocks are higher even as actual flows are reversing.
However, while preserving the farce of the S&P's relentless rise no matter the earnings recession, the 1% GDP or the negative funds flow, has been entirely a central bank mandate in the past month (one which will soon inlude the PBOC), the good news for the BOJs and the NYFeds of the world is that the stock buyback hiatus is almost over, and starting this week the bulk of companies can come right back and proceed to repurchase their stocks at all time highs.
And what a come back it will be. According to Goldman, the pace of buybacks is now absolutely off the charts, with nearly $1 trillion in buyback announcements expected in just this calendar year, a mindboggling number, one which is the same size as the largest annual Fed Quantitative Easing amount in any one year going back to the great financial crisis.
Corporate activity in early 2015 supports our view that the S&P 500 will return more than $1 trillion of cash to investors this year. We forecast an 18% surge in corporate buybacks and a 7% increase in dividends in 2015. S&P 500 repurchase announcements YTD in 2015 have totaled $265 billion, 59% higher than during the same period in 2014 (a 29% rise excluding GE).
Where is the buyback activity most acute?
Information Technology has the highest average buyback yield (5%) and total cash return yield (7%) among the S&P 500 sectors (see Exhibit 3). Telecom buyback yield averages 6% in addition to a market-leading 5% dividend yield. Information Technology, Consumer Discretionary, and Financials accounted for 56% of total buybacks during the last four quarters.
What Goldman does not show is that the biggest seller into the ravenous tech buyback frenzy has been none other than tech insiders, who are dumping record amounts of their own stock to their own company! We explained all of this in "The Nasdaq Has Become The Biggest Circle-Jerk In History."
What Goldman does show it the absolutely staggering amount of buybacks due this year: at $900 billion in authorized buybacks, this means that not only will corporate America soon be drowning in debt - again - but that corporations are on pace to inject more liquidity into the market than the Fed did at the peak of its QE!
Our corporate trading desk estimates that authorizations will total $900 billion this year, 4% above the 2007 peak of $863 billion. We have witnessed a 23% increase in active orders compared with last year. So far this year 146 S&P 500 firms have announced dividend changes and 142 of the firms boosted their dividend. The average dividend hike has been 15%.
And here something peculiar emerges: Goldman appears to actually be lamenting the relentless buying spree that companies have (and will) unleash of their own stock all with the management's intent of boosting their equity-linked compensation. It does so by reminding everyone - very vividly - what happened the last time buybacks were this high (pun intended):
Although we forecast strong buyback growth in 2015, US corporations should consider using their cash for other purposes. The S&P 500 P/E multiple stands at the highest level in the last 40 years outside of the Tech Bubble. In 2007, S&P 500 firms allocated more than one-third of their cash use ($637 billion) to buybacks just before S&P 500 plunged by 56%.
Is it legal for Goldman to remind muppets of what happened after the last stock bubble burst? We'll ping the CFTC on that one...
Conversely, at the bottom of the market in 2009 firms devoted just 13% of their annual cash spending to repurchases ($146 billion). Like investors, many firms are poor market timers.
Yes they are. And speaking of which, isn't it time David Kostin pushed up his 2100 year end S&P which is now 25 point below the latest print target, and is also on top of his S&P target one year from today?
Until he does, however, he has some advice for companies: stop buying back your stock.
Given current historically high equity valuation and a strong US dollar, for many firms a superior strategic allocation of cash could be overseas M&A rather than share repurchases. As an example, on April 7 FedEx (FDX) announced that it would acquire the Netherlands-based package delivery and logistics provider TNT Express for $4.8 billion, a 33% premium to the last closing price. Although the purchase was made with a long-term view, investors applauded the deal and FDX shares outperformed by 270 bp on the first day and the excess return has persisted.
And in parting, some philosophical words from Goldman's chief strategist:
The aim of a portfolio manager (and a strategist) is to forecast what will happen, not what should happen. We expect companies will repurchase shares at a robust pace in 2015, and investors will reward these moves. However, from a strategic perspective, managements would in many cases better serve shareholders by pursuing acquisitions. Others have argued for more capital spending. However, capacity utilization is just below the 40-year average of 80% and many industries do not need additional capacity.
Don't worry Goldman: once the bubble finally bursts and everyone, well mostly companies, hedge funds and central banks - retail checked out long ago - is stuck holding the bag and is desperate to sell to any bid you, like a good FDIC-backed samaritan (and funded with yet another Fed bailout) will be there to soak up all there is to sell. Because the aim of a good reported is to tell what will happen, not what should happen.
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Can't argue with ultimate logic of Goldman's points, but wonder how their advice is received? Perhaps like a rattling, venom-drooling snake, painted head-to-tail in squid ink, who says "Don't keep hiking toward the bright sunlight, the true way goes thru this dark, dank cave -- oh no, after you ..."
If you believe that Stocks are subject to the laws of Supply and Demand then "with nearly $1 trillion in buyback announcements expected in just this calendar year" really shrinks the supply side of the equation. Not helpful for the pending market crash.
Nor does "call it Citadel spoofing the ES higher with the explicit blessing of the NY Fed's Chicago office"
all you CEOs, don't listen to GS. Keep buying back those stocks at the top of the market. After all, it's not your personal money. That comes from the bonuses for screwing the company pooch.
seems like GS and JPM are as short as they want to be....hence the fear mongering is begining
You kind of have to wonder how heavily GS is exposed....
"Who you going to sell to...you're the egg man."
" 1% GDP?"
Dream on! Only in the world of BLS Make Believe.
This time is different cuz the cloud
OK great, so companies aren't supposed to buy back their own stock. What are they supposed to do?
1) Sit on cash / Buy giant gold nugget
2) M+A
3) Worthwhile investment
4) Return to shareholders
If the top 3 don't appeal to you, what is wrong with door no. 4?
How about paying any debt owed?
They are borrowing money on the cheap.........to buy the stock back.
All actions have a consequence.
How about paying shareholders a dividend?
Door #4 interferes with zirp dealer buying and selling within the banking cartel to make a profit.
So what, the FED will pick up the slack.
Someone is about to lose their wealth. I believe it's an important GS client.
It's market cannibalism then?
Having gold to leverage investment and financing wins.
The one left standing is going to have mad cow disease.
As long as there are fees to invoice, life is good.
this too, is bullish
About as bullish as whacking off without ejaculating.
I think what we're seeing is that as more babyboomers hit retirement age they're, shocker, no longer contributing new money into the markets and are all now slowly taking funds back out... soon there will be far more people taking money out of the markets than suckers like me putting money into them via our small% of salary into a 401k.
Of course QEx's will be what keeps this all going 'til the EMP wars put us all back to a kill-or-be-killed "society". :-/
Hence nigger Obama bringing new taxpayers.
I wonder of BOJ thinks Fukishima will destroy their country, so they are going to print unlimited money to buy up the US stock market, and then move over here. Same for the EU - the Euro will go down the tube, but they'll own a good chunk of American companies. Maybe these people are smarter than we give them credit for.
"Given current historically high equity valuation and a strong US dollar, for many firms a superior strategic allocation of cash could be overseas M&A rather than share repurchases."
Translation: We make more money off of mergers than we do off of stock buybacks.
You nailed it HB.
I fully expect corporations to continue;
1. Avoiding taxes
2. Lobbying
3. Borrowing cheap
4. Cashing out at regular intervals
That's what's good about them. That's why they command a premium beyond their base business. They can do many things I can't do nearly as effectively.
No one is forced to go all in or prevented from cashing out or hedging other ways.
What don't you understand? Oh it doesn't clean up the mess from all the corruption, confiscation, mismanagement? It may, in the long run, make things worse for the junkie bag holders? That's not a given btw, oh great swamis.
We're all junkies but it helps to keep some contact with reality.
Baby boomers are going to die. These motherfuckers think they're so smart in keeping the population at a fixed level to continue debasing the dollar. Might want to invest into a private security team.
We have special forces that can blow your head off from a mile away. Keep that in mind next time you pass laws. Blows kisses.
Sorry Tyler, just venting. I get so pissed when you already know the truth. I will refrain. Respect trust within you.
Fuck Goldman Sucks
Overseas M & A huh?
well of course, goldman makes a lot more money on M & A than stock buybacks.
Good Piece, A Must Read! - Record $Trillion 2015 Stock Buybacks Announced, Bigger Than Peak QE!
Leveraged stock buybacks are insanely deflationary in two different ways.
Company debt increases very nonfunctionally just to buyback own stock at record overvalued prices while this money is taken off the market partly parasitic on lower and stagnating wages and partly on ultra low ‘Funny Money’. Company cash suppose to be used to grow a company, but that strategy is so eighties.
'Get rich quicker' is CEO’s motto nowadays. Even company split ups are proposed just for stock value sake, it’s getting disgusting, this self defeating system trough shortsighted stock gain incentives.