Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19
The Unknown Tech Stock Transforming The Internet - 10th Sep 19
More Wall Street Propaganda - 10th Sep 19
Stock Market Price Structure Still Suggests We Are Within Volatile Rotation - 9th Sep 19
Stock Market Still Treading Water - 9th Sep 19
Buying Pullbacks in Silver & Gold - 9th Sep 19
Government Spending - The High Price of a "Free Lunch" - 9th Sep 19
Don't Worry About a Recession - 9th Sep 19
Large Drop in Stocks, Big Rally in Gold and Silver - 9th Sep 19

Market Oracle FREE Newsletter

The No1 Tech Stock for 2019

Share Buybacks just another Wall Street Scam

Stock-Markets / Stock Markets 2015 Dec 15, 2015 - 05:43 PM GMT

By: Sol_Palha

Stock-Markets

Better a diamond with a flaw than a pebble without one.
Chinese Proverb

Wall Street has a new hobby use good money to create the illusion that all is well; only unlike most hobbies, the intent is to distort reality and reward lazy insiders for doing next to nothing.  Gone are the days of actually trying to improve the bottom line, by improving efficiency, find new markets, etc.; now the idea is simply cut the supply of outstanding shares, thereby magically boosting the EPS. Why are executives doing this with such impunity?  The “safe harbor” rule passed in 1982, essentially allows corporations to repurchase shares without having to face charges of manipulating the price of their shares.  Before the passage of this rule, stock repurchases were next to zero. In fact, Senators Elizabeth Warren and Tammy Baldwin both share the sentiment that stock buybacks should be forbidden by the SEC because they are a form of market manipulation.


Senator Baldwin issued the following statement in regards to share buybacks:

In 1982, when the Securities and Exchange Commission (SEC) issued a rule to provide 'safe harbor' from manipulation liability, buybacks were near zero. Last year, over $500 billion was spent on share repurchases.

Senator Warren also shares a similar sentiment

“These buybacks were treated as stock manipulation for decades because that is exactly what they are,” she said. “The SEC needs to recognize that.”

Does the SEC recognize that; apparently not as the SEC admits it not monitoring stock buybacks to prevent manipulation?  SEC chair Mary White made the following comments in response to a letter addressed from Senator Baldwin

“Performing data analyses for issuer stock repurchases presents significant challenges,” White writes, “because detailed trading data regarding repurchases is not currently available.”

White goes on to state that “because Rule 10b-18 is a voluntary, safe harbor, issuers cannot violate this rule.”

Many other leaders and experts view share buybacks in a negative light

Druckenmiller told CNBC in March that he is extremely concerned about the doubling in U.S. corporate debt to roughly $7 trillion, up from about $3.5 trillion in 2007. "Most of that mix has been in more highly leveraged stuff," he said. "And if you look at what corporations have been using it for, it's all financial engineering."

Brian Reynolds Chief Market Strategist at New Albion Partners:

 “Pension funds have to make 7.5%,” so they are putting their money “in these levered credit funds that mimic Long-Term Capital Management in the 1990s.” Those funds, in turn, “buy enormous amounts of corporate bonds from companies which put cash onto company balance sheets…and they use it to jack their stock price up, either through buybacks or mergers and acquisitions…It’s just a daisy chain of financial engineering and it’s probably going to intensify in coming years.”   

Stanley Druckenmiller:

"If you're running a business for the long term, the last thing you should be doing is borrowing money to buy back stock."

Larry Fink, CEO of BlackRock

 “It is critical … to understand that corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their companies’ shares at any moment in time, but to the company and its long-term owners,” Fink wrote in the letter, dated March 31, 2015.

James Montier:

He labels share buybacks as the The World’s Dumbest Idea,”.  He states that shareholders are not providing capital to corporations but are instead extracting it and demonstrates that since 1980 public companies have repurchased more equity than they have issued.

Harvard Business review stated the following in article title profits without prosperity

 In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets. Full Story

Bottom line, they can do what they want without having to worry about any repercussions. It’s like giving a prisoner the keys to the cell and telling him to make sure the door to the jail cell remains locked at all times.  

Stock repurchases are nothing but a nefarious, albeit cunning account trick to inflate the widely followed earning per share statistic for a stock.  The old way of increasing EPS was to increase profits, but the cunning and gray method is to decrease the number of outstanding shares.  In the present environment of tough corporate profits, this simple trick can make the difference between demonstrating declining or rising profits.  In this ultra-low interest atmosphere, cash is cheap and given the challenges most corporations face in improving the bottom line, taking the easy out makes sense.  Most executives see this as a win-win situation; get paid handsomely for doing nothing.

In a recent report, CNN money states that that dividend and stock buybacks will new a new high of $ one trillion in 2015.  Gold Sachs is expecting that number to surge for 2016; they state this number will increase by 7% in 2016, surpassing the one trillion mark.

Everyone is joining the party now because it’s the easiest way to improve the bottom line; just take a look at some of the recent participants

  • Baidu announced a $ 2 billion share buyback program, its second for the since July of this year.
  • General Electric and Microsoft announced mega share buybacks this year, for a combined value of $100 billion.
  • Master card announced it would purchase $ 4 billion worth of its stock
  • Visa Inc and Google both announced $ 5billion worth of share buybacks each.

You can access the full list here

US flows vs issuances.png

The above chart shows that the supply of the outstanding number of shares has continued to drop while the demand has held.  Consider this, since 2009; corporations have spent over $2.4 trillion on share buybacks.  The above figure matches the Feds current balance sheet, which has soared to $2.4 trillion since the inception of QE.

Conclusion

Despite all the noise, nothing is going to change on Wall Street for greed overrules everything else.  Morales are meaningless in the land of lust and greed, and unless strict new laws are put in place or the safe harbor rule is repelled, nothing will change.  Why would executives take a large pay cut when they can legally take this route, do next to nothing and walk away with a fortune.  Would you do things differently if the roles were reversed?  Maybe some of you would respond with a yes, but the vast majority would probably be only too glad to follow the same path.

As long as compensation is based on share performance, except the outlook to worsen.  The era of cheap money only adds fuel to an already raging fire. Against this backdrop of so-called wonderful growth, share prices have doubled over the past five years and so has corporate debt. This party will not end well, but waiting for that day, could mean financial loss for you. There is a vast chasm that separates being right and being right at the right time. Wall Street is full of Tombstones of people who were right but could not stay solvent long enough to benefit from their convictions.  We expect corporate to debt to soar to heights that could make the current levels appear sane in nature. Translation, stock prices could continue trending upwards for far longer than most envision.

The first and worst of all frauds is to cheat one's self. All sin is easy after that.
Pearl Bailey

by Sol Palha

www.tacticalinvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

© 2015 Copyright Sol Palha- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules