Robert Bronsdon (Hollywood Rob)
This morning as I sat bleary eyed and confused I tried to slog my way through a lengthy, and no doubt insightful article on where the stock market is likely to land, and why it is likely to land there.
Kass – The Underpricing Of Risk
I am sure that Mr. Kass has made a lot more money in the stock market than I have and I will freely grant that he has a far far deeper understanding of how the markets work. But as I read I became more and more uncomfortable with one thing.
For almost my entire life…no wait, for my entire life, rich people have been selling me stocks in companies. I never really understood why this was a good idea but I assumed that it was the way that they got the capital that they needed to jump start their venture. They went to me to get money because it was cheaper than going to the banks. This no longer appears to be the case.
If indeed, as the author points out, 20% of the stock market activity over the past ten years has been to buy back all of the stock that they sold to me, what caused the changeover. Somebody in some boardroom looked up from his caramel latte and in a surprised voiced opined that perhaps it wasn’t in the best interest of the company to have all of these troglodytes having a say in how they ran their company. For all those years it was “we need to generate a reasonable rate of return for our investors,” and now it is “how do we get rid of those pesky investors?” And wouldn’t you know it, just when this spark of genius descended from on high into the consciousness of the anointed, their brothers in the fed up and dropped the interest rates so low that they could grab almost unlimited amounts of free money to buy back all of those stocks that gave those troglodytes a voice.
So they embarked on a spending spree of biblical proportions using other people’s money to sop up all the stock that they could get their hands on and promptly retired it. This 20% of stock buy backs is the sole driver of the stock market and has been for the past ten years. This buying back has to be pretty important to the anointed because they are willing to spend ever increasing amounts of money to pry ever more of their old stock out of the hands of the unwashed. I do suspect that using free money has been a boon to them, but it doesn’t explain why they want to shut down the stock markets.
So…that’s my question to all you market mavens. Why do they want to shut down the stock market?
Equity is actually the most expensive way to finance a company. Debt is much cheaper. If this really interests you, then look up the Capital Asset Pricing Model, which will help you to better understand risk and return and why equity is more dear than debt. The point is if your business can get really cheap debt, and buy back equity, it is generally a good thing as long as there is reasonable expectation for the company’s business to continue as in the past, i.e. it has the steady cash flow to pay down the debt and expects to continue to grow at priced-in rates.
Agree, more people should have an understanding of CAPM. That way they’d know just how upside down the world works today, as well as have a rudimentary understanding on how mega-corporations are on Welfare from Central Bank controlled interest rates and GovCo subsidies and tax favors. You have to read between the lines though.
Thanks Gilnut. And this is why rates can’t rise much. If that happens then paying the debt gets tougher since a lot is variable rates, meaning companies will have to fire a lot of workers. If this country sees another high rate of unemployment while fat cats are fine, we get the revolutions and riots a lot of people joke about. Except it won’t be funny because no one ever knows who/what emerges from revolutions. Ask the Russians
“no one ever knows who/what emerges from revolutions. Ask the Russians”
The American revolution was exceptional in that things went pretty swimmingly. Somebody smart (probably a white guy) said it was because there was no USA to subvert and sabotage the revolution.
Take a look at the Trump revolution, it seems we can detect the same pattern of resistance and sabotage where the deep state is in deep trying to put the kibosh on the whole thing. If all else fails, they may start a civil war just to bring everybody under state control, for our safety, of course.
WTF were you morans thinking? You can’t vote for freedom, shit, this freedom stuff might spread like a cancer to other countries in a domino effect.
To paraphrase Henry K. – I don’t see why we need to stand by and watch a country [gain economic freedom] due to the irresponsibility of its people.
You did get the “white people” thing right.
Never mentioned them, paleface, I said probably a white guy. Smarts do not attribute to all whites, at least not on TBP.
I think it’s more complicated than wanting to “shut down” the market. Key issues that I see that are controlling things right now.
1. Companies aren’t what they used to be. Big conglomerates and mega-corporations are an aberration and an unnatural phenomena. Stocks used to be used to raise capital to invest in the company in order to make more money, making the company ‘worth more’ and draw more capital investment…and so on. Nowadays, not so much, these big companies simply exist to exist, and ALL of them are getting Corporate Welfare from GovCo. I’ve worked at quite a few Fortune 50 companies, trust me this is more true than most people know.
2. Low interest rates completely break the ability of a ‘market’ to perform it’s only true function. Price Discovery. THAT is what has been suppressed since the US went off the gold standard. Without price discovery being allowed, a market is only able to perform one other function. Gambling. The “Stock Market” has been nothing more than a huge Casino for decades, one where free money is “laundered” into and out of the system by a very few people who have the money and influence to truly control these so called “markets”, the rest of us are only “picking up pennies in front of the steamroller”. BTW, the FED is now ONLY concerned with ensuring that Price Discovery NEVER HAPPENS, else the whole Ponzi collapses.
3. Beans and bullets. History shows that no country can provide for both Welfare and Warfare, it’s just not economically possible without incurring outlandish debt. Since WW-II the US has been at almost a constant state of warfare, and welfare has blossomed. The only way to ensure this ponzi continues is to ensure US Dollar hegemony remains guaranteed, else the gray train stops.
I could go on and on, but these are my top 3 and I don’t want to write an article in response to an article. 🙂
I like Gil’s explanation. Still, it appears to me that a switch was thrown a while back and that most companies and the people who run them realize that they don’t need you to own their stock any more.
“they don’t need you to own their stock any more”.
THAT’S the end game of monetization. Think about it, we’ve reached the point that even your identity and online activity has been monetized. There’s nothing left to monetize, THEY already own EVERYTHING. Even that house or car you think you “own”, just try not paying GovCo’s yearly rental (tax) and see how long it takes them to relive you of that property and hand it over to it’s “lawful” owner, the “state” and it’s corporate partners. Just sayin……….
Perhaps they are getting in position to have even grater riches (from the soon to be revealed World Financial, Political, Religious, Technocracy? Their motto: (Better us than troglodytes.)
I may be wrong about this BUT I DON’T THINK SO!
Daniel..
I agree.
Daniel, my brother, you are older than me and you can see things I never dream of.
I too hope to someday have grater riches.
Cheese grater, vegetable grater, ice grater, etcetera.
Somebody get Rdawg a cheeseburger.
Hells yeah.
Daniel, you’re a grate star in the face of the sky.
Must be the clouds in your eyes
i agree.
There is going to be some sort of a global debt reset/asset allocation in the near (few years) future. I have no idea what the precipitating event is going to be, or precisely how it is going to be accomplished, but a few things are clear:
-People who have a lot of unsecured debt (think credit cards and student loans, and medical care bills) for things that either canot be repossessed or have no value if they are repossessed will skate. Most of them are cash-broke anyhow, so all they will get is the end of dunning phone calls and threats to collect.
-Everyone not politically connected will lose the right to their cash and securities (stocks and bonds which are traded) overnight. They may still have some sort of interest in those assets, but will not be allowed to hold or dispose of them without authorization and steep (confiscatory) sales premiums.
-Owners of any valuable or productive real estate will, overnight, gain a new partner. Namely Big Brother of one sort or another. As with cash and securities, acquisition and disposal of these assets will require strict authorization and involve a hefty payment on any “equity liquidation” contemplated. You will still owe taxes on the land, but will not really own it in any unfettered fashion.
People with no money, no debt, and no attachable property will either be ignored or arrested, depending on whether Big Brother thinks you are stupid (ignored) or sneaky and hiding some assets (arrested).
The re-allocation of the securities (including mortgage paper), stocks (many companies will be seized outright), privately placed bonds and corporate paper (more seizure), and public bonds (made whole, I think, regardless of previous condition of servitude) will determine who is in charge of the globe for a bit. A short bit, I think.
The financial service types, who think they are players with their repos, forex, exotic derivatives and the like are going to be entirely and unceremoniously wiped out. And the public will (mostly) applaud when this is accomplished. If you are in this crew, get out right now. There will be no rights respected or sympathy extended.
Gonna get pretty sporty, by and by .
There are several reasons why public companies buy back stock. The order of importance of these reasons changes over the course of the life of a company and the economy.
1. The company cannot see its way to invest in its own business to gain income and profit. The reasons might be incompetence, risk aversion, competitive environment, economic conditions, and/or limited market size for its products.
2. Management wants its stock options to increase in value, especially when the timing is critical. Timing issues can be option expiration dates, retirement plans, and contemplation of the sale of the enterprise itself with prettying up the balance sheet (buybacks increase earnings per share and return on equity).
3. Stockholders like buy-backs, and big stockholders love them and they do the voting for Board members. Dividends are taxed as ordinary income while increases in the price of a stock are not taxed until the sale of the stock and often at capital gain rates.
Very often, even most often, managements do a terrible job of timing buy-backs, with action when prices are high and inaction when prices are low, indicating management has its own reasons for buy-backs that have nothing to do with maximizing shareholder value.
There are a lot more lobbyists in DC than Congressmen. Why? Corporations seek favors from the pols and the pols like money. All is made in heaven for both parties. CEOs these days are not hired so much for their management skills as for their skills in gaining competitive favors from the pols.
These days the big money is what moves stock prices. Trillions slosh around up on high while down low the common investor gets the hindmost, if anything, whether or not he invests on his own or through mutual funds. It’s a rigged game and the winners are the pols, the money managers, the banks, and the insiders.
Cryptocurrencies are the new game and the little guy who gets in now has a shot at big money.
“Cryptocurrencies are the new game and the little guy who gets in now has a shot at big money.”
Sadly it appears that particular train has already left the station. I also wonder what will keep the big banks from rigging the prices like they do to everything else once BTC and the other shitcoins get their ETFs?
Yeah, all the little guys got on the BTC train and it derailed before “The Big Money” was in hand. Is it manipulated Dawg? Could be.
I can’t think of one single reason why it wouldn’t be.
They have the means, the motive, and the opportunity.
There’s a really simple answer (bigfootmm touched on it above) and that is the buybacks counterbalance the generous options being granted to executives. When executives exercise options – it adds to the float of a company, which in turn hurts bullshit metrics like EPS. By buying back shares, the companies keep the float in check or actually reduce it, which juices EPS (which typically results in bigger bonuses and bigger options grants to the very same executives.)
“1. The company cannot see its way to invest in its own business to gain income and profit. The reasons might be incompetence, risk aversion, competitive environment, economic conditions, and/or limited market size for its products.”
Or it might be that we have reached Limits to Growth in the global aggregate, that oil production from existing fields is declining on the order of 6%/year or so (according to HSBC)
Those things tend to kill any sort of forward-looking debt-money system, a system currently unlikely ever to return to the world stage.
Charles A. Hall (21 min.)
“Organisms which use more energy than they gain are going to go extinct; it’s a kind of iron law of natural selection.”
But, but abiotic oil! Reeeeeeeeeeeee!!!
Hmm…I see a really good opportunity in printing in the future…..printing targets with bansksters and others from Wallstreet .
Re.”The Underpricing of Risk”: when I read that article initially, I wondered to myself whether risk is really “underpriced” or whether it is simply unaffordable.
I will add my pennyworth to these enlightening comments so far.
I prefer the ‘occam’s razor’ approach to the question. Humans are driven by fear and greed. In this case it is greed first, being that the guys with skin in the game and power of decision-making call the tune: they benefit handsomely from buy-backs, so that’s what they do.
If these guys believed in the future prosperity of their company they would invest in this, but they fear the future and therefore are jumping ship, staying in cash, until the storm passes. The rest of the arguments just add colour to the game.
Here’s an argument for unlimited liability to avoid corporate irresponsibility:
https://academic.oup.com/cje/article/34/5/837/1700679
Maybe TPTB Godfather said he wants Corporations to buy back stocks to keep Wall Street up for now and if they want to keep getting cash from out of the backdoor of the Federal Reserve and drug money from the Intelligence Agencies, they do what they are told with a smile.
It is really simple. What do buybacks do?
1) by reducing the number of shares owning the company, it increases the value of the remaining shares, assuming profitability remains unchanged.
2) it increases the EPS figure.
Any guesses how CEOs are generally remunerated? That would be based on increased price per share, and increased earnings per share.
Gee, I wonder why they are buying back shares.
Never spoil misinformation and tall tales with the facts.
The word for today is- UNDERVALUATION-Bob.
Knowing that times will be tough the company can hold cash to buy back stock to prop up the price. Money usually used for M&As and investment in new employees hires, etc. are used to hide income ratios.
A lot like the reason you don’t see mile long soup lines since the EBT card was in distribution.
Many insightful comments. Thank you all. I am not even going to argue with many of them, although so do tend to wander off the point. But the question that I asked is why, at some point in the recent past, did a large group of business leaders all decide to start buying back their stock. All of the arguments that you business men seem to present as reasons for doing stock buy backs existed for as long as stock markets have existed. What changed to prompt this massive stock buyback? Did a light bulb go off over somebodies head? Did it suddenly become uneconomical to invest all that extra cash in buying some other business? That’s what they did with it before the great crash of ’08. Did they decide that having all the money was all that they could get so why bother with that pesky stock market? Come on ladies. Show me what ya got.
The thing that changed after 2008 was the interest rate, Hollywood Rob. This has allowed the execs to load the company with cheap debt paying zilch on interest and saving x% on dividends – it’s a no brainer – and has been going on for 10 years.