Sunday, May 10, 2015

KA-CHING!!!: Peak Buybacks Peak Market

BBG: October 6, 2014
5% of corporate profit is reinvested in the economy. Yes, you read that right.

When profit growth stagnates and then falls, corporations turn to the only gimmick left to boost their own stock price, which is to buyback shares i.e. to siphon cash out of the stock market. It's a form of corporate self-liquidation, indicating that no further investments can be found. In the context of declining profits, massive buybacks merely temporarily support share prices allowing corporate insiders to liquidate their holdings ahead of the inevitable "repricing"...

Stock buybacks are the use of corporate cash to buyback shares and hence reduce share count. They may well increase the price of a given stock, but they are market capitalization neutral hence they have zero impact on stock market indices. They don't increase the size of the pie, only the size of the slices.

ZH: May 10, 2015
"Stock buyback authorizations are at a record $1.2 trillion, shattering the previous 2007 high of $863 billion"

By no coincidence, corporate cash is at a record $1.43 trillion, so 84% of current cash is earmarked to be liquidated. And the last peak in buybacks coincided with the 2007 peak.

The Buyback ETF:
In 2007 the peak buybacks of $863 billion coincided with the market top. Impossible !!!

Why would companies buy back shares while profits are falling? To allow insiders a last chance to liquidate their holdings ahead of a major price decline:
ZH: March 6, 2015:
Insider selling by Tech Executives highest in 8 years

At best, stock buybacks are market neutral, due to share count reduction i.e. they are an unsustainable gimmick that reduces cash available for re-investment. Stock valuations represent the present value of future earnings, so if those are falling, no amount of buyback chicanery will save the market.