This actually stems from questions asked in the Whole Foods and Apple threads. It attempts to explain the now widespread use of 'stock buybacks' by corporations on the price of the company's own stock shares, as well as on other aspects of their ( future ) business ...

from


(snip)"In the Business Roundtable’s second quarter CEO survey, the chiefs of the largest US corporations weren’t exactly in an ecstatic mood either. They lowered their GDP growth forecast for the year to 2.3%; among other tidbits, they also expected to spend less money on capital investments.

Capital investments are crucial to the economy. One, they crank up GDP when the money is spent. And two, investing in productive assets creates future growth. But only 44% of these CEOs are planning to increase capital investment, down from 48% last quarter.

Companies axe capital investments brutally when dark clouds appear at the horizon. It started in early 2000 as the stock market was blowing up and lasted through the recession that followed. Then capex recovered and peaked in the summer of 2008, even as the financial crisis was spreading. In either case, that sudden cut in corporate investment deepened the recessions. This chart of new orders of non-defense capital goods (St. Louis Fed) shows the brutality of the cuts – for example, slashing them by a third from $69 billion in August 2008 to $46 billion in April 2009:





But note how the chart has stayed within its range over the last two decades – a time when the US population has soared 19% and GDP, adjusted for inflation, 51%. Turns out, corporations had found other things to do with their money: stock buybacks.

Which have been skyrocketing. In the first quarter, buybacks jumped 50% from a year ago to $154.5 billion, according to FactSet‘s report released yesterday. It was the third-largest in the data series, behind only 2007 when in Q2 and Q3 $161.8 billion and $177.9 billion were spent on buybacks, while the financial crisis was already fermenting underneath.

Tech blew $47.4 billion on buybacks, a record in the data series, up 175% from a year ago. A cool $18.6 billion of that came from Apple. IBM was in second place with $8.3 billion. Industrials, up 119% from a year ago, also set an all-time high. Overall, Apple and IBM led the pack, followed by FedEx, Boeing, Abbott Laboratories, Corning, and eBay.

For the trailing 12 months, our corporate heroes bought back $535 billion – funded largely with borrowed money – a notch below the $603 billion record set during the trailing twelve months ended in Q3 2007, on the eve of the financial crisis (chart by FactSet):





Buybacks peaked precisely at the top of the market in Q3 2007 then plunged over 80%. By Q2 2009, when stocks were cheapest, buybacks had nearly stopped. It seems like a clockwork of bad timing: buybacks soar when stocks go into bubble mode and collapse when stocks get cheap. But the relationship works the other way around.

The purpose of buybacks is to use shareholder equity to manipulate up the stock price. It works in three ways: one, through the sheer buying pressure – especially easy during these times of super-low trading volume; two, through this form of financial engineering that boosts earnings per share by lowering the share count, though it does nothing for actual earnings; and three, through the hype surrounding the buyback announcements and even the whispers of them.

And it works even when, as for example in IBM’s case, revenues and actual earnings are crummy for two years in a row, and when the stock should be roasting in purgatory. At every earnings announcement, the stock plunges, but then over the next three months, mirabile dictu, the share price rises again, fired up by buybacks. The Wall Street hype machine uses them as bait. Investors swallow them hook, line, and sinker. But that’s all buybacks do.

What they don’t do is generate future revenues and earnings, unlike R&D or capex or any of the other productive activities companies undertake. In this way, the moolah blown on buybacks simply disappears as a driving force from the economy – an issue that has been dogging the US for two decades, as the range-bound chart above shows.

But the tide seems to be turning, and the money seems to be ebbing. Most of the top buyers have already indicated that they’re cutting back. A couple of days ago, FedEx announced that it whittled down its buybacks from $2.8 billion in Q1 to $1 billion this quarter. When Apple raised its buyback authorization through December 2015, it worked out to be $6.3 billion per quarter – down from $18.6 billion in Q1. IBM slashed its full-year buybacks by about $2 billion per quarter for the remainder of 2014. GE disclosed that it would cut its buybacks. Exxon Mobil, AT&T, Oracle, and Wal-Mart already reduced their buybacks in Q1 from the average quarterly amounts in 2013.

So what happens to the stock market when these huge and reckless buyers with their nearly endless resources and ability to borrow at practically no cost start cutting back after such a phenomenal peak? Well, we know what happened when they did the last time"(snip)


And the Wall St. Journal just had this to say ... from


(snip)"Companies particularly splurged on buybacks during the first quarter. They bought back $159.3 billion worth of stock during the first three months of 2014, up 59% from a year ago and a 23% increase from the fourth quarter.

Apple Inc. AAPL -1.03%, International Business Machines Corp. IBM -0.69% and Exxon Mobil Corp. XOM +1.17% spent the most on buybacks in the period. Apple repurchased $18 billion worth of stock, while IBM bought back $8.2 billion of its stock and Exxon repurchased $3.9 billion of stock. Five of the top 10 companies that implemented the biggest buybacks hailed from the tech sector, including Cisco Systems Inc. CSCO +0.49%, Oracle Corp. ORCL -3.98% and Corning Inc. GLW +0.83%

Buybacks increase a company’s earnings per share by reducing the supply of stock, making each share more valuable. For instance in 1993 IBM had 2.3 billion shares outstanding. Today, it has about 1 billion. The stock is up more than 900% in that time frame.

“Keeping up with the current bull market means that companies have to pay more for the same number of shares, and activists are demanding more of a return, both via dividends and buybacks,” Mr. Silverblatt said. “For buybacks the true test is share count reduction, and we are seeing more companies achieve share count reduction as they increase their [earnings per share].”

Many investors have warmed to strategies that invest in companies boosting their payouts. The S&P 500 Buyback Index, which measures the 100 stocks with the highest buyback ratios, has rallied 24% over the past 12 months, compared to the broad S&P 500′s 18% gain over that same time frame.

But the rally has slowed in recent months. Since Jan. 1, the Buyback Index is up 4.7%, underperforming the S&P 500′s 5.1% gain.

Critics say companies would be better off deploying their capital in other ways, such as boosting hiring, investing in research and development or making deals. Companies also have a history of buying back shares at the wrong time. At the end of 2007, buyback activity was near record levels just as stocks were in the early stages of a precipitous drop.

“The key question for the second quarter is did they do it to boost a poor first-quarter earnings period that was impacted by weather conditions,” Mr. Silverblatt says, “or was it a shift towards more enhanced earnings via share count reduction, similar to what we experienced in 2006 and 2007?”(snip)