Stock Share Buybacks Now Bought Out — American Enterprise in Decline
By Knave Dave
Published originally on The Great Recession Blog
I have pointed out in previous articles how most of the growth in stocks over the past few years has been due to stock share buybacks. Without this hideous (and at one time illegal) practice, there would have been no bull market over the last few years.
That’s right. Research from no other place than Wall Street, itself, indicates that almost all of the returns since 2009 have been due to stock share buybacks!
Liz Ann Sonders, chief investment strategist and perma-bull at Charles Schwab, recently acknowledged that “… there has not been a dollar added to the U.S. stock market since the end of the financial crisis by retail investors and pension funds….” Since every buyer has a seller (and vice versa), what group or groups had enough of a buying presence to push the S&P 500 14.2% off of the February closing lows? Corporations. (Seeking Alpha)
Most people assume what has kept the market afloat this year after sinking 11% at the start of the year was a mixture of better news out of China, oil prices stabilizing, and indications that the Fed won’t raise rates as much as thought. But the real thing bouying the market could be something else: Stock buybacks…. The stock buybacks come at a time when major investors including individuals, foreign investors, and pension funds have been selling off their shares, according to a note from Goldman Sachs, amid market volatility and weak oil prices. (Fortune)
Stock share buybacks may be winding down
But you cannot do share buybacks forever. Companies have been using profits and loading up on debt to make these share buybacks for so long that the law of diminishing returns is kicking in here, too.
First, it is kicking in because companies are nearing the end of their capacity to keep eating themselves. Earnings have been falling while debt has been stacking up, and so the capacity just isn’t there any more. (And I mean even the doctored earnings — as almost all major corporations have moved away from GAAP reporting policies — have been falling badly.)
Secondly, buybacks have gone insane to the point where the practice is even starting to reek of death to market bulls who are growing wary of them.
Over the past five weeks, the value of shares bought back has fallen 42% (yoy). The number of scheduled buybacks has fallen off substantially this year (35% below last year’s pace). So, we can anticipate the market will lose some of the hot air that once kept it aloft.
Here are two confusing headlines for you, released this week within 24 hours of each other: First comes Bloomberg’s “Bull Market Losing Biggest Ally as Buybacks Fall Most Since 2009.” Ah, but then came the Financial Times, with “US companies step up share buybacks in the first quarter of 2016….” At face value this would seem difficult. However, Bloomberg and the FT are in fact …read more
Source: Stock Share Buybacks Now Bought Out — American Enterprise in Decline
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