"Day Of Reckoning" Nears As Goldman Projects A Record $650BN In Stock Buybacks

When it comes to stock buybacks - an increasingly politically charged topic - 2018 has already been a historic year: as we reported last weekend the $171 billion in YTD stock buyback announcements is the most ever for this early in the year. In fact, it is already more than double the prior 10 year average of $77 billion in YTD buyback announcements.

And, according to Goldman's revised forecast of corporate cash use, the buyback tsunami is about to be truly unleashed this year.

In a note released on Friday, Goldman's chief equity strategist David Kostin revises his prior forecast for S&P 500 corporate cash spending, and now expects that in 2018 corporate cash outlays will grow by 15% to $2.5 trillion as a result of corporate tax reform and strong EPS growth, with $1.4 trillion (54% of the total) going toward growth while $1.2 trillion (46%) gets returned to shareholders.

While Goldman expects capex to grow by a modest 11% to $690BN, remaining the single largest use of cash, it will be so only by a fraction as buybacks will be breathing down CapEx' neck, and are set to increase by a whopping 23% from $527BN in 2017 to an all time high of $650BN, an amount which would make total 2018 buybacks the highest annual S&P500 stock repurchase on record.


Here a quick reminder:  corporations - via share buybacks - have been the main buyers of shares in the U.S. since 2009. Non-financial corporates have repurchased a net US$3.3 trillion worth of US equities since 2009, according to the Federal Reserve’s flow of funds data based on calculations from CLSA's Chris Wood (see following chart). By contrast, households and institutions (insurers and pension funds) have sold a net US$672 billion and US$1.2 trillion respectively over the same period, while mutual funds and ETFs have bought a net US$1.6 trillion.

Cumulative net purchases of US Corporate Equities:

This tremendous demand for equities from largely price-indescriminate corporations has had a knock-on effect of crushing equity volatility: As Christopher Cole, the well-known Artemis hedge fund manager  who has been rightly warning that volatility has been artificially and dangerously depressed for a while, warned "Stock buybacks are in effect creating low volatility," adding that "Share buybacks are like a giant synthetic short-volatility position."

Recently, even Bloomberg hinted  at the dangers posed by buybacks, points out that "companies over the past decade or so have significantly increased buybacks to the point where they are now collectively the largest single buyer of stocks. Some have called the market self-cannibalizing. Equity shrink is the nicer way to say that."

As a further reminder, and as we first showed over two years ago, the explanation for the unprecedented increase in US corporate debt since the financial crisis can largely be explained with one word: buybacks. In fact, as SocGen showed, all net debt issuance in the 21st century has been used to pay for stock buybacks...

Vineer Bhansali, the chief investment officer of LongTail Alpha, who has warned about the volatility bubble, echoed Artemis and told Bloomberg recently  that buybacks can suppress volatility for the right reasons. When companies produce more cash than they can productively reinvest in their businesses, they buy back stock, lifting prices and curbing volatility.

The problem, as has increasingly been the case, comes when companies fund buybacks by taking on debt rather than with the cash generated by their operations, which as the chart above shows, has been almost exclusively the case. That's when repurchases become part of the leveraged low-volatility trade that can unwind disastrously when interest rates rise.

This is a problem because according to IMF estimates from last spring, "large U.S. corporations have experienced a negative net equity issuance of $3 trillion since 2009 due to share buybacks.” As a result, total U.S. corporate debt — piled on by both strong and weak hands — sits at an all-time high of $13.7 trillion. Meanwhile, as Kiril Sokoloff's 13-D notes, "the tax bill will disproportionately benefit the strong hands — for one, the richest 10% of companies control 80% of the $1 trillion offshore cash hoard. Begging the pressing question: As the cost of debt goes up, can the buyback spending of the strong offset the turbulence caused by the weak?"

That is indeed the question, especially in a rising rate environment because as we showed last week, the total cost of funding debt for buybacks has been rising in recent months.

It's not just the rising cost of debt that is a threat to the future of buybacks: there is also a growing political threat which may slow if not halt corporate repurchases. As 13-D wrote in its note last week, "a political backlash against buybacks is intensifying as the tax bill manifests — since passage, total buybacks announced exceed worker bonuses and raises by roughly 63x."

So going back to Artemis' warning, and the interplay between stock buybacks and low vol, recall the following excerpt penned by Chris Cole last October which perfectly encapsulated the importance of stock buybacks to perpetuate the record low vol regime observed until recently:

“The later stages of the 2009–2017 bull market are a valuation illusion built on share buyback alchemy…The technique optically reduces the price-to-earnings multiple because the denominator doesn’t adjust for the reduced share count…

Share buybacks are a major contributor to the low volatility regime because a large price insensitive buyer is always ready to purchase the market on weakness…Share buybacks result in a lower volatility, lower liquidity, which in turn incentivizes more share buybacks, further incentivizing passive and systematic strategies that are short volatility in all their forms…

Like a snake eating its own tail, the market cannot rely on share buybacks indefinitely to nourish the illusion of growth. Rising corporate debt levels and higher interest rates are a catalyst for slowing down the $500-$800 billion in annual share buybacks artificially supporting markets and suppressing volatility.”

A graphic representation of Cole's lament is shown below:

Of course, between Goldman's forecast revision, and actual corporate announcements which in recent weeks have included Cisco's announcement of $25 billion in share buybacks, Wells Fargo's $22.6 billion, Pepsi's $15 billion, Alphabet's $8.6 billion and Apple's ongoing stock repurchases which UBS believes will double to $60 billion this year, and Artemis fears seem premature at best.

Or perhaps not: to be sure, there are numerous caveats, and as 13-D adds, the topline numbers neglect the severe inequality within the corporate ecosystem:

As of 2015, just 30 firms accounted for half the profits of all publicly-listed U.S. companies, down from 109 in 1979. Only through cheap debt accumulation have laggards been able to afford the buybacks necessary to keep stock appreciation stable. As the IMF warned last year, 22% of U.S. corporation are at risk of default if interest rates rise.

Ultimately, the biggest factor enabling future buybacks is the recently passed tax reform, whose biggest feature is big cuts in corporate tax, and which is meant to encourage American companies to invest more in the real economy and less on financial engineering.

And yet contrary to expectations, companies are set to do the opposite and - if Goldman is right - will boost their buybacks by the most on record, hitting an all time high of $650BN this year.

This should hardly come as a surprise: recall that in November, during an event for the Wall Street Journal's CEO Council, an editor at The Wall Street Journal asked the room: "If the tax reform bill goes through, do you plan to increase investment — your company's investment, capital investment?" He asked for a show of hands.

Alas, as the camera revealed, virtually nobody raised their hand.

Responding to this "unexpected" lack of enthusiasm to invest in growth, Cohn had one question: "Why aren't the other hands up?"

The answer: because what companies really were preparing to spend money on was stock buybacks, as recent buybacks announcements have clearly confirmed. As for why CEOs, CFOs, and corporate treasurers pick buybacks over investment, the answer is simple: as Goldman notes, "Returning cash to shareholders is a winning long-term strategy," and since corporate executive comp is usually linked to the stock price, the monetary motivation is all too clear.

Hence the growing political backlash against buybacks, especially among Democrats.

There is more: add to these considerations the "paradox" that corporations generally retreat from buybacks at times of market uncertainty. The only year in the last 14 in which big U.S. companies spent less on buybacks than dividends was 2009, ironically the one year when they should have been loading up as stocks hit cyclical cheap levels. As Reuters wrote last week: “Share buybacks proliferate when the market is rising but evaporate when the market collapses”:

In other words, as long as the stock market keeps rising, largely due to buybacks, companies will likely keep those "buyback at VWAP" orders coming in. As Goldman's Kostin said, "the Goldman Sachs Corporate Trading Desk recently completed the two most active weeks in its history and the desk’s executions have increased by almost 80% YTD vs. 2017. New repurchase program announcements will also support buyback growth. Authorizations have surged by 100% YTD vs. 2017."

So can anything spoil the party? Well, yes.

First, and foremost, there's rates: as we noted last week, as debt costs spike, it will become harder for C-level execs, no matter how desperate to juice their compensation-dependent stock prices, to justify the balance sheet leverage to buyback shares in a market whose Fed Put appears to have been removed.

In addition to the potential threat of higher rates which could put a damper on debt issuance, and thus debt-funded buybacks, there are other, more intangible considerations. As 13-D reminds us, until the early 1980s, buybacks were illegal in the U.S. due to concerns executives would use them to manipulate share prices.

Today, politicians on both sides of the aisle are threatening restrictions, if not a reinstatement of the ban. Democrats have already made it clear buybacks will be a primary attack point as they seek to sway public opinion about the tax law and take back the House and Senate in the midterms. If rising interest rates and market volatility don’t curb buybacks, politicians may step in and do the job anyway.

One way or another, as the low-volatility regime winds down, buybacks appear destined for a day of reckoning, as 13-D ominously warns.

Buybacks have played far too big a role in the QE era not to cause complications as Quantitative Tightening progresses. In the words of Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked."


itstippy Atlas Crapped Sun, 02/25/2018 - 21:12 Permalink

The cost of debt servicing will eventually siphon off all corporate profits, making ownership of the corporations a liability instead of an asset.  Who would want to own stock in a corporation that's insolvent due to massive debt obligations?

Personal debt, corporate debt, municipal debt, State debt, and Federal debt will eventually be beyond servicing; the entities will go tits up, and a lot of people are not going to get paid what they think they're going to get paid.  The problem is global.

“Better enjoy the war—the peace will be terrible”  - a common saying in Germany circa 1944.  

In reply to by Atlas Crapped

Zhaupka Sun, 02/25/2018 - 18:11 Permalink

During the Great Depression, there were those who worked through it all, others part-time, others cyclically hired and laid off, and others who, as today, cannot and will never work again.

During the Great Depression the economic experience was repeatedly and vehemently denied calling the economic experience a Recession . . . a Great Recession.

Many years after the Great Depression all organizations did acknowledge all experienced a Great Depression.

History Today (over past 7+ years (2007) to Today 2014)
1. Fed paying security bonds (mixed with bad mortgages) to investors / businesses - others not fed insured are in court(s)
2. Businesses laid off millions, then took back many because demand was not satisfied
3. Businesses laid off trickle over past 5 years as demand lessened
4. Businesses reduced wage increases or gave none at all
5. Businesses receiving fed money held cash
6. Businesses were allowed accelerated depreciation and other accounting changes
7. Businesses hired part-time workers
8. Businesses paid fewer wages for same worker
9. Businesses see no real growth opportunities decided buy back losing stock values

So, investors / businesses slowly got Fed money, initially laid off millions of workers, hired back workers for less money, hired part-time workers, showed balance sheets awash in cash, used changed accounting techniques, bought their own stock seeing no other growth opportunities.

On paper all is well showing strong stocks, reduced costs, and better profits. Reality is this activity is False. It works! The accounting numbers look good. But False.

The cash was not gotten by businesses from the capitalist market, the hiring was not done for real demand economic expansion, the stocks did not rise on business supply to economic demand, and hence GDP is False.

Hence, economic expansion beyond equilibrium (between basic needs and supply) did not occur. There is no Growth.

Counting dollars at 2 percent +/- dollar inflation show more dollars used not from voluntary demand dollars but customers forced into buying at higher prices showing increase in sales dollars not actual increase in number of sales based economic demand expansion growth. Yes, a False economy.

Yes, the U.S. Federal government is at Fault. Providing cheap loans to the poor who received for generations U.S. Federal Government Welfare, wrote laws telling Fed to let loose money for low interest rates enabling those on Generational Welfare to use their housing stipend to move into a house, however, what was good for one-class is egalitarian good for all. Itinerant unstable income job holders in the economy were also approved hence housing bubble.

All mortgages were bundled with other investments -securities. The Generational Welfare could always pay because they get a steady monthly housing cash transfer (check) from the same U.S. Federal government (different department), the itinerant workers less able. Fail then Epic Uproar among the investors! Next the U.S. Federal Government via Treasury, via the Federal Reserve made / is making whole those defaulted securities paying a few trillion unaccounted for extra.

Taxes were not raised but Fees imposed in lieu of Taxes were. Muddle through (memes) i.e. New Normal, etc.

Businesses now having zero percent loans and awash with cash, if they take it, do not borrow for economic demand expansion (because there is none) but can borrow for margin stock purchases (buy low sell high margins) and could possibly pay back “fed gov loans” if stock “profit” margins are a gain. No cash for long term U.S. Economic Expansion based on Economic Demand. Finance Capitalism.

During the time U.S. Media (investor class) cooperated with the U.S. Federal Government broadcasting using the National Microphone to all U.S. Citizens via newspapers, magazines, radio, television, and the internet various Propaganda / PSYOPS supporting the Do-Not-Scare The Populace Policy using a variety of Propaganda / PSYOPS Techniques: All is well. Including today.

Next, the U.S. Federal Government Nationalized the U.S. Medical Industry forcing all U.S. Citizens to send money to the U.S. Federal Government.

Economic Reality: U.S. Economy is completely distorted (disrupted for those chic’). 100 percent of all U.S. Business are Directly or Indirectly Dependent on U.S. Federal Government for Earnings. All Six Stock Market Ratios Indicate False Stock Prices.

Truly, Baby Boomers are completing their lifetime purchases en masse. Demographically, GenX are missing the 11 million consumers needed for the economy (import foreign workers multicultural PSYOPS) as compared to Baby Boomers (77 million or so), and Baby Boomer Children (157 Million) won’t come on-line until 2020 the very earliest to make a Real Economic Recovery Reality.

Business Earnings Disclosures show Profits based on Economic Demand Flukes, U.S. Federal Government Direct Contracts, Modified Accounting Techniques, and Lessened Government Taxes, Reduced Work Force, Reduced Wages, and Supported Stocks via Buybacks. Including all aforementioned, many companies are able to show health.

What is next? More PROPAGANDA /PSYOPS: Stay Calm. Hide Facts. All is well.

Republicans skrewed u (again)? Vote Democrat. Democrats skrewed u (again)? Vote Republican.

All the same, Stay Calm. Hide Facts. All is well. THE “New Normal” WAR EFFORT (the threats “middle East” and enemies “Russia” and all that), and Finance Capitalism (China and India), u know.

Snaffew Sun, 02/25/2018 - 18:14 Permalink

so it appears that 2018 will be another stellar year for stocks as earnings will be massively inflated by share buybacks...perhaps by october, the market will be ready for a decline.  By then, the S&P should be at a ridiculous 3100-3300 level.  A massive selloff will take the S&P down to about 2700...or somewhere near our current levels.  What a racket.

cstu7011 Sun, 02/25/2018 - 18:20 Permalink

I try to buy corporation free as much as possible. If I have to buy.. I try to purchase on the secondary market.


I do anything possible to stay off their bottom line.

SH_Resurrected Pollygotacracker Sun, 02/25/2018 - 18:59 Permalink

"Reducing the float is a method of boosting EPS. Fraud."

Fraud?  WTF?

A Company that has 1M$ of annual earnings and is worth 9M$ is owned by 3 equal partners, so each owns 3M$ worth of the company and each have claim to 1/3 of its earnings.

One of the partners sells back to the company his 1/3 ownership.

What's the value of each of the remaining 2 partners' interest in the company?

What percentage of the company's earnings can now be claimed by each remaining partner (i.e., how much in $s did their individual claim to the company's earnings grow?)?

How much is the company now worth?

How was this transaction fraudulent?

In reply to by Pollygotacracker

Pollygotacracker SH_Resurrected Sun, 02/25/2018 - 19:19 Permalink

Your analogy is flawed. Not all shares are owned by partners. Some are some aren't. Institutional investors, retail, hedge funds, sovereign wealth funds, and central banks own shares.

OK. Explain...what is the purpose of share buy backs?

It is my humble opinion that they buy back shares to boost earnings without actually increasing cash flow.

It is a trick.

In reply to by SH_Resurrected

SH_Resurrected Pollygotacracker Sun, 02/25/2018 - 19:29 Permalink

"It is a trick."

No, a stock split is a trick.

A buyback, all else being equal, increases the value of the remaining shares.  And, yes since there's a reduction of shares, then each remaining share garnishes a larger size of the company's earnings.

There are solid arguments that can be made against buybacks, especial the current ones, but seeing an increase in the per share earnings is never one, especially one that claims that seeing an increase to the earnings per share is fraudulent.

In reply to by Pollygotacracker

SH_Resurrected Sun, 02/25/2018 - 18:35 Permalink

It's not too late to front-run this upcoming buying madness, especially since we just recently had a bit of a pullback and SPX not having yet reached its pre-pullback level.

Party on, Wayne!

Party on, Garth!

MusicIsYou Sun, 02/25/2018 - 18:51 Permalink

You mean as they keep the circle-jerk going. Like the funny thing about the Olympics is that it's five rings. But they forgot about the actual Lord of the Rings. And like in the way an Arc is a partial ring, and how God appointed Noah to build an Arc which is really just a partial ring. But they aren't dealing with just a arc, or a solitary ring, they're dealing with the Lord of the Rings. Like building an Arc out of light/ Gopher Wood. Can you talk to gophers do you know what gopher wood is? Gophers sit there amazed standing in the light outside their hole full of wonder.

JibjeResearch Sun, 02/25/2018 - 19:17 Permalink

Gentlemen, you better fight for some of those shares...

because if you don't have some, you'll likely fall behind.


Nokia is cheap with dividend, and the next 5 years will be about 5G network and IoT. 

Noone can help you, but yourselves.

the_river_fish Sun, 02/25/2018 - 19:35 Permalink

Don't really think businesses are bothered about bond yields.

In 2016, public listed companies consumed 51% of net income in stock buybacks, 35% for dividends, leaving just 14% for all other purposes.

In the US, the 500 largest listed corporations spent on average 64% of their profit on buying back shares between September 2014 and September 2016.

US companies have announced over $100 billion worth of corporate buybacks already in 2018.

In the US the top 200 companies (exchange listed and private) account for around 90% of all corporate profits.

There are far fewer listed companies globally now then there were 20 years ago. 20 years ago, there were over 8000 stock market listed companies in the US, that number has halved by 2018.

With very little choice, valuations are soaring especially for the very big listed companies. Little wonder the market doesn’t worry about valuations any longer. Neither do corporates worry about bond yields. 


g3h Sun, 02/25/2018 - 20:24 Permalink

As long as we can lock her up, and have our supreme court, I will sleep in the street and give my every penny to the rich.

Trump forever !

idontcare Sun, 02/25/2018 - 20:44 Permalink

SO, IOW, the tax bill was about keeping the stock market ponzi scheme alive while allowing the FED to exit & take their chips over to Asia.   So, Dow 30K by May?

Yen Cross Sun, 02/25/2018 - 21:38 Permalink

  The irony of it all, is that corps are borrowing against their repatriations to buy their own stock(s)

  The cash is still sitting idle because rates are so low. [Capex is a fucking joke]

Companies would be fucking retarded to invest in expansion this late in the most easy $ expansion in the history of the universe!

awarebulldog Sun, 02/25/2018 - 23:19 Permalink

I wonder how all this affects the new employees of the big companies.  Big companies are giving stock grants at review time.  New employees are getting grants at the highest stock prices the company has ever had.  Are we to expect that the prices will just keep going up at the pace they are now?  What if there is any type of correction?  The employees stock grants are not worth much.  Should we assume for the interest of the morale stock prices will just keep going up at the pace they are now?  Short term it can be explained as the bad market.  Long term it makes the employee question things.  Just thinking aloud.

duckandcover Mon, 02/26/2018 - 00:12 Permalink

This article did a terrible job justifying the headline.  Interest rates are not gonna 'spike'

Cheap money > buy back stocks > same earnings, better EPS, better stock price, issue stock at an increased price, pay off your debt.  It's really not that complicated.  It must be working for someone.

Phillyguy Tue, 02/27/2018 - 09:48 Permalink

The philosophy on Wall St is always the same- insatiable greed. Just prior to the 2008 financial implosion, then Citigroup CEO, Chuck Prince was quoted by FT “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” (Link: business.time.com/2007/07/10/citigroups_chuck_prince_wants).

Unfortunately, none of the problems which created the 2008 financial crash-multiple tax cuts for the wealthy, job outsourcing, financial deregulation and spending astronomical amounts of money on the military, have been resolved. Rather, equity markets have been inflated by a FED- fueled orgy of corporate debt, where large corporations have borrowed over $3 trillion of ultra-cheap money from the FED for share buybacks and MA deals. To my knowledge no society has developed an economic perpetual motion machine where a countries economy can be forever sustained by printing money and issuing unlimited debt. This is going to end very badly.  See- “Day Of Reckoning" Nears As Goldman Projects A Record $650BN In Stock Buybacks Sun, 02/25/2018; Link: www.zerohedge.com/news/2018-02-25/day-reckoning-nears-goldman-projects-…