It’s time to add stock buybacks to the long list of bubbles beginning to pop.
Market Roundup
U.S. corporations announced just $244 billion in planned buybacks during the first four months of 2016. That was a hefty 38% plunge from a year earlier, the biggest drop since 2009, according to Bloomberg.
Companies generally only buy around 81% of the shares they pledge to. So the actual pace of buybacks will likely fall below $600 billion this year – the first time that has happened in three years. Falling profits, less cooperative debt markets, and management conservatism are all contributing to the buyback bust.
Why does that matter for the broad market? Because companies have been the biggest equity buyers over the past several years, snapping up more than $2 trillion of their own shares since 2009. Without that buying power to prop them up, stocks look vulnerable.
|
|
| Falling profits, less cooperative debt markets, and management conservatism are all contributing to the buyback bust. |
What’s more, hedge funds, wealthy investors, and other individuals have been net sellers of shares for the past 15 consecutive weeks, according to Bank of America (BAC). That’s the longest streak on record. And to top it all off, more companies are cutting dividends now than at any time in the last seven years.
If you go back to my bubble list, published most recently in early April, you can see that I warned about debt-funded stock buybacks. I also listed several other asset bubbles, including tech unicorns and commercial real estate, which are unsustainable and bound to pop. My work suggests that process is already underway, so be sure you get your capital out of harm’s way.
| “Be sure you get your capital out of harm’s way.” |
In the meantime, I’d love to hear from you about the buyback bust. Do you think it will have a significant impact on stocks? Why or why not? Why do you think other classes of investors, from hedge funds to wealthy individuals, are consistently yanking money out of stocks? Use the comment section to add your voice to the mix.
|
What is the bond market telling us about the state of the economy? Should we be concerned about lackluster growth? Several of you weighed in on those topics over the weekend.
Reader $1,000 Gold said: “The bond trade is getting awfully crowded. Once everybody gets in, you know what happens next. I’ve sworn off leveraged funds, but that TMV ticker (the Direxion Daily 20 Year Plus Treasury Bear 3X Shares) is tempting me daily.”
But Reader Gordon said he’s plenty concerned about the economy, and that should continue to support bond prices. His view: “Governments should be charged with racketeering the way they are throwing false numbers around, mostly inflated. Banks are really in trouble with all these low interest rates. And let’s see how car sales hold up in the future with manufacturers almost daily being found to be fudging their performance figures.”
Reader Justin added: “With so many weak and even failing retailers, it looks like a recession. Remember the ‘soft-landing’ rhetoric in the early ’90s, which the government finally admitted was a recession five or so years later? Therefore, I have a hard time believing government ‘state of the economy’ statements that have not undergone five years of review.”
Lastly, Reader Mike S. said: “The only way to clean up this Federal Reserve bubble is to let the economy bust. We can then start at zero and rebuild the economy the way it should be as a free market.”
Thanks for sharing. And if you didn’t have a chance to add your thoughts to the mix yet, feel free to hit up the comment section below.
[Read More – Yet ANOTHER Billionaire Warns About Coming Chaos – Mike Larson]
|
Hong Kong became the latest market to suffer a “Flash Crash” overnight, with markets plunging over 2 percentage points in about 2 minutes out of nowhere in the mid-afternoon. Investors and traders couldn’t seem to explain the move in the Hang Seng China Enterprises Index, where so-called “H-shares” that track Chinese equities trade.
Many investors have gotten disillusioned by the losses in big technology names like IBM (IBM) and Apple (AAPL). But not Warren Buffett, apparently. His Berkshire Hathaway investment firm increased its stake in IBM, and added a new 9.8 million-share position in Apple. That’s worth around $900 million at recent prices
 Like shopping at Amazon.com (AMZN)? Then you’re in luck, because you’ll soon be able to buy the company’s own private-label products. The Internet retailer will start selling food, vitamins, and household items under brand names like Happy Belly and Wickedly Prime in the next few weeks.
 Drug giant Pfizer (PFE) is buying Anacor Pharmaceuticals (ANAC) for $5.2 billion, a move designed to add eczema and toenail-fungus treatments to its collection of products. The price represented a 55% premium to where Anacor closed on Friday.
What do you think of Buffett’s latest moves in the technology sector? Good or bad investments? How about Amazon’s private-label brand foray, or the mini-Flash Crash in Hong Kong? Let me hear about it in the discussion section below.
Until next time,
Mike Larson
Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 43 comments }
I may be wrong, but I think you can add gold to the list of things that will soon “pop.” Gold has moved a long way in a short period of time (and the move up is seemingly out of the blue) …..but, they’re still running the adds on tv, wanting people to buy coins. When gold really begins it’s move up, I believe the coin adds will strangely disappear. Everyone will be ready to save up and stockpile gold then.
Eczema and toenail fungus … that’s what this market reminds me of :)
No doubt that Amazon is on a VERY fast track delivering even more than expected. Private label is fantastic so why don’t they call it “Amazon”? The names suggested in your story are vial, disrespectful of the parent. too.
w/so many opinions out there I really do not have a clue where
any of these markets are headed.
Whats the view on Ireland? Growing at double the rate of the euro zone > ? IS this a country that will benefit or decline if Brixet occurs ?
If buybacks are $2trillion since 2009 and unicorns and trash stocks have taken pretty big hits.. then who is left to sell? I would offer that this at least gives some idea of why it’s so quiet (before a storm?) So, I say the next rout of selling is going to be panic based. What goes up soooo fast , must come down just as fast. I would also offer that there are plenty of Swans.. pick your shade:) to get that ball rolling and just when the Fed might be forced to raise rates. It could be ugly now through October.
Ireland is growing because so many American “multi-nationals” are moving there to achieve a 17% tax rate instead of the U.S. 35% rate. Burger King, Wendy’s and 100 others have “inverted” and are still being allowed to plunder the U.S. market without paying taxes on there American profits. It’s absurd. . . unless you’re Irish.
What’s absurd is a US corporate tax rate of thirty five per cent. Jim
Agreed Jim. When you set the tax rates too high….businesses and individuals flee. This is part of the reason that Bernie and his 90% idea are insane. Tax revenue would actually decrease significantly under his hare-brained ideas because funds, people and businesses can now move…quickly.
Anyway, Corporations don’t pay taxes. We do. Jim
“The trend is your Friend”
So, do what the Corporations are doing, get citizenship in low tax jurisdictions! Since when is it illegal to hedge yourself against these ridiculous high tax rates in America???
Your right Jim. A famous statement from the past from Leona H is “The rich do not pay taxes the little people pay taxes”
There are no “free markets” left with the Fed Reserve in control of the bubble machine and federal regulation heading for 80,000 pages. The Deep State elites and corrupt Congress will keep all the balloons floating until someone wakes up one day, and tells the truth about the emperor’s missing apparel.
The near psychotic behavior of this market is becoming very tiring. Far too many normal A:B relationships are way out of kilter, and my trust of the data has drop to such a low that it may have no further to go (for me anyway).
I’m not sure how to take Mike’s article today on the tailing off of buybacks. On one hand it could simple mean that they’ve bought back the number of shares that they wanted out of the market. Another perspective might be that the low interest used to buy those shares back is about to jump higher, perhaps much higher quickly, and they want to get out of the way. If it’s the later case, our government is in deep/exceptionally deep poo. Our debt is barely serviceable at these interest levels, if the market drives (read not the fed) interest rates rapidly higher, our national debt could easily become un-serviceable. When you add in the stealth (actually not so stealthy) attack on the US dollar as the reserve currency, and how that issue might further push our formerly usable metric into an unrecognizable mess, we are clearly in for a rough ride.
Key takeaway: all of this uncertainty = risk/unacceptable risk, which will rock the markets …. eventually …. you know, once the banksters have filled up the trucks, and their license plates are no longer readable. Brace yourselves.
The big boys are probably reducing their equity holdings due to your advice!
What is the rational of share buybacks in today’s market?
Is there any value long term value giving back to the shareholders when a cash rich company issues billions in new long term debt because it’s more cost effective to issue new debt at current record low interest rates than it is to bring in the equivalent in cash from overseas accounts & be forced to pay a significant premium in taxes?
Does it help a company to be more productive and innovative when billions are redirected to buy back stock rather than investing in new plants, equipment, R&D, etc. for the sole purpose of reducing the number shares to improve EPS & other Wall Street metrics that are based on the number of shares outstanding?
Does it improve employee moral who have seen stagnate wage increases, increased workloads due to cost cutting, etc while hearing their CEO boast about how under their leadership the company has returned billions of dollars back to the shareholders through share buybacks while knowing one of the beneficiaries of the buybacks are the CEO and executives who directly benefit because of the higher share prices?
Seems to me that the purpose of share buyback is to get the short-term approval from The Street while ignoring the longer term impacts that may arise from misdirecting capital from productive investments to unproductive expenditures.
Issuing Stock is a method to raise capital. That capital (money) is used for R&D, building new plants, hiring workers, etc. just like getting a loan.
And that loan must be serviced. You do that by paying dividends or the promise of higher stock price (capital gain).
Buying back stock is just paying down debt so that the profits can be shared with fewer “lenders” and be put back into the company in raising wages, more R&D, etc. if you don’t pay, then why would Anyone invest more in the company?
You act like The Street is some greedy monster or that only CEO’s profit. It’s actually the most democratic and open way to share profits. Private firms only have to pay the owners and away from public scrutiny. Business loans are the original smoke filled back office deals. This way, everyone can be an owner. But you better pay.
It’s not a trick. EPS is a measure of the “interest” a company is paying for capital it received from investors. Using cheaper , limited term debt is like transferring balance on your credit card. Better to pay it off, but not a bad financial move if you have less profit to service your investors.
Nice try, but R&D and investment in Capitol Stock are at generational Lows. Before the Pillagers took over your comments had some validity, now they moulder in old MBA texts.
PLEASE get out of all kinds of markets. Raise cash and sit on your hands
Djia, spx….head and shoulders formation, wherein we’re now working on the right shoulder, the left shoulder and head already in place?? …..Or….descending triangle formation?? Either way could spell trouble….When the major indices sell off, gold will be sold off with them!
DUST (bear etf for gold miners) is looking very attractive now to me…the bollinger bands on that chart are compressing very nicely, which, at least in the past, indicates a sudden, sharp move to the upside!! :-))
I’ve noticed that the Bollinger bands also compressing very nicely on the chart of UVXY too!! The markets ALWAYS go down faster than they go up!
everyone is recommending “get into cash” can you give some advise as to the best places for cash? If you have any.
William H
Your question is a good one. There is no answer thus all the suckers are staying in the market till it crashes. Common sense will tell you this debt pyramid cannot keep climbing forever.
Mutual funds, Treasuries or go stick it in savings. That’s why yields are so low because as bond prices rise with demand, there’s less payout in the end.
Stocks are trading at very high P/E ratios. If buy backs continue to fall, EPS will also fall. Looks to be a good time to hold cash or go short!
My biggest holding at the moment is $VXX
Let’s play “whose side are you on”. John Kerry’s daughter is married to Dr. Nahed, an Iranian national. His best man was his father Muhammad Zarif, the Minister of Foreign Affairs for Iran. Kerry negotiated the nuclear deal with his daughter’s father in law. Missed that one. Jim
you might want to go check out snopes on this one, jim.
It appears you are right. I was misinformed by someone I trust implicitly. There are certainly connections but not to the extent I stated. Sorry! Jim
no need to apologize. we’ve all had this happen to us at one time or another. –goldy
Some of the best minds are running these Corporations that are buying back their own stock. These captains of industry have insight, Experience, Know-how, they are street smart, and they know what they do! The best place to put your money today is to buy back your own shares! In doing so, you take the capital out of the crooked hands of the banking cartel, (think bail-in) and your own company act as your own bank. Self management is better than to be at the mercy of the money gangsters. If there is NO DEMAND WHY INVEST IN MORE PLANT AND EQUIPMENT???
It may be after all not such a bad idea to invest in thyself!
I think there are a couple of potential problems with it. To are large measure they are using borrowed money to buy the shares. More debt Is good? It also allows them to increase earnings per share when there really isn’t any growth. Could be their salaries and bonuses are earned by increasing EPS. If you are making lots of money and buy back shares I get it. If you are having to borrow to do it, I don’t. Jim
I basically agree, Jim, but management making themselves look good at the expense of stockholders should be a no-no, and stockholders should rebel. Buy-backs should NEVER be paid for with borrowed money. Sell! If shares aren’t reduced enough by a buy-back to raise the price as much as a special dividend, the dividend should have priority. Buy-backs seldom seem to benefit stockholders as much as management.
Actually, a buy-back may or may not raise a stock price at all, but a higher dividend might make a stock more desirable and cause a higher price. Managers who benefit themselves at a cost to the “owners” of the company should be fired.
Thomas the money gangsters you talk about ARE the corporations.
If you are buying back shares with profits then you are decreasing the amount of shares receiving dividend dollars so that would be considerable savings to offset the share purchase expense. Also a plus for shareholders if company then allocates some of the cash to remaining shareholders. If you are borrowing money at low rate of interest to buy back shares then the same logic could apply. The interest is probably deductible and the reduction in share count would decrease the cost of dividends. If the company anticipates level or increasing revenue then the reduced share count would result in higher share price for the remaining shares since there are fewer shares receiving dividends after the buyback(s) and the company could then sell the shares they acquired back into the market at a profit. Don’t think buybacks are necessarily a bad thing if more profitable uses for the cash are not on the immediate horizon. Maybe the company just has a lot of cash and has maxed out their investment or capital expenditures.
It makes little sense to me to leverage stock buy-backs. Maintaining a healthy cash reserve and using that to buy back stock at bottoms or in new bull markets makes more sense.
Common sense suggests that pulling back on stock buy-backs at the top or in a falling market is simply prudency.
Some reports I have seen are indicative that many hedge funds are selling to generate cash for many requests for distributions by clients. Seems fund managers are compelled to sell and not of their own choosing? Since Apple has more cash than most banks and throw in BH cash, those two will be big survivors I do believe. Anywho, win lose or draw, I am long Apple and uvxy.
Is the Fed manipulating the gold market? Take yesterday for example. I just watched a graph on this. The Asian market opened and gold climbed $15 an ounce up to the point where the Comex opened in the USA. Then someone dumped 55,000 gold contracts onto the market which translates into 5.5 million ounces of “theoretical” gold. The chart does a Niagara Falls at this point. The following is a quotation from this article.
“Theoretical†because it’s only in theory that the Comex has 5.5 million ounces of gold to deliver. Currently the Comex is reporting a little over 697k ounces that are available to be delivered into the paper gold contracts that the banks print up and dump on the market. The Comex vaults are showing a little over 7 million ounces in total in the vaults. This is highly theoretical because most of the gold is accounted for the big bullion banks. I use “accounted for†loosely because there is no mechanism in place to hold the banks accountable for what they are reporting. In other words, the amount of “physical†gold reported by the Comex is likely nothing more than a “suggestion.†Funny that the stock market should climb a 175 points and the Nasdaq and the S&P made good gains as well the face of a pile of negative news. These paper gold contracts are nothing but a sham and the government should be cited for allowing this nonsense. As the saying goes ” Something is rotten in Denmark”
Is Wall Street in New York City?
Stocks will no longer be propped up with rigged EPS.
So the big money have been net sellers for a record time. That should be a good clue as to what they see coming. The longer they are able to hold things up, in order to extract most of their own money, the more violent an ultimate collapse is likely to be. Retail investors should be taking note, and following the smart money people. Move to cash, or to investments that will rise as the general markets fall (inverse ETFs, for example).
I see the hounds at the Fed are braying again going from dovish to hawkish in a flash upsetting markets and especially the gold market. Either do a dump or get of the financial pot your rocking the boat to extremes. Again proof that the Fed is interfering in markets. Have your meeting and go relax in the spa or drink beer but stay the H away from making disturbing threats against the markets that never seem to materialize. By this time we are well aware of the fact that your huffing and puffing and trying to blow our houses down.