You hear the shills and shysters on CNBC every day telling you about record corporate profits and the fact that corporations are sitting on $1 trillion in cash. These scumbags are trying to lure you into the stock market just before this entire house of cards collapses. Jim “always sure, never right” Cramer interviews the CEOs of whatever stock he is hawking that day and everything is rosy.
The real data tells a different story. Corporations have never had more debt on their balance sheets in the history of our country. What are these brilliant corporate executives doing with these borrowed funds? They must be investing in new plants and new equipment and hiring thousands of new employees because opportunity abounds in the good old US of A.
Not so much. These bastions of American capitalism are using the borrowed funds to buy back the stock of their own companies to the tune of $124 billion in the first quarter of this year. So, let me get this straight. The stock market is up 100% from its 2009 low and now they are buying their company stock. The old buy high, sell low method. These company executives must be really positive about the future for their companies. I’m sure they must be buying their company stock hand over foot with their own substantial wealth.
Not so much. Corporate insiders have been selling their company stock at an all-time high rate. Here is some info from ZH:
Nothing new in the latest S&P 500 insider selling (and occasional buying). There were 2 (count them: two) purchases of stock by corporate insiders, of which one, which accounted for 97% of all purchases, came from Berkshire Hathaway. As usual selling dominated, with a ratio of 41 in notional sales to buys. And while we have been exposing this relentless dumping by insiders for years now, TrimTabs has added some voice to these ongoing warnings in which insiders sell their holdings to far less knowledgeable investors who are happy to burn “other people’s money.” Specifically, TrimTabs looks at the corporate share repurhcase-to-insider stock buying ratio, and gets some shocking results, namely that companies that have enacted $168 billion in corporate buybacks in 2011 have matched this with just $10 million in insider buying, a 16,800-to-1 ratio.
And this is where the rubber meets the road. Why should corporate executives buy stock in their companies with their own money when they get paid million dollar salaries with guaranteed multi-million dollar severance packages and a huge part of their compensation is stock options. Their goal is to use borrowed funds to buy back their stock, which will make the EPS go up, luring the ignorant masses into buying their stock, then they cash in their stock options and buy a nicer house in the Hamptons.
I’m having trouble seeing how this helps our economy, the middle class, or the average worker. Can a Wall Street scumbag please explain the benefits to us all?
The real story behind the market ‘boom’
Commentary: Companies are buying stock, but insiders aren’t
By Brett Arends, MarketWatch
NEW YORK (MarketWatch) — A new report from TrimTabs, the investment analysts, has blown the whistle on what really went on behind the stock-market “boom” we saw in the first quarter, when the S&P 500 Index rose more than 5%.
No wonder everyone turned bullish by the end of March — just before the market started tanking again.
So who was driving up the market? What was creating this boom?
Turns out it was the companies themselves. TrimTabs says companies spent a thumping $124 billion in the first three months of the year trying to boost their share prices by buying up stock.
That works out at about $2 billion for every day the market opened.
Meanwhile, according to Trim Tabs, guess who avoided buying stock during the first quarter? Company executives. The “insiders.”
These are the guys whose stock purchases tend to strongly signal bull markets and genuine booms. They were spending investors’ money buying their stock, but weren’t spending their own.
TrimTabs says insiders’ stock purchases came to less than $2 billion for the entire quarter, a comparatively low level.
“We’ve never seen such a sharp contrast between what insiders are doing with their own money and what they’re doing with the money of the companies they manage,” TrimTabs Chief Executive Charles Biderman wrote in a note. Stock buybacks outnumbered executive stock purchases by the highest ratio TrimTabs has seen since it started tracking the numbers back in 2004.
“While insiders are willing to use corporate cash to try to support the value of their stock-based compensation, they don’t seem to think their stocks are attractively priced,“ Biderman said.
No kidding. When it comes to insiders, follow what they do, not what they say.
When company executives are spending their own money buying stock, it’s a bullish sign. After all, who better knows their companies’ prospects? But when they are sitting on their hands or cashing out, it’s not so good.
As for companies buying up their own shares, this needn’t be a bad thing. After all, if you drive up stock prices, all shareholders benefit.
Share buybacks also are a pretty good way of returning cash to investors. They’re not as good as paying dividends, but they are a better investment than most of the other things management likes to do with the money — like investing in pet projects, or providing more executive perks or making ill-timed acquisitions.
Alas, in this case, there’s another chapter to this story.
Where did the companies find the money to buy back their stock? In some cases the money came from profits. That’s a good thing. But in other cases they just borrowed the funds.
According to the latest data from the Federal Reserve, corporate debt surged again last quarter — to the highest levels on record.
Debts for nonfinancial corporates hit $7.3 trillion by March 31, reports the Fed. That’s up more than $100 billion since the start of the year.
The total at the end of 2007, at the peak of the so-called “credit bubble,” was just $6.7 trillion.
This borrowing spree has pushed overall gearing for nonfarm, nonfinancial corporates to hefty levels. The Fed says that U.S. nonfinancial corporates now have debt equal to 50% of their net worth. It’s near record levels for modern times. As recently as 2006, it was just 40%.
When a company borrows money to bolster its own stock price, it makes me wary of the bonds. When the executives aren’t even willing to invest their own money, it doesn’t exactly make me enthusiastic about the stock either.
