Cumulative Funds Flows and $5 Trillion in Stock Buybacks

-edited

Callum Thomas, Jim Bianco, and Win Smart have a trio of Tweets on the S&P 500 worth a close look.

Callum on Fund Flows

Bianco on Buybacks in Response

Win Smart on Buybacks

Buybacks Work Until They Don't

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

Comments (43)
No. 1-18
Jackula
Jackula

Essentially corporate America is being looted and nobody complains cause stock prices are going up, damn!

Six000mileyear
Six000mileyear

Once buybacks stop, 401K accounts will crash with the markets. The government won't get those future tax dollars they were counting on.

Freebees2me
Freebees2me

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...

leicestersq
leicestersq

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.

caradoc-again
caradoc-again

Isn't it indicative of a system screwed up by excessively loose money?

  1. buy was is limited in supply or can become (company stock) using something that is nearly limitless at low cost, easy credit.

  2. low hurdle rates encourage risky behaviour that companies are aware of so they steer away from & buy their own stock instead.

  3. 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.

caradoc-again
caradoc-again

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.

lol
lol

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.

Snow_Dog
Snow_Dog

“Recall that Angelo Mozilo, former Countrywide Financial CEO cashed out over a billion in stock options while running the company into the ground.“

Mr. Mozilla was helping people “get into housing” and thus brought fulfillment of their American dreams.

How can he help it if he becomes a billionaire from the rampant Robo-signing of bogus mortgages based on fraudulent information from unqualified borrowers who bid up residential RE out of the reach of middle class boiled frogs who are still following rules?

Herkie
Herkie

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.

njbr
njbr

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?

Carl_R
Carl_R

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.

RonJ
RonJ

"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.

caradoc-again
caradoc-again

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.

Http://www.leveson.org.uk/stmarys/resources/cadbury0503.htm

JonSellers
JonSellers

Just folks exercising their God-given liberty.

Tony Bennett
Tony Bennett

"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 ...

1 Reply

Stuki
Stuki

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.

TCW
TCW

"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.

SteveKo
SteveKo

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.