The stock market is up and we should all be celebrating. However before you pop open the champagne, let’s look at the real story. The stock buybacks driving the market used to be illegal because they manipulated the market.
The stock market has been on a tear since 2009, rising to record levels, and optimism that it will continue seems to be widespread. Even Federal Reserve Chair Janet Yellen said, “Would I say there will never, ever be another financial crisis? … Probably that would be going too far. But I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t believe it will be.”
It appears many other financial experts agree. As Tyler Durden writes in his article in ZeroHedge, Blackrock’s CEO Larry Fink sure thinks times are booming. According to Mr. Fink, “While significant cash remains on the sidelines, investors have begun to put more of their assets to work.”
However, before you enjoy that bubbly and join in the celebration let’s take a look at some startling facts and figures.
Mr. Durden quotes Credit Suisse strategist Andrew Garthwaite, who wrote, “One of the major features of the US equity market since the low in 2009 is that the US corporate sector has bought 18% of market cap, while institutions have sold 7% of market cap.”
As Durden further notes, “there has been only one buyer of stock: the companies themselves, who have engaged in the greatest debt-funded buyback spree in history.”
Source: Thomson Reuters, Credit Suisse
That’s right! Since the financial crisis there’s basically been only one buyer of stocks, and it’s not the average individual who was burned by the crash after the 2008 market plummeted and they lost their investments, but companies who have engaged in the largest debt-funded buyback activity in history. Individual investors are still leery of putting their own money at risk.
So what does all this mean? Most people believe the stock market shows public confidence and public buying, however, the reality is very different. It may all be an illusion, yet another Ponzi scheme. This corporate buyback trend is especially dangerous, as the majority of these purchases since 2009 until today are debt funded!
It gets more interesting… The Federal Reserve recently gave the most systemic important financial institutions a heads up on the 2017 stress tests, with an all clear; “it did not object to the capital plans of all 34 bank holding companies.”
Wall Street was jubilant. The champagne flowed. And buyback sprees are being accelerated for the financial sector. Almost immediately three of the largest Wall Street banks announced they were putting $47 Billion into their own share buybacks; J.P. Morgan Chase with a potential $19.4 billion; Citigroup $15.6 Billion and Bank of America, $12 Billion.
In the September 2014 Harvard Business Review, William Lazonick wrote the following:
“Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.”
He added that 449 companies in the S&P 500 index, listed from 2009 to 2012 used 54% of their earnings, $2.4 trillion to buy back their own stock. And more recent analyses reflects that in 2016, 66% of earnings were used for buybacks, with 2017 expected to be significantly higher.
And now the real shocker! Until 1982, stock buybacks were “deemed illegal because they were thought to be a form of stock market manipulation.” Now they are indeed being used to financially engineer the stock market!
In a previous post on Danielle DiMartino Booth’s recent book, FED UP, I quoted Ms. Booth as saying,“The Fed has made it so cheap to borrow that companies, with their management driven by incentive compensation on increased stock prices, have driven a significant amount of debt-fueled common stock purchases to, for the short term, increase EPS and, therefore, stock price.”
She, too, commented that companies in the S&P 500 expended more than $2 plus trillion to buy back their stock in 2014 and 2015. And this has driven down the investment in research and development and capital expenditures in recent years. It is R&D and capital expenditures which ultimately drives the growth of companies and thus employment, and that’s being curtailed by the temptation of cheap debt.
Stock repurchases do not accomplish anything productive and are for the short term, as contrasted with capital expenditures, which are typically made for increasing long-term productive assets and are thus expenditures, “investments” in the companies’ future. She further notes cheap debt is also driving much of the acquisition binge, which in turn leads to more employee layoffs.
Ms. Booth quoted Rana Foroohar in May 15, 2016 Financial Times op-ed stating ”It is easier for chief executive officers with a shelf life of three years to try to please investors by jacking up short-term share prices than to invest in things that will grow a company over the long haul.”
She notes that easy “money kept those who already have the money and Wall Street alive and flourishing, while Main Street struggles.” I agree.
So, the Wall Street execs get wealthy at the expense of the company’s future, its employees and the economy.
So once again, the market soars, Wall Street celebrates and the champagne flows, and we drink soda pop!
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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
