This Is What The Slow-Motion LBO Of The Stock Market Looks Like

When it comes to stock buybacks - an increasingly politically charged topic - 2018 has already been a historic year: as we first reported three months ago, as a result of Trump tax reform which made offshore cash repatriation far more economical, corporations would use much of this redomiciled cash to buyback $650 billion of their own stock in 2018, an all time high (for an extended analysis of the market and political implications of record cash flows, see ""Day Of Reckoning" Nears As Goldman Projects A Record $650BN In Stock Buybacks")

A few weeks later, JPM followed up with its own stock buyback analysis, calculating that no less than $840 billion in stock would be repurchased courtesy of the new tax law, a staggering number as shown in the chart below.

Fast forward to last week, when the WSJ expounded on the stock buyback tsunami, reporting that "U.S. companies are buying back their shares at a record pace, providing support for the stock market when many investors have rushed for the exits."

S&P 500 companies that have reported earnings for the first three months of 2018 bought $158 billion of their own stock in the first quarter, according to S&P Dow Jones Indices. That is on pace for the biggest amount in any quarter, based on data going back to 1998. About 85% of S&P 500 components have reported so far.

Indeed, this largely debt-funded activity - or rather extremely cheap debt-funded activity...

... has been a panacea to corporations and their management teams, eager to boost not only their stock price but also their equity-linked compensation, in the process sending the overall S&P to new all time highs, as more and more shares outstanding are quietly taken out of circulation.

"The reason these companies are buying their stock is that they’re smart enough to know that it’s better for them than anything else,” said Charles Munger, vice chairman of Berkshire Hathaway Inc., at the company’s annual meeting last weekend.

It is hardly a surprise then that Berkshire Hathaway recently became the 3rd largest holder of Apple stock: having lost the ability to innovate, Tim Cook is now the single largest repurchaser of stock in the S&P500...

... having just bought back a
record amount of AAPL shares:


Incidentally, Buffett's brief infatuation with IBM was for the same reason: until recently, Big Blue had been the biggest, most reliable repurchaser of its own stock. That all ended in 2014 when as we reported at the time, the company's leverage became too big to sustain the surge in buybacks, sending both IBM stock price, and Buffett's interest in it, tumbling.

Going back to the direct impact of buybacks, contrary to the false public perception that buybacks do not work, perhaps as a result of charts such as this one by Goldman which suggests that buybacks have done little to boost stock prices, which in retrospect is absolutely wrong...

... the WSJ found that repurchases have been especially effective in raising stock prices at a time when most others - both retail and institutional investors - have been selling. In fact, according to the Journal, companies repurchasing their stock have outperformed the broader market by over 170%:

Of the 20 S&P 500 companies that spent the most on buybacks over the first quarter, nearly three-quarters have outperformed the index so far this year. The group has risen an average of 5.2% in 2018, compared with the S&P 500’s 1.9% gain, according to a Wall Street Journal analysis of S&P Dow Jones Indices data.

Some examples:

Apple Inc., the largest U.S. company by market value, said last week that it would embark on a $100 billion buyback program. The stock surged 4.4% the following day and 13% for the full week—marking its biggest one-week percentage gain since October 2011.

Microsoft Corp.’s stock has risen 14% this year, after the company bought back $3.8 billion in shares in the first quarter. Boeing Co. , JPMorgan Chase & Co. and UnitedHealth Group Inc. are up this year after big first-quarter buybacks.

To be sure, buybacks have not worked for everyone: Amgen, the second-largest buyer of its stock among reporting companies in the first quarter, repurchased $10.6 billion of shares in the first three months of the year, and yet its shares are down 1.8% this year. That, however, hasn’t stopped companies from continuing to pump cash into buybacks. Amgen expects to buy back between $2 billion and $4 billion more of its stock in the second quarter, the pharmaceutical giant said.

How much longer can this continue?

The answer may well be "indefinitely", especially with debt interest rates still very low relatively to the pre-central planning era, which means companies will be able to keep issuing debt, gobbled up by yield-starved managers of other people's money, for the foreseeable future, until one of two things happens: i) rates jump to the point where it is no longer economic to repurchase stock at the expense of incremental interest expense, or ii) there is no more public stock to repurchase.

While the second may appear to be a joke, an analysis by JPM on Friday found that at the current rate of stock buybacks, all else equal - i.e. assuming no new stock issuance - the S&P will LBO itself in about 77 years. Here is the math from JPM's Nikolaos Panigirtzoglou:

The Divisor of the S&P500 Index, proxied here by the ratio of the free float market value divided by the price, is shown in Figure 2. Between 2014 and 2017 the S&P500 Index Divisor had been declining by 1.3% per annum. YTD it declined by 0.5% which annualized stands 20% above last year’s pace.

And this is what the accelerating LBO of the S&P500 looks like:

Some additional observations from JPM:

while our expectation remains that corporate buyback activity will increase this year vs last year due to repatriation flows as well as strong earnings growth and corporate tax cuts, thus far in 2018 it seems that most of the increase is concentrated to a few large companies and the share buyback increase for the overall US equity market has been more modest.

Others disagree, such as BofA managing director Jake Mendelsohn, who leads the desk that does corporate buybacks: "Activity is very widespread and we’re seeing it executed in a lot of ways."

And while nothing appears able to stop, or even slow down, the slow-motion LBO of the entire market, the reality is that while rewarding shareholders in the short-term while boosting your own stock price does miracles for management morale (by way of equity-linked comp), the trade off is the vibrancy, productivity and global leadership of America's corporations: critics say spending on buybacks comes at the expense of spending on R&D, hiring and equipment upgrades — things they believe are the ultimate drivers of growth over the long run. Of course, we all know what also is true about the "long run"...

Meanwhile, the topic of buybacks is so controversial, not even Charlie Munger can stop himself from yet another episode of demented hypocrisy, saying that buying shares just to keep the stock up is "insane and immoral." Ironic, considering Berkshire just announced it bought another 75 million shares in the world's biggest repurchaser of stock...


gdpetti venturen Sun, 05/13/2018 - 10:09 Permalink

Not yet.... when that happens, it'll be like those living near an active volcano that suddenly goes off..... seeing it coming for their entire lives... knowing the inevitable will happen one day.... but... but..... it never seems to come... until that day... and then nothing no longer matters... too late to leave... stuck.... market is the same... acquiescence.... apathy.... cognitive dissonance etc... all leading to sheep remaining sheep... asleep until slaughtered.... more energy in their screams that way... remember that truthful bit from "Mosters Inc"? Sadists know this priniciple well... and it's why wars never seem to end... if they did, their 'food' would run out.

In reply to by venturen

DipshitMiddleC… Sat, 05/12/2018 - 18:26 Permalink

they are bidding it up just in time for another economic shoah


it will be the last one for quiet sometime. it might be the last one forever as the NWO emerges and there is just one world stock market and it will be centered in tel aviv

chestergimli DipshitMiddleC… Sun, 05/13/2018 - 10:04 Permalink

You might be right.  Since most of the big corporations are now controlled by the Jews, it would behoove them to get stock in their companies out of the hands of us goyim.  Then if there is a takedown of bank computers internationally, no one will have any computer records of their cash stash, IRA’s, COD’s, etc. and all the folks who thought they had money in the banks will be SOL.  Then, Georgia Guidestones here we come.

In reply to by DipshitMiddleC…

MuffDiver69 Sat, 05/12/2018 - 18:35 Permalink

After months of heated debate over whether companies would hand the biggest tax break in three decades back to shareholders or reinvest it in their businesses, there’s finally some hard data..

>Among the 130 companies in the S&P 500 that have reported results in this earnings season, capital spending increased by 39 percent, the fastest rate in seven years, data compiled by UBS AG show. 

Meanwhile, returns to shareholders are growing at a much slower pace, with net buybacks rising 16 percent. Dividends saw an 11 percent boost.

>The data is a fresh rebuttal to those who warned that hundreds of billions of dollars of tax relief will head directly to the stock market and be harvested by shareholders already fattened by a nine-year bull market. 

While buybacks indeed got a boost from the windfall, companies increased the rate at which they unleash cash for building factories and upgrading equipment, a strategy that’s preferred by investors for the benefit of future growth.

itstippy MuffDiver69 Sat, 05/12/2018 - 19:52 Permalink

This is a Public Relations piece put out by the National Association Of Manufacturers.

"Manufacturers are reinvesting their tax reform savings back into their facilities, their workforce and their communities."

True, many are investing in new facilities and equipment.  However, the majority are NOT investing in their workforce or communities.  They're relocating and automating to cut those costs.  It goes like this:

Kraft Foods decides to build a new processing plant for Oscar Meyer Weiners.  They demand and receive large tax breaks for locating it in a Southern community that already has an Oscar Mayer Weiner plant.  The new plant puts the old plant out of business, eliminating 1,200 jobs, but creates 800 new jobs.  It's the best deal the Southern state community can get from Kraft's parent company, 3G Capital.

The new plant is so automated and efficient that it also closes down the old flagship Oscar Meyer Weiner plant in Madison, Wisconsin.  This eliminates another 1,200 jobs and an important tax base for the Madison community.

In the end, Kraft Foods saves a ton of money on labor costs and local taxes.  That isn't putting money into their workforce and communities at all, but it is good for shareholders.  The Corporation answers to its shareholders, not to its workforce or community.  

In reply to by MuffDiver69

RabbitOne itstippy Sat, 05/12/2018 - 20:30 Permalink

I totally agree with what you are saying. However you left out why it is happening and a few details....

The main force is political parties who will take any level of campaign contributions (bribe) and in turn allow any form of business corruption. Kraft lined a lot of pockets of lots of politicians and parties at the local,  state and federal level to make these deals. These campaign contributions (bribes) are exceptionally high since people would lose their jobs and government would no longer collect their dime’s off the back of workers. Partially to make up for this local politicians receive huge bribes since they are forced to defer taxes.

The assumption that automated plants save a ton of money on labor cost is not correct. I have worked in IT in automated plants and the labor savings was at most 20% in direct labor cost. It takes a lot of pricy manpower to keep automation working. Where the savings come in is in areas like injuries and the savings of workmen’s compensation. These amounts can be huge if major injuries take place in the plant.

In reply to by itstippy

the Dood Sat, 05/12/2018 - 18:57 Permalink

It's only good or bad in retrospect. They typically buyback most in the best of times, ie when the market is already high and times are good. 

spiff Sat, 05/12/2018 - 19:02 Permalink

"The reason the corporate executives mismanaging these companies are having the company buy their stock is that they’re smart enough to know that it’s better for their immediate short term gain than anything else,” 

There, fixed it.

JLarryL Sat, 05/12/2018 - 19:15 Permalink

This will end up as the biggest bubble of all time. Likewise, it should end with the greatest crash. And after the crash, companies will find that they have given up both the knowledge and the capital needed for innovation, while having amassed heavy debts.

Let it Go Sat, 05/12/2018 - 19:40 Permalink

America's tax plan will not have the effect many people hope. The structural issues that haunt America's competitiveness far outweigh the benefits of lower taxes. The ugly truth is American companies have little reason to bring jobs home, the logic that lowering corporate income tax will create a massive flow of jobs to our shore is flawed. 

Hidden within the tax bill are some provisions aimed at past violations of US tax laws that can lead to both civil fines and criminal prosecution for the corporate managers and their legal counsel who designed some of the schemes companies have used in the past. This could prove very important. More on why jobs may not come back in the article below.

http://US  Companies Have Little Reason To Bring Jobs Home.html

Constitution_Bitches Sat, 05/12/2018 - 20:45 Permalink

What is missing from most analysis of the Corporate Stock buyback programs is the fact that most of the stock is offset by new stock issuance through employee grants, RSU and or options.

Corporate Stock buybacks are another form of Wealth transfer through the very mechanisms created by the Federal Reserve ZIRP and NIRP counterfeiting programs.…

"Stock buybacks are one of many transactions that a company can execute on their stock. At the same time that it is repurchasing shares, a company may also be issuing new shares via employee equity grants or stock options. It is often the case that share buyback programs are instituted to specifically offset new stock issuance via such grants or options. As a result, it is possible for a company to issue more shares than it repurchases over a stated buyback period."

exartizo Sat, 05/12/2018 - 20:45 Permalink

So large corporations are So Desperate to keep their stock price up they're arbitraging the fucked up totally manipulated bubble interest rates which reflect only the complete destruction of real world risk so that interest rates now represent zero real world risk pricing to leverage their stock buybacks.

The obvious point being that without stock buybacks the Dow would potentially now be at HALF what it currently is, without ANY real buyers of American equities. That's real world economics. But today of course we live in The Funniest Money World in history.

If anyone ever had a doubt that the US government has totally fucked up the equity markets horribly one need look no further than this article.

This will end very very badly.



lizzoilz Sun, 05/13/2018 - 06:15 Permalink

Non e of the sources is legitimate. This tax buy back has probably topped.

I am just waiting for Shepwave traders to give sell signal. This week

MoreFreedom Sun, 05/13/2018 - 10:08 Permalink

It's hard to see how stock buybacks are "insane and immoral".   No one is being forced to sell or buy.  And it just represents those who like and own the stock buying out others who don't like it as much and who are willing to sell their shares.  

everything1 Sun, 05/13/2018 - 16:50 Permalink

I suspect Apple is poising itself to become the next media giant not sure, just a hunch.  Buybacks seem protective.  These mergers are as well.  And, they can use debt to buy them!  Wow.

They can sell them later for more because of scarcity, or distribute among the bosses who can sell them in blocks as they see fit, buybacks will tend to lift the stock prices, kind of a win/win for these hucksters.

Being that apple will be doing the most buybacks, no wonder .. buffet is just following the money here.