Tag Archives: stock buybacks

Intel & TSMC on Chip Shortage: After Blowing $84 Billion on Share Buybacks since 2011 and Now Woefully Behind, Intel Clamors for $50 Billion in Subsidies for US Chip Industry, by Wolf Street

Who cares if your company falls behind in its main line of business if you can borrow a lot of money and buy back your stock to keep its price going up, especially when you have lots of stock options? From Wolf Richter at wolfstreet.com:

“We will not be anywhere near as focused on buybacks going forward as we have in the past”: Intel’s new CEO.

US semiconductor manufacturing has declined to where it is now only 12% of the world’s total, said Intel’s new CEO Pat Gelsinger in an interview with CBS on 60 Minutes. “And anybody who looks at supply chain says, ‘That’s a problem.’” It’s a problem, he said, “because relying on one region, especially one as unpredictable as Asia,” where 75% of the chips are made, “is highly risky.”

And Intel, which made $63 billion in net income over the past three years combined, “has been lobbying the US government to help revive chip manufacturing at home – with incentives, subsidies, and-or tax breaks, the way the governments of Taiwan, Singapore, and Israel have done,” Gelsinger said. This lobbying came after Intel had incinerated $84.5 billion in share buybacks since 2011 (data via YCharts):

The success of Intel’s lobbying became clear in late March when the White House unveiled $50 billion in subsidies for semiconductor makers in the US to address the shortages and US exposure to foreign chip makers, as part of its $2 trillion infrastructure plan. The subsidies for the semiconductor industry have bipartisan support in Congress, the White House said. Corporate subsidies have nearly always bipartisan support.

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Stock Buybacks a Piece of “Financial Engineering Game”, by Bruce Wilds

Stock buybacks are mostly hocuspocus, and operate on the hope that buying in shares, particularly with borrowed money, will work the same magic as cutting up the same size pizza into more slices to justify increasing its price. From Bruce Wilds at brucewilds.blogspot.com:

In today’s market far too much has become based on financial engineering rather than making money. Prior to the Great Depression share buybacks and margin lending was a huge factor in lifting stocks to an unsustainable level. We must remember this today because for years we have seen a slew of stories and articles about how companies buying back their own stock are driving the market higher. I would be amiss not to comment on this and point out the impact and importance of stock buybacks and how they add to both low volatility and at the same time support “crazy high” valuations.
For decades stock buybacks were illegal because they were considered to be a form of stock market manipulation. They were legalized in 1982 by the SEC and since then have become a tool for companies and management to boost share prices. Buybacks have been described as “smoke and mirrors,” because when a company buys back shares of their own stock they reduce the “share float” and increase earning per share.
Stock Buybacks Just Keep Coming

Buybacks should be viewed as a double-edged sword with great power in that they reduce the number of shares over which earnings are divided at the same time they add to market demand. Buybacks can give the impression the companies earnings are increasing while in reality, overall earnings may be flat or even on the decline. The deregulation of buybacks years ago has returned to haunt us because it tends to create a dangerous illusion that draws less sophisticated investors into a market that is not nearly as strong as it appears. 

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Day of Shame: US House Approves $2 Trillion Everything Bailout on a Voice Vote, by David Stockman

When historians look back, they may well pinpoint the $2 trillion bill and the Federal Reserve actions in response to the coronavirus outbreak as the inflection point when the US’s slide into bankruptcy accelerated. From David Stockman at davidstockmanscontracorner.com, via lewrockwell.com:

Did we say it’s getting stupid crazy down there in the Imperial City?

Well, we probably have….ad infinitum. And we are doing so again but not merely owing to today’s abomination in the once and former Peoples’ House, which thinks so little of its oath to defend the constitution and the rights of current and future taxpayers that it approved the $2 trillion Everything Bailout without even a roll call vote.

Then again, like the late night TV pitchman says – wait, there’s more!

Consider the chart below, which surely the Fed heads have not. To wit, it took the Fed 85 years after its doors opened in 1914 to print enough money to fund a $600 billion balance sheet.

It wasn’t exactly the Ohio State offense – three yards and a cloud of dust – which accomplished this. But it was pretty close – even including Greenspan’s first years at the helm. Between the famous Treasury Accord in 1951, under which the Fed was liberated from Treasury-ordered yield pegging, and 1999, its balance sheet grew at a modest 5.2% per annum.

And, by your way, the Fed’s relative stinginess with the printing press was a great big no nevermind. Real GDP grew at 3.4% per annum over that near half-century period, and real median family income more than doubled from $35,000 to $74,000.

We are pondering the number “$600 billion” today because its capsulizes the insanity loose in the Imperial City. What took 95 years to accomplish in the purportedly benighted 20th century, has now taken just five days!

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10 Years Later, No Lessons Learned, by Jim Quinn

The too big to fails in 2008 are bigger, the debt pile is higher, and policymakers are at least as stupid, if not stupider. From Jim Quinn at theburningplatform.com:

“A variety of investors provided capital to financial companies, with which they made irresponsible loans and took excessive risks. These activities resulted in real losses, which have largely wiped out the shareholder equity of the companies. But behind that shareholder equity is bondholder money, and so much of it that neither depositors of the institution nor the public ever need to take a penny of losses. Citigroup, for example, has $2 trillion in assets, but also has $600 billion owed to its own bondholders. From an ethical perspective, the lenders who took the risk to finance the activities of these companies are the ones that should directly bear the cost of the losses.”John Hussman – May 2009

This month marks the 10th anniversary of the Wall Street/Fed/Treasury created financial disaster of 2008/2009. What should have happened was an orderly liquidation of the criminal Wall Street banks who committed the greatest control fraud in world history and the disposition of their good assets to non-criminal banks who did not recklessly leverage their assets by 30 to 1, while fraudulently issuing worthless loans to deadbeats and criminals. But we know that did not happen.

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Why I Think the Stock Market Cannot Crash in 2018, by Wolf Richter

Companies are buying back their own shares at a record clip and Wolf Richter thinks that will put a floor under the stock market. From Richter at wolfstreet.com:

But the crash-insurance policy is a one-time deal. And then what?

The 85% of S&P 500 companies that have reported earnings so far disclosed they’d bought back $158 billion of their own shares in Q1, according to the Wall Street Journal. The quarterly record of $164 billion was set in Q1 2016. If the current rate applies to all S&P 500 companies, they repurchased over $180 billion of their own shares in Q1, thus setting a new record:

At this trend, including a couple of slower quarters, S&P 500 companies are likely to buy back between $650 billion and $700 billion of their owns shares in 2018. This would handily beat the prior annual record of $572 billion in 2007.

Here are the top buyback spenders in Q1:

  • Apple: $22.8 billion
  • Amgen: $10.7 billion
  • Bank of America: $4.9 billion
  • JPMorgan Chase: $4.7 billion
  • Oracle: $4 billion
  • Microsoft: $3.8 billion
  • Phillips 66: $3.5 billion
  • Wells Fargo: $3.34 billion
  • Boeing: $3 billion
  • Citigroup: $2.9 billion

Buybacks pump up share prices in several ways. One is the pandemic hype and media razzmatazz around the announcements which cause investors and algos to pile into those shares and create buying pressure. Since May 1, when Apple announced mega-buybacks of $100 billion in the future, its shares have surged 11%. The magic words.

Other companies with big share buyback programs have also fared well: Microsoft shares are up 14% year-to-date. And if buybacks don’t push up shares, at least they keep them from falling: Amgen shares are flat year-to-date.

Shares of the 20 biggest buyback spenders in Q1 are up over 5% on average year-to-date, according to the Wall Street Journal, though the S&P 500 has edged up only 2%.

Share buybacks also prop up prices because they create buying pressure by the company itself when it finally does buy the shares. This is the only entity in the market that doesn’t want to buy low. It wants to buy high since it’s trying to manipulate up its own shares. By design, it provides the relentless bid in a market that might want to sell off. The amounts are huge.

To continue reading: Why I Think the Stock Market Cannot Crash in 2018

Stock Buybacks Are Nothing but Margin Speculation, by Valentin Schmid

If you borrow money to buy stocks, you make more on the upside and lose more on the downside. If, by some weird chance, the downside has not been abolished, corporations who borrowed money to buy in their own stock may find themselves in a bind. From Valentin Schmid at theepochtimes.com:

Not only individual speculators are all-in the stock market; companies are, too

Let’s say you have $10,000 in an account with your stockbroker. Under normal circumstances, you could buy up to $30,000 worth of stock with a $20,000 loan from the broker. Let’s assume you are lucky and the stock goes up 50 percent. The position is now worth $45,000, and your equity has increased by $15,000 to $25,000. This means you can increase your position size again to $75,000 and buy more stock, because most brokers only require you to keep 30 percent of cash or stock as collateral.

This is why using margin is so powerful in a rising market and why margin debt in the accounts of the New York Stock Exchange (NYSE) has kept pace with the records in the S&P 500 and the Dow Jones industrial average, reaching an all-time high of $581 billion in November 2017.

In a falling market, the whole exercise becomes less fun, and speculators trading on margin were one of the reasons behind the vicious crash of 1929.

The biggest companies in the United States run the risk of ending up like speculators caught in a margin call.

Let’s assume you just bought more stocks and your total position in company A was $75,000 with your initial cash outlay, with profits totaling $25,000, as in the example above.

If the market moves 10 percent against you, your position is worth $67,500 and your equity is worth $18,500, but the loan is still worth $50,000 and you are supposed to keep $20,250 as collateral. In order to make up the difference between your collateral value ($18,500) and the margin requirement ($20,250) of $1,750, you can either deposit more cash or sell some securities to decrease the margin position.

To continue reading: Stock Buybacks Are Nothing but Margin Speculation

“It’s An Alice In Wonderland World” – GRI Warns “Debt Is Being Piled Upon Debt Being Piled Upon Debt” by Tyler Durden

There was probably more logic in Alice in Wonderland’s world than there is in the world’s present astronomical pile of debt. From Tyler Durden at zerohedge.com:

The combination of low interest rates and “an explosion of debt” has become the biggest risk to the world’s economies, according to the head of Canada’s Global Risk Institute.

“These low interest rates could have the potential to be the next serious issue faced by countries and it’s because debt is exploding everywhere,” Richard Nesbitt, 60, chief executive officer of the group that researches risks to the financial industry, said Monday in an interview in Bloomberg’s Toronto bureau.

“There’s debt being piled upon debt being piled upon debt.”

Since the middle of 2015, central bank balance sheet expansion has once again led to a collapse in sovereign bond yields, further encouraging global corporate debt to surge…

As the majors plunge into negative rates…

Global debt has climbed about 37 percent since the 2008 financial crisis, Nesbitt said, as central banks around the world have pushed interest rates down to stoke growth and even below zero in the case of Japan and some of Europe’s central banks.

Enticed by record-low interest rates, companies increased total debt by $2.81 trillion over the past five years to a record $6.64 trillion. In 2015 alone, liabilities jumped by $850 billion, 50 times the increase in cash by S&P’s reckoning.

And as SocGen showed last year, all the newly created debt in the 21th century has gone for just one thing: to fund stock buybacks.

To continue reading: “It’s An Alice In Wonderland World” – GRI Warns “Debt Is Being Piled Upon Debt Being Piled Upon Debt”

How Much Of S&P Earnings Growth Comes From Buybacks, by Tyler Durden

Stock-buyback smoke and mirrors, from Tyler Durden at zerohedge.com:

Having pounded the table on buybacks as the only marginal source of stock purchasing since some time in 2013, we were delighted one month ago when Bloomberg finally got it, writing an article titled “There’s Only One Buyer Keeping S&P 500’s Bull Market Alive.” The answer: corporate stock repurchases of course.

This is what it found:

Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

“Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins, director of equity research at Wilmington Trust Co., which oversees about $70 billion. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’

But, when you have the ECB backstopping purchases of corporate bonds, giving companies a green light to issue debt at will and use the proceeds to buyback even more stock, it won’t end just yet.

However, now that it is common knowledge that over the past several years the market has been conducting the most elaborate acrobatic example of pulling itself up by its bootstraps, by conducting a slow motion LBO in which just over 1% of the S&P has been purchased with incremental leverage, another question which bears answer is how much of S&P EPS growth comes from buybacks?

This is important because with Q1 earnings season starting and expected to post the worst, -8.5% drop in EPS since the financial crisis, and one in which collapsing energy and financial will be routinely ignored, we asked what would happen to “earnings” if one also excluded the benefit from buybacks.

To continue reading: How Much Of S&P Earnings Growth Comes From Buybacks

No Wonder the Stock Market’s So High: It’s All Corporate Buybacks, by John Del Veccio

From John Del Veccio at economyandmarkets.com:

So like a lot of people, I’ve gotten suckered into following the presidential race. As of last night, the Republican field has narrowed to just three candidates. That’s a long way from the 19 or so who started out, but who’s counting?

Not too long ago Carly Fiorina was still in the race. Everyone remembers Carly as the former CEO of Hewlett Packard who lost her job. I remember when Carly took over as the Chief Executive back in 1999. In her six-year tenure, the company bought about $14 billion of its stock, which was $2 billion more than it had made in profits.

Again, that was just in six years. Over the next six years, her first two successors bought back about $53 billion. That was as of 2011. I don’t even want to know how much the current CEO has purchased, as corporate buybacks have only grown more popular in recent years.

I was reading an article about buybacks published in Business Insider this past weekend. It said that they’ve accounted for almost all of the stock market’s gains since 2009.

That didn’t really surprise me. I knew the market’s rally over the past few years has been fueled by shenanigans. But, I was shocked by the sheer amount of buybacks that actually is.

The article quotes an HSBC research report that says S&P 500 companies have bought back $500 billion in stock in the last two years, and $2.1 trillion since 2010.

That’s an amazing statistic. And it gets weirder.

On a cumulative basis, individual investors and pension funds haven’t contributed one ounce to the market’s rise over that time. Every bit of it has come from these stock buybacks.

If you’ve also read that the Fed has been responsible for virtually all of the stock market’s moves since the financial crisis, it’s really the same point. Low interest rates made it cheap for companies to take on debt and then buy back their stocks.

It’s one way companies can juice their earnings per share because it reduces the share count. But, it’s a low-quality source of earnings growth. It has nothing to do with demand for a company’s product or services. And it comes at the expense of innovation and research and development.

It’s all financial engineering.

This chart shows that hundreds of millions of dollars have been added in buybacks each month and at a growing pace since 2010. It lines up with what we’ve seen in the S&P 500.

To continue reading: No Wonder the Stock Market’s So High: It’s All Corporate Buybacks

Apple, Cisco and IBM prove that stock buybacks are a sham, by Jeff Reeves

From Jeff Reeves at marketwatch.com:

Another earnings season, another load of massive stock-buyback announcements.

In the past few weeks alone, we saw:

• A $4 billion boost to General Motors’ GM, +0.57% stock-buyback plan, bringing the total $9 billion.

• A new $4 billion buyback plan from MasterCard MA, -0.84%

• A new $10 billion buyback program at battered oil company Schlumberger SLB, -2.30%

The repurchase amounts are big, and they are only getting bigger.

“Among the 1,900 companies that have repurchased their shares since 2010, buybacks and dividends amounted to 113% of their capital spending, compared with 60% in 2000 and 38% in 1990,” Reuters said in a recent special report on the buyback craze.

You would think that with all that cash being plowed into stock buybacks, investors would be reaping the rewards. But, sadly, more often than not, the buybacks are simply a waste of money as shares are bought at inflated values, diluted by employee stock awards and ultimately come at the cost of growth and innovation.

Here’s why stock repurchases are good for nothing, and why companies like Apple AAPL, -1.04% Cisco CSCO, -1.95% and IBM IBM, +0.16% need to wake up and stop wasting their money on buyback boondoggles.

To continue reading: Apple, Cisco And IBM Prove That Stock Buybacks Are a Sham