From Birch Gold Group
It appears the “sleight of hand” that corporations use to inflate share prices and bloat balance sheets may be slowing down, for now.
The website Wolf Street highlighted the beginning of the end for this round of corporate share buybacks:
So far into this crash, over 50 companies have suspended share buybacks, accounting for $190 billion in cash that is not flowing into the stock market, representing over a quarter of total share buybacks in 2019.
HSBC also issued a dire estimate of $300 billion in lost inflows for the next two quarters, thanks to further buyback cuts.
Like a rendition of the late Billy Mays infomercial, however, there’s more…
Bloomberg reports that, according to Chris Wood, global head of equity strategy at Jefferies, the corporate share buyback game has ended:
The problem for the U.S. equity asset class is that it began the downturn so overvalued at a record high valuation to sales… The other problem is that the leveraged share buyback game has ended, which also means an end to the phony earnings growth it produced.
Stephen Dover, head of equities at Franklin Templeton added that limits might even get placed on buybacks in the future:
Probably going forward there will be regulation, or there will be limits to how much companies can do buybacks and pay dividends, and that will affect how much the market appreciates… It could put the United States market on a more even playing field with overseas markets, where buybacks are less prevalent.”
Already, any companies that get aid from the recently-passed coronavirus stimulus package will be prohibited from stock buybacks. As for all other companies, we’ll have to wait and see if any limits get placed down the road. For now, a more important question needs to be asked…
Could Canceled Buybacks Make this Market Crash Worse?
The interesting “sleight of hand” that corporations use to repurchase shares seems to manufacture market cap out of thin air. For example, in their 2018 Q2 results, Apple announced $100 billion in share buybacks, likely leveraging the new tax incentives available from the Administration at the time.
The tax incentives and share buybacks, along with media hype, increased Apple’s market cap by a whopping $118 billion. All from some fancy bookkeeping.
But today, the “sleight of hand” comes when that cash disappears into thin air after benefiting the corporation that pulls it off. As Wolf Richter explains:
This is cash that became a fresh inflow into the stock market. Most of these shares were canceled after the companies had bought them back. From a company point of view, this money just disappeared.
The drawback to this tactic comes when the corporation actually needs money, like right now. Since the “sleight of hand” made the money disappear, companies are now stopping this “cash furnace” to the tune of hundreds of billions that used to go into the stock market.
That is one big, empty hole in the markets that used to be filled with corporate cash flow. Wolf finished his coverage with the price for using “market cap magic,” and the potential impact for the U.S. economy:
By incinerating $4.6 trillion in cash since 2012, and often borrowed cash… companies willfully burned up their equity capital and rendered themselves recklessly fragile and overleveraged, and predictably far less able to withstand the next crisis.
Leaving aside the speculation of whether these companies foresaw the current crisis or not, if these companies don’t make it, jobs and economic spending are at stake.
So it seems like a bad situation was made worse by at least some of these corporate share buybacks. And, on top of that, they could be bailed out by the Government.
Thankfully, the current $2 trillion stimulus package has those rules to prevent buybacks, for now. The future remains up for grabs; let’s just hope fundamentals play a bigger role.
It’s Not Too Late to Consider Your Own “Crash Insurance”
Similar questionable “fundamentals” that those dot-com companies used to inflate their share prices have us potentially headed right into an even worse recession than originally thought.
And now that much of the buyback “gravy train” has stopped, the markets are left without a massive crutch. Consider this an opportunity to think about protecting your retirement with some “crash insurance” in the form of diversification and asset risk reallocation.
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Why use Apple as an example? Their buyback program was used to give shareholders more value, which is, or rather should be, the whole point of being a shareholder. Apple had and has the money, which comes from the profits of a well-run company.
In other cases, cheap fake money was borrowed for buybacks solely to goose share prices so the people mis-managing those companies could exercise their stock options and grant themselves outrageous bonuses. In a sane economy, nobody (unless they were getting a kickback) would loan a failing company money to buy back their own shares. No regulation needed, just end the Fed.
Value? Borrowing money to buy back shares to make the share price inflate is a scam, it is not producing value. It hurts the company, and the shareholders who support it deserve to lose their shirts.
Paying dividends doesn’t produce value either. This is an old concept you’re probably not familiar with: rewarding shareholders (the owners of the company) for risking money on you.
I get that your more modern thinking is to “buy the dip”, not caring at all about underlying fundamentals or even if the company is profitable, then wait for the Fed to increase share prices through money printing so you can then sell to a greater fool. Now THAT’s creating value.
At least paying dividends is coming out of profits. To go in debt to buy back stock at stupidly high valuations to increase that value even more is unsustainable and self destructive. Both CEO’s and shareholders are guilty of putting their own short term gains ahead of the overall health of the company. I have no sympathy for the people who bought into the pyramid scheme and are now losing their asses… They deserve what they are getting.
“Why use Apple as an example? Their buyback program was used to give shareholders more value”
perhaps it’s a matter of (((who))) the shareholders are, more than a matter of “upholding the economy”.
Gee… you think? You mean a scam perpetrated to make money for CEO’s and shareholders at the expense of the companies welfare is going to have ramifications to the companies value? Hmm, who would have thought?
Give it 6 mos. and you will not be able to get anyone to buy stocks at any price. This thing is going to make 1929 look minor in comparison….
“This thing is going to make 1929 look minor in comparison….”
One can only hope.
“One can only hope.”
at this point, a well-founded hope.
“if these companies don’t make it, jobs and economic spending are at stake”
if the companies are insolvent and failing, are their employee taskings valid? I mean in a dog-eat-dog capitalist sense.
Capitalism will survive, although it will go through a very rough time. Businesses built on poor foundations and people with un-valuable skills will fail. Strong businesses, and people with real skills will survive.
We will see a resurgence in “gorilla capitalism” in which people with skills or the ability to provide products will work under the radar and out of reach of the tax man. Side jobs, and working for cash will become popular as people turn to friends and neighbors to do the jobs they cannot do themselves instead of using businesses with high overhead and prices.
Real money will be based on value. (Skill, labor, items or food.) Barter will be king. I figure energy (anything from labor to gasoline) food (or your ability to grow food including seeds) and dirt (the right kind of real estate) will be and remain valuable. Few people will have use for insurance agents, realtors, etc etc.