|
Corporate share repurchases have turned out to be a great mechanism
for converting Federal Reserve easing into higher consumer spending.
Just allow public companies to borrow really cheaply and one of the
things they do with the resulting found money is repurchase their stock.
This pushes up equity prices, making investors feel richer and more
willing to splurge on the kinds of frivolous stuff (new cars, big
houses, extravagant vacations) that produce rising GDP numbers.
For politicians and their bureaucrats this is a win-win. But for the
rest of us it’s not, since the debts corporations take on to buy their
own stock at market peaks tend to hobble them going forward, leading
eventually to bigger share price declines than would otherwise be the
case.
The ultimate loser? The only people traditionally willing to buy in
after corporations are finished overpaying for their stock: Retail
investors, of course.
Let’s see how it’s playing out this time.
First, corporations spent several years elevating stock prices with
share repurchases. Note the near perfect correlation between the two
lines:
 
Now they’re scaling back their purchases:
(Wall Street Journal) – Companies in the S&P 500 are on pace to spend the least on buybacks since 2012
Large companies are repurchasing their shares at the slowest pace in
five years, as record U.S. stock indexes and an expanding economy propel
more money out of flush corporate coffers into capital spending and
mergers.
Companies in the S&P 500 are on pace to spend $500 billion this
year on share buybacks, or about $125 billion a quarter, according to
data from INTL FCStone. That is the least since 2012 and down from a
quarterly average of $142 billion between 2014 and 2016.
Buyback activity among top-rated nonfinancial debt issuers, many of
which have regularly borrowed money to finance share repurchases,
declined for the third straight quarter in the July-to-September period,
according to Bank of America Merrill Lynch. Meanwhile, mergers and
acquisitions among that group of companies had their biggest quarter of
the year, analysts at the bank said.
Factors including high stock price, historically high share
valuations and uncertainty over the future shape of the tax code mean
that “companies may be less likely to favor buybacks over other uses of
cash in 2018,” analysts at Goldman Sachs Group Inc. said in a report
this week.
And – here’s the really sad part – individual investors are taking up the slack:
(CNBC) – “The level of enthusiasm about the market … has been building.
We’re seeing more individuals come in,” said Liz Ann Sonders, chief
investment strategist at Charles Schwab.
Sonders said she’s anecdotally seeing signs of more individuals
putting money to work in the stock market in the last several months,
after years of skepticism and concerns about “every variety of doom and
gloom.”
She says she is getting fewer investors asking about bubbles or about what’s the next shoe to drop.
“I think it’s finally starting to suck people in … emotionally, and
actually it’s hard to judge why now all of a sudden, but maybe it’s
because of how persistent the move has been with so little volatility on
the upside and on the downside,” Sonders said. “This year has been
different. This kind of year pulls people in.”
Retail brokers have been reporting an influx of accounts. Charles
Schwab, in its earnings release, said clients opened more than 100,000
new brokerage accounts a month in the third quarter, making for a
record-breaking 10-month streak of new accounts topping 100,000. Its
rival, TD Ameritrade, said on its earnings call last month that new
accounts, asset inflows and other indicators are at the highest since
the financial crisis.
What’s frustrating about this is the repeating pattern of government
creating conditions in which smart money (that is, the guys who donate
big to political campaigns) is allowed to get in early, make huge
profits, and then hand the bag to regular people who aren’t connected or
sophisticated enough to see what’s happening. The rich, who are or will
soon be shorting the hell out of this market, get richer and the rest
see their hopes for a decent (or any) retirement dashed one more time.
And the political class wonders why voters don’t like them anymore.
|
John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.
|
The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
| |
