As Firms Buy-Back Shares In Record Amounts, Look Who Was Selling

As the old adage goes "if you've been at the table for a while and you still don't know who the sucker is... it's you."

And in the case of the US equity market, it is hard to argue with who the 'whales' are and who the 'suckers' are based on the following data.

At the start of the year, when the impact of Trump's offshore cash repatriation holiday was just being felt, JPMorgan made a daring forecast: it predicted that buybacks in 2018 would hit a record $842 billion, a number that would put any prior year's total to shame. It also meant that as corporations themselves emerged as the biggest buyer of stocks in 2018, it would require an avalanche of selling to push the market lower.

More recently, when looking at its client trading activity, Bank of America made another surprising observation: in the first half, corporations were the only net buyers of stocks (with the only exception of companies in the Industrial sector), as institutions and hedge funds have been net sellers throughout 2018.

And while we were originally skeptical that JPMorgan's forecast would be validated, the latest official data blown all our skepticism out of the water.

According to TrimTabs, Stock Buyback Announcements swelled to a record $436.6 Billion in the second quarter, smashing the previous record of $242.1 billion set just one quarter earlier, in Q1. Combined, this brings the first half total at a ridiculous $680 billion, or just $160 billion less than JPM's full year forecast. Annualized, this number amounts to  $1.35 trillion, an absolutely staggering number.

Putting the Q2 number in context, TrimTabs writes that "the amount of money committed to buybacks last quarter could fund 6.8 million $1,000 bonus checks to workers every single trading day."

So, as we have noted numerous times, the 'demand' side of the US equity market is dominated by corporate buybacks... and within that group, dominated by the Tech industry.

All of which perhaps explains why, amid a collapsing yield curve, crashing yuan, trade war turmoil, and geopolitical chaos, stocks soared, led by the mega-cap tech stocks.

However, there's a dirty little secret lying just beneath the surface of this 'different this time' ramp in stocks.

Insiders are dumping their shares to retail investors at an almost unprecedented manner...

h/t @hmeisler

And guess what sector dominates... (hint - Tech!)

h/t @jmllubber

So while CNBC et al. are busy gloating over the soaring stock market (that must mean the economy is - or will be - awesome), perhaps it is worth them paying attention to just who is selling into this surge as they bring guest after guest on to stock-promote FANGs...

And even the SEC is starting to find this potential market abuse too much to ignore, as we noted previously, according to an analysis by SEC Commissioner Robert J. Jackson, Jr., company executives have been grossly abusing the timing of buyback announcements and selling significantly more of their stock immediately after the news than they do beforehand. taking advantage of price bumps that often accompany share-repurchase announcements.

But what is most infuriating, is that this is perfectly legal, and as the WSJ reports in a speech on Monday, a pissed off Jackson — appointed by President Trump and sworn in this year to fill a Democratic seat at the SEC — may emerge as the most credible SEC employee in years when he urges fellow regulators to review securities laws that provide protection to insiders who capitalize on the timing of buyback announcements.

This is where it gets bizarre: while companies engaging in buybacks have certain constraints, such as following a blackout period, or only selling on a NBBO uptick, insiders who sell stock into buyout bounces aren’t trading illegally and Jackson isn’t accusing them of that. But these price surges can be especially beneficial to corporate executives holding large chunks of corporate stock looking for an uptick to unload shares. And since it is the executives that decide when to buy back stock and when to announce it, it seems that this is yet another way for corporate insiders (literally) to skew the market in their favor. Oh, and the other difference of course, is that when the company, retail investors, algos (and central banks) are buying, corporate insiders - those who know their company better than anyone - are selling.

Almost as if the market is being inefficient and not rewarding those with the best information.

To be sure, Jackson is not happy with the fact that corporate insiders are so grossly exempt from what is so clearly insider trading, that it needs to be exempt:

“The SEC gives an exemption from market-manipulation rules to companies doing a buyback,” Mr. Jackson said in an interview. “The SEC shouldn’t be making it easier for executives to use them to cash out.”

And yet that's precisely what the SEC has been doing for decades. Ironically, it is only a Trump-appointed commissioner who dares to blow the whistle.

However, we suspect that this will never be allowed - since it remains the source of Trump's stock market (never mind enriching the anti-Trumpers at the top of the Silicon Valley sycophants).

Comments

hooligan2009 Sun, 07/22/2018 - 13:54 Permalink

stock buy backs should be illegal.

excess cash flow should be returned to shareholders to give them the option to reinvest - this should not be an option for c-suites/management to push up share prices so their stock options appreciate.

of course, the excess cash could be shared between the work force and shareholders, but then management would not get the excess cash right?

hooligan2009 Bobbyrib Sun, 07/22/2018 - 14:17 Permalink

agree with the debt point, very good point.

i cannot the stock buy back point.

management should not have the option to buy back stock,  shareholders should be given first rights to receive cash and reinvest, OR, receive cash and invest elsewhere.

how many billions of dollars has GE cost its shareholders in terms of stock buy backs? eyeballing that chart, it looks like around 100 billion of buy backs by GE

https://ftalphaville.ft.com/2018/02/19/1519031430000/The-buyback-backla…

it is my view (ya ya i know opinions are like noses/assholes everyone has them and they all smell) that in less than ten years time, the companies engaged in the largest buybacks will suffer the same fate as GE

In reply to by Bobbyrib

AGuy hooligan2009 Sun, 07/22/2018 - 14:41 Permalink

"stock buy backs should be illegal."

Stock buy backs are fine. Its stock buybacks using Margin (aka debt) that should be illegal!

FWIW: A very long time ago (ie 17th century). Stocks were used to raise capital from investors. The company that issued stock would payback in the investors by purchasing the stocks back at a higher price.

In reply to by hooligan2009

all-priced-in hooligan2009 Sun, 07/22/2018 - 16:11 Permalink

The people they are buying the stock from are shareholders -

 

So buybacks are 100% return of capital to shareholders.

 

It is just a fact - so if you "feel" different about it that is your problem.

 

Now I think any company that - in any way borrows money to buy back stock should be barred from deducting the interest expense on their tax return.

 

I mean any - if you have any debt outstanding and you buy back stock you lose interest deductibility.

 

But don't stop there -

 

Any company with an underfunded pension pays a 100% penalty on every $1 of buybacks it does.

 

All stock options should be adjusted for any company buybacks -

 

If a CEO has stock options available that equal .1% of the outstanding stock - and the company buys back 50% of its outstanding stock - the number of options available gets reduced to .05% - so in effect the same % of the company's outstanding shares.  Plus 100% of all stock options would be treated as ordinary earned income - subject to the full payroll taxes - with no dollar limit. And of course NOT deductible in any way by the company.

 

Maybe cut off any banker's balls that took a bailout and has earned more than $5.25 (five dollars and twenty-five cents) in option income.

 

 

 

 

In reply to by hooligan2009

numapepi hooligan2009 Sun, 07/22/2018 - 16:17 Permalink

Stock buybacks, far from returning revenue to shareholders, transfers wealth from the principles, (shareholders) to the agents (executives).

Remember, executive pay is largely based on the performance of the stock. There are a few ways to raise stock price, take market share, grow market share, innovate, lower costs, and buy back stock. Buybacks artificially inflate stock values and so inflate executive pay as well.

In reply to by hooligan2009

SnottyBubbles hooligan2009 Sun, 07/22/2018 - 16:26 Permalink

Assets = Liabilities + Shareholders' Equity

Buying back stock with cash assets increases shareholder equity and increases future earnings return. If you don't like the returns, buy another security.

 

Outlawing stock buy-backs would lock up $1T in US macroeconomic liquidity. The fed would need to print more money to make up for the liquidity shortfall in any given year.

 

 

 

 

 

 

 

In reply to by hooligan2009

vladiki hooligan2009 Sun, 07/22/2018 - 18:15 Permalink

Correct. Were illegal till 1982. No problem. But buybacks are a 'capital management tool' that reasonably applied would be OK, so the law was changed. Grossly abused, of course, since management hasn't the moral spine to keep its hands out of the till. So they again must again be made illegal ... albeit after the event. But half of Congress half-witted and all of them on the take from major corporate donors, so what chance?

The ongoing rape of corporate treasuries by those trusted to care for them is a disgrace, hugely against the national interest, and the scum in charge of these organisations merit our contempt. Sad thing is they're such moral pygmies they wouldn't care, so long as they got the $$.

In reply to by hooligan2009

PitBullsRule Sun, 07/22/2018 - 13:59 Permalink

The individual investor doesn't have very good odds in the stock market. Ever notice that you are constantly told you need to contribute to a 401K account, and after you do the only option you have is to buy stocks? There's a hefty fine if you want to withdraw the money, so better keep buying those stocks.

This is why real estate is a good investment, because of the lack of alternatives.

AGuy PitBullsRule Sun, 07/22/2018 - 14:48 Permalink

"The individual investor doesn't have very good odds in the stock market. Ever notice that you are constantly told you need to contribute to a 401K account, and after you do the only option you have is to buy stocks?"

As far as I recall 401K plans always provide low risk investments such as buying gov't debt\corporate debt.

"This is why real estate is a good investment, because of the lack of alternatives."

Except for the taxes, maintenance, and sudden crashes, just like all other investments. The advantage of Stocks\Bonds and other "paper" investments is generally they are easier to sell. Trying to sell real estate in a bear market is difficult without taking a loss, and during that period you trying to sell, you still have to deal with property taxes & maintenance.

Like any investment, if you buy at a steal and sell it before the bubble bursts you can make a nice profit. Unfortunately we are in an Everything is a bubble economy (Stocks, Bonds, Real Estate & cash). There is no market, only gov't & institutional investment manipulation.

In reply to by PitBullsRule

Quivering Lip Sun, 07/22/2018 - 14:02 Permalink

Silly me I thought all the corporate tax cuts would be used to create jobs in America.

Well at least the babbling incoherent narcissist in chief will put tariffs on American companies that manufacture in China. Oh that's right he's not going to do that. 

To bad he didn't use tax cuts to actually brings jobs back. 

Can't have the bubble burst on his watch because like every narcissist it's always about him.

Quivering Lip jmack Sun, 07/22/2018 - 15:43 Permalink

Which one the real one or the BLS number? Do you know how the BLS figures out the unemployment number? There's a survey number and then there's a birth/death model of new businesses.

There's U3 and U6. Look at the U6 number for a better idea of the unemployment number. Look at the number of part time no benefit jobs. Look at how many people have multiple jobs or side jobs.

Shit even Trump said they were all bullshit numbers before of course, he took office. Suddenly they're real? 

 

In reply to by jmack

DeathMerchant Sun, 07/22/2018 - 14:05 Permalink

Looks like the naysayers are tired of having their doomsday predictions not listened to so now this desperate ploy to turn the tide and make grandma and grandpa sell their shit.

Let it Go Sun, 07/22/2018 - 14:09 Permalink

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

 Reuters reported recently that “Share buybacks proliferate when the market is rising but evaporate when the market collapses.” In many ways, the decision way back in 1982 to again allow stock buybacks may highlight the true meaning of the phrase. "Been there, done that, learned nothing."

 http://Stock Buybacks Driving Market-Where It Might Take Us.html

MrNoItAll Let it Go Sun, 07/22/2018 - 14:18 Permalink

It means that back in 1982, the elites and other powers that be including military and intelligence agencies ALREADY saw the writing on the wall. It didn't take a genius. Projecting future population growth and future resource depletion, then putting the two projections side by side, anybody could see that after the turn of the century the global economy would cease to grow and instead start trending negative, slowly at first, then all of a sudden in a supernova of bankruptcies, civil unrest and resource scarcity. The plan put into place was to extend and pretend, to push the inevitable collapse date out as far as possible, but NOT past a time where they would lose the initiative. Everything points to the elites and powers that be getting prepared, dragging things out to complete their preparations. The only question now is, how much longer will they stretch it out before finally flipping the switch. Crash and burn is inevitable, huge reset is inevitable, they know it, we know it -- and the rest are all just sheep waiting for the slaughter.

In reply to by Let it Go

Clock Crasher Sun, 07/22/2018 - 14:10 Permalink

When this market falls 20% from the highs for 15 minutes intraday sometime next decade before rallying 10,000% people would have vaguely recalled this article. 

MrNoItAll Sun, 07/22/2018 - 14:10 Permalink

Who is BTFD'ing in the face of a constant barrage of negative economic data? Corporations themselves! Priceless. True Patriots they are, keeping pension funds from crashing, keeping the American Dream alive, pushing the date of global economic collapse forward day by day.

tedstr Sun, 07/22/2018 - 14:38 Permalink

Tons of these tech unicorns are bullshit companies who don't really have a valid business.  It gets worse if they actually had to pay for US citizens to do their coding/warehouse work, and worse still if they had to pay the others in real cash rather than options.  A big part of the tech pump and dump is supporting the ridiculous wage scales enabled by option.  It's not just the CEOs comp.  No doubt a big part of the tech selling is employees cashing out their options to pay for their absurdly priced SFO homes

Yen Cross Sun, 07/22/2018 - 14:55 Permalink

  All the money that corps had overseas was levered up with debt, and when it was repatriated they all started selling off the levered debt to do buybacks.

 So when SHTF, there isn't going to be a bid under all that debt being unloaded.

 Hint-- IG &HYG

Rabelais Sun, 07/22/2018 - 15:19 Permalink

As a professional who has modeled, and distributed Insider Data for 44 Years, I find this article consistent with my findings, and conceptually of value to Investors.  My work began in 1974 with a study confirming the work on Insider behavior presented by Dr. Martin (Marty) Zweig in 1974.  At the time, Dr. Zweig was working on his Doctorate at Michigan State University.  In my view, the Behavioral mechanics of the markets, in the qualitative sense, are nicely supported by the quantitative data presented here.

I note 3 features which require expansion:

One, it is important to consider the footnotes that accompany the Insider Transactions Ratio.  Limiting the data-set of companies to the top 20 buys and sells provides an incomplete picture of activity.  A more complete picture is painted by analyzing the entire universe of companies which are subject to Insider reporting requirements.  Of additional benefit in this approach, is that a more robust statistical picture of behavior at the Economic Sector, and Industry level is possible. 

Two, it is important to recognize that aggregation of Insider behavior - indicating a Bearish extreme - takes longer to work out in terms of a pricing signal, than does a Bullish extreme (where Buying predominates over selling.) 

Three, it is important to take into account the natural tendency of Insiders in Sectors or Industries to Sell or Buy.  In the case of Technology, for example, the natural bias is on the Sell side.  The effectiveness of predictive models based on Insider behavior is enhanced when this aspect is taken into account.

All-in-all a good article. I hope my additional notes have been helpful. 

More_sellers_t… Sun, 07/22/2018 - 15:22 Permalink

Insiders are notoriously bad sellers.   For many compensation is given in stock.  It has nothing to do with reality.  Not that I would buy any of these, but I wouldn't sell them for this reason.