Callum on Fund Flows
10. Cumulative fund flows vs S&P500 — incredible. Something tells me this is going to be even more interesting in hindsight… @topdowncharts $SPX $SPY pic.twitter.com/jT6CzGVyRv
— Callum Thomas (@Callum_Thomas) October 19, 2019
Bianco on Buybacks in Response
What is missing here is buybacks. Since 2009 S&P 500 companies have bought back $5 TRILLION of the stock. This cumulative flow is SIGNIFICANTLY than mutual fund and/or ETF flows.
This cycle is about buybacks. Investor flows are a sideshow. https://t.co/QWoVK7f88k pic.twitter.com/HRKCFYm0ut
— Jim Bianco (@biancoresearch) October 20, 2019
Win Smart on Buybacks
Buybacks pic.twitter.com/WV2nZADN7y
— Win Smart, CFA (@WinfieldSmart) October 20, 2019
Buybacks Work Until They Don’t
https://twitter.com/EricMarkowitz/status/1181740464824672256
GE Market Cap
Since 2008, GE has spent $53 billion on share buybacks for a market cap of $75 billion.
Go back a few more years and GE will have spend more on buybacks the the company is worth.
Aren’t executive options and cash-outs great?
Recall that Angelo Mozilo, former Countrywide Financial CEO cashed out over a billion in stock options while running the company into the ground.
Share buybacks provide a strong bid for insider selling at exorbitant prices.
Mike “Mish” Shedlock
In a few years we will all be chanting “It’s the debt, stupid!” 1974 brought the Humphrey-Hawkins Full Employment Act, a piece of socialist legislation if ever there was one, essentially making the Fed responsible for the US economy! Impossible to eliminate the Fed, but we can reverse this act and the secular nosedive into negative real rates. Corporate loans at LIBOR of 1/2% to 2% are powerful incentives for management to stuff their pockets. Some buybacks use cash flow but the majority just lever up. What do we do now with these zombie companies?? Bail them out to “defend the economy”. We sheep have been the culprits for a long time.
“Recall that Angelo Mozilo, former Countrywide Financial CEO cashed out over a billion in stock options while running the company into the ground.”
But what did he then do with all that money? He probably bought stocks in other companies which have a higher potential for profit, still benefitting the overall economy. Makes for a good reason to own index funds since they capture the flow of capital from less productive to more productive venues.
So racketeering is OK ? Drugs trafficking, illegal arm trades and fraud in general should be legalized too, all that money benefits the overall economy….
Like investing in Chinese companies?
If allocating capital by way of letting self promoting welfare recipients do so, to the tune of billions of dollars others had to work for, resulted in anything remotely resembling efficient capital allocation, Pol Pot’s Cambodia would be the wealthiest place on earth.
my word that’s some tortured logic.
Investing in stocks doesnt benefit the overall economy.
“Since 2008, GE execs wasted more than $53 billion on stock buybacks.
In 2017, it paid its CEO, Jeff Immelt, a reported $211 million exit package.
Now, in debt, it’s freezing pensions for 20,000 employees–while its share price reaches 25-year lows.”
…
Immelt?
Oh yeah, … Obama’s jobs czar …
A central prerequisite for being the sort of undifferentiated idiot which financialized, progressive idiotopias depend on for their survival; is to believe that some entirely average or worse mediocrity is somehow more qualified to do anything at all, simply because he receives unusually large welfare checks from The Fed.
So you end up with the illiterate dunces falling all over themselves cheering for and listening to mindless gibberish spouted by one dumb clown or another, whether that be Warren Buffet, Some Goldman Sachs monkey, George Soros, Mary Barra or this guy. No doubt ending up equally surprised every time, when it turns out the ones who benefited from the “expert advice” these well connected mediocrities confidently dole out, are the well connected mediocrities themselves. At the expense of everyone else.
Just folks exercising their God-given liberty.
Some great companies started from people with good values. Cadbury, Barclay, Lloyd, Carrs, Clarkes, Albright & Wilson and list goes on. Anti-slavery, pacifist and saw business as more than just a way to enrich themselves.
Society has lost it’s way and the result is the economy we have.
We are society.
link to leveson.org.uk
“Recall that Angelo Mozilo, former Countrywide Financial CEO cashed out over a billion in stock options while running the company into the ground.”
This is the sort of thing that makes people like Bernie Sanders, popular.
As I have said before, share buybacks are mathematically equivalent to one-time dividends. There is nothing inherently wrong with them, nor does it matter whether they happen at market peaks or market valleys. If a company buys back 1% of the shares, and an investor responds by selling 1% of their shares, after the transaction the shareholder has cash equal to his share of the buyback, and has the same proportional ownership of the company, exactly as if he had received a dividend. If he chooses not to sell any shares, after the buyback he doesn’t have cash, but does have a higher proportional ownership of the company, exactly as he had received a dividend, but was in a DRIP program, and his dividend was reinvested in purchasing additional shares.
But they always take the cash don’t they?
Carl_R – you absolutely right, but ability to get past the headline is apparently very hard for some people.
Stock buybacks have far exceed exec comp otherwise exec compensation payments would have equaled the current value of all public companies and that’s simply not accurate.
And, as you aptly point out, stock buybacks are simply a way of distributing cash, but people are sure there’s something very sinister going on……
If executives were simply paid in cash (vs company stock that the company buys back), the company would have less cash. The executives would have cash – not company stock. But the company would still have excess cash that it needed to deploy and would do so by buying back shares.
But some people read a headline that says – Companies have repurchased as much stock as their value and see something sinister. But I thought that the whole point of investing in a business was to receive back way more than you invested, but apparently that’s NOT the object of investing in a business. The Business is supposed to hold the cash and piss it away on engineering projects that no one wants to buy.
It’s not the what, it’s the why. Why take on billions in debt simply to buy back shares? It’s stupid. Qui bono? Obviously it’s the shareholders which includes a lot of executives. Does the company benefit? No. For a company like Apple, sure, they should give some of that cash to the shareholders because the literally have more than they need. But GE? Yeah, it’s sinister.
In principle you are of course quite correct. Nevertheless, there are problems associated with the practice. The main one is that many companies lever up their balance sheets with debt in order to be able to conduct buybacks. Buybacks have exceeded aggregate free cash flows substantially for six or seven years in a row. A great many companies have weakened their balance sheets to the point that it has become doubtful whether they will be able to survive an economic downturn. Naturally, this raises questions of motive. I would submit that corporate management incentives have become distorted. Apres moi, le deluge, seems to be the motto. These days, CEOs of listed companies stay at the helm for five years on average. Like the provincial governors of the Roman Empire, many seem mainly focused on enriching themselves by driving up share prices via debt-funded buybacks (since the buybacks reduce share counts, even a mediocre business performance can look stellar on a “per share” basis. This also adds undeserved gloss to the reputations of corporate chieftains).
However, I certainly do not believe that any regulatory interference is called for. It is up to shareholders to limit such actions – if they condone them, they will have to live with the eventual consequences. And of course, there should be no bail-outs when push comes to shove.
Lastly, it should be pointed out that record high buybacks and major market peaks invariably coincide. Borrowing to buy back overvalued shares is just dumb and shareholders will eventually regret having supported the practice.
Without buy-backs, the market is toast. Look at the relatively small number of companies that have had increases in their stock valuation as opposed to the majority that have lost in the last year. Between over-priced cash-eaters like Netflix and buy-back goosing by the market darlings, the fundamentals of the major components of the indexes are entirely gone.
How long until the charade is acknowledged to the extent sufficient to damage the speculation? How long can we dance on the edge?
Who’s a bear now?
Mish, I think someone at CNBC is following you….
Goldman warns buybacks are ‘plummeting,’ ending a big source of buying power for the market
PUBLISHED AN HOUR AGOUPDATED 8 MIN AGO
KEY POINTS
Buyback spending is plummeting as companies spend less amid growing global uncertainty.
According to Goldman Sachs, buyback spending slowed 18% to $161 billion during the second quarter, and the firm anticipates that the slowdown will continue.
“During full-year 2019, we expect S&P 500 cash spending will decline by 6%, the sharpest annual decline since 2009,” the firm wrote.
As corporate spending slows, investors hunting for yield should look to high-dividend stocks, the firm said.
never mind , the way things are, there s always the FED as the buyer of last resort …. One thing is sure this ongoing Ponzi scheme can no longer unwind without fatal and dramatic consequences….
Ceo’s gorging on all that freshly printed cash,look at that WeWork dude,Cash out a billion dollars on a company that’s not worth 1/100 of it’s valuation,and it’s only gonna get much worse,the central banks have opened up the printing press levees flooding an already saturated market with freshly printed currency.
Buybacks are just a symptom.
Hurdle rates matter if you want sustainable business and somewhere in this mess a low hurdle rate matters.
Start-ups that shouldnt happen, buybacks that are too easy, too easy M&A killing competition.
Periods like this will result in management that are less used to care with capital allocation and the consequences far reaching when the environment changes. Some will collapse. Some of the zombies are not small. The change could be rapid, deflationary and painful to funds, pensioners and wider society.
Isn’t it indicative of a system screwed up by excessively loose money?
buy was is limited in supply or can become (company stock) using something that is nearly limitless at low cost, easy credit.
low hurdle rates encourage risky behaviour that companies are aware of so they steer away from & buy their own stock instead.
the improving metrics for eps can be in excess of what a dividend receiver can achieve with a post tax dividend because rates are so low.
Yes – some management are gaming the system.
Monetary policy encourages these outcomes too.
Solution – either ban buybacks or tax them.
Public markets will cease to operate when float reaches some lower bound. They either stagnate or go parabolic as index trackers still buy monthly as pension savings hit the fund.
Market cap weighted become interesting. Some company stock dries up, market cap can lose touch with any fundamental (upwards) and the stock move up the weighting – positive feedback loop.
Avoid market cap weighted index trackers no matter how cheap. If you can find a target company likely to move rapidly up the weighting there could be a speculative opportunity there. Depends on rate of reduction of float vs peers vs position in index.
I know everything is corrupt, but say that it wasnt. I would propose the following rule for publicly owned companies.
You cannot vote on a share unless,
a) You are the individual who owns the share
b) you are not on the board of the company
c) you are not related to or know anyone on the board.
b) is important here as in order to run the company properly you must not have anyone with conflicted interests. If I am the chairman and own 51% of the company, I can pay myself in excess of what I am worth because I can vote on my own pay.
Now as long as shareholders get to decide on stock buybacks and executive remuneration, you would see buybacks diminish and gross out of control pay fall. It is only because the voting mechanism for stocks has been corrupted that things have gotten so far out of control.
There’s no question that stock buybacks provide a “bid” For exec Comp, but that’s not the driver in doing a share buy back.
It has a lot more to do with the other less safe options on how to deploy the excess earnings. A company could increase its dividend but that may be unsustainable and ultimate hurt the share price. It could declare special dividends, or it could use the cash profits to purchase other business. Studies have shown that almost 80% of corporate M&A ends up destroying shareholder value, i.e., the executives overpaid for the business. So not a lot of good choices…
In GE case, it should have contributed more to it’s defined benefit pension plan earlier on (if it even could under federal tax law). GE’s pension plan is now running the company vs the company running the plan.
But the bottom line is that tHe biggest decision point in deciding whether to do a stock buy back is not increasing the share price because of exec Comp. It’s done because it’s a much safer play for the money than trying to use it “internally” to add shareholder value given the poor track record of exec’s over paying for other businesses…
I agree that buy backs are the safe choice. Most companies are generating more cash than they can prudently invest.
The best choice for the $ would be a special dividend but this isn’t what the majority of shareholders want as they can’t time the tax impact or take advantage of capital gains rates.
“For exec Comp, but that’s not the driver in doing a share buy back.
It has a lot more to do with the other less safe options on how to deploy the excess earnings. “
It should be obvious that if buybacks exceed company value (as is claimed in comments above) then company value is zero, and the buybacks were NOT a safe choice.
Rather, the one benefit that comes out — pumped executive compensation — appearse to be EXACTLY the reason it is done.
How right you are. GE was once a towering presence in the market. It produced things that were true marvels of engineering and and design. The Chicago School have a lot to answer for. What is the best way to preserve shareholder value, bean counters or engineers who make things?
You need both. Unrestrained engineers will make things forgetting the economic bound if free to do so. Accountants unrestrained can see only cost and not value, and will eventually cut the out the things that make value for the company.
The problem, as I have pointed out, is the corrupt oversight process. Shareholders should be represented by only those who act purely as owners. Sadly, fund managers rarely act as proper owners, but they use the votes of others to outvote those that wish to act as proper owners. Voting should be limited to individual beneficial owners only.
It is nice to see something we can agree on. I believe that skin in the game is of paramount importance. I think that the hollowing out of GE, as shown above, has been done by rent seekers and price gaugers not capitalists. Share buy backs must be outlawed. The incentive should be to return the state of affairs back to the time when GE produced magnificent products which made it a world leader, not a company known for financial shenanigans and decline.
Take it back to basics – the Quaker model.
Our problems is values. Eroded and decayed.
The Quaker model works when the owner/board members have solid ethics. That isnt the situation you need to legislate for.
The model doesnt work when one group are trying to grab everything for themselves, and they both manage the company and control the votes of the shareholders. That is the situation where it all goes wrong.
That is why there needs to be a clear division between the managers and the owners of a public company. Each can keep the other in check. That is why you should have your voting rights taken away if you work on the board of a company.
The role of the vulture rent seekers must be examined and curtailed if not outlawed. There is a tedious regularity about good companies going bust. They are taken over by vulture rentiers. The vultures lend money to the company. The vultures sell management consultancy at enormously expensive rates. They then grant themselves enormous salaries and dividends. The company goes bust because it has been overloaded with debt which has been foisted on the company by the vultures who have syphoned off all the cash. This is an intolerable situation and it is legal. Why is theft legal?
These situations arise because again, those who truly own the company lose their votes. Wall Street has ‘fund managers’ who get to vote with other people’s shares and in the process disenfranchise the true owners.
The results are obvious. First of all they vote to sell companies at below their proper values. They buy shares in companies where private equity has gutted them, and await their collapse. They also finance the debt those companies are loaded with by buying the bonds used to finance the debt, and then they wait for the inevitable haircut.
It all becomes possible when you disconnect the real ownership of that capital from the capital itself. So when people can make decisions with other people’s money, oddly enough many of them will make a decision that is in their own interest rather than the interest of the beneficial owner.
My solution of banning voting on shares unless the voter is the individual who actually owns the shares only solves some of this problem. Perhaps making the world of capital less scary so people dont outsource decisions to others might help as well.
The vulture rentiers own the companies they loot. As I have said I wholeheartedly agree with your general thrust but believe that Vulture rentiers must be excised from the economy.We cannot have people whose sole intention is robbery being part of the system.
avid,
Well sometimes vultures as you call them, have a stake in what they are doing. But rarely are they 100% on the line with their own money. What they normally do is use other people’s capital and either pay themselves a huge amount for the work done, or for big bucks, take huge risks on the transaction and let bankruptcy take care of the losses if it goes to pot. If you have just a small slither of equity, you don’t lose much, and you can afford to lose most of the time if you are highly leveraged cos the one time that you do win you will win big.
These sorts of activities are only possible though if you can get hold of and misuse someone else’s capital somewhere in the process.
Granted that the vultures do everything with borrowed cash. But this ties in with what you said above about everything being corrupt. These vultures take no risk , there is no enterprise here, the
vultures are the people you quite rightly call corrupt.
Absolutely.
I think you’re correct on buy backs, and would only add that if the company has no other productive investment options it should distribute extra cash as dividends. (FWIW, I’m aware of the argument that dividends are not tax efficient, but buy backs have been manipulated to the point they are little more than a way for executives to loot companies.)
Once buybacks stop, 401K accounts will crash with the markets. The government won’t get those future tax dollars they were counting on.
And just in time for your post see my post….
Crash they are.
Essentially corporate America is being looted and nobody complains cause stock prices are going up, damn!
Yup.
And, just as essentially, and exactly analogously: America is becoming homeless. And, again, nobody complains, because home prices are going up….
The technical term for this, is end stage indoctrination into undifferentiated idiocy.
When one has become so utterly devoid of even the tiniest traces of a functioning brain, that one can be suckered into believing paying more for the exact same thing is, of all idiotic things, a good thing; this kind of absolute moronicity is what ensues.
An inevitable corollary is, that absolutely all possible change from the current setup, is a change for the better. Including civil war, conquest by Jihadis, mass starvation, plagues, and any possible nuclear Armageddon, aside from possibly one thorough enough to not even render the affected shithole able to serve as host for radioactive cockroaches for the next 3000 or so years.