Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24
Bitcoin Trend Forecast, Crypto's Exit Strategy - 31st May 24
Zimbabwe Officials Already Looking to Inflate New Gold-Backed Currency - 31st May 24
India Silver Imports Have Already Topped 2023 Total - 31st May 24
Gold Has Done Its Job – Isn’t That Enough? - 31st May 24
Gold Stocks Catching Up - 31st May 24
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Buybacks Main Force Driving Bull Market; Rewards Investors and Starves Innovation

Stock-Markets / Stock Markets 2016 Oct 13, 2016 - 05:23 PM GMT

By: Sol_Palha

Stock-Markets

"All the power that we exercise over others depends on the power we exercise over ourselves." ~ Cotvos

Share buybacks are nothing new; they have been around for decades, and in most cases, one would view this type of action under a favourable light. However, for the past few years, companies have used this technique as a ploy to hide stagnating earnings or even falling profits. The idea is very simple, and the rewards are lucrative as most corporate officers have incentive-based rewards. Corporations borrow money for next to nothing and then use this to purchase huge blocks of shares; the number of outstanding shares drops and the EPS magically rises. Each year for the past six years the amount of money allocated towards share buybacks has soared, because as we stated, this is the fastest way to increase EPS without doing a single thing magically.


In the good old days, companies would invest the cash they accumulated or the money they borrowed into activities that would improve the bottom line and not resort to financial gimmickry to create the illusion that all is well.  Instead of investing in their own business, corporations have been funnelling huge amounts of cash towards share buyback programs. Total payouts to shareholders which include dividends and share buybacks have increased at an unbelievable rate of 20% per year for the S&P 500 since 2009. As we stated in 2015, 2015 and now in 2016, this trend is not going to stop. It will continue to gather momentum because it is an easy fix to an otherwise unfixable situation. The economy is in bad shape; if the outlook were bright as the BLS claims corporations would be investing larger amounts in their business and not squandering billions on financial shenanigans.

"We estimate total payouts for the S&P 500 will reach $1 trillion for the first time ever in 2016. This will include approximately $400 billion in dividends and $600 billion in gross share repurchases and will culminate six years of substantial growth in payouts. As recently as 2010, total payouts were just $500 billion per year", stated Jonathan Glionna of Barclays

This shady activity would be okay if corporations were only using cash on hand, but they are not; they are borrowing money to fund these purchases. One day they will have to pay this money back, and as they invested nothing into their business, they might not be in a position to service this increasingly large mountain of debt. However, that is a story for another day. The trend is in full swing and showing no signs of letting up, and as negative rates have yet to hit the US, we can state that we are far from reaching a blow off top. In other words, even thought this mountain of debt looks huge today, it might look tiny and manageable compared to what it is going to look like 3-5 years from today. Take a look at the chart below

S&P500 Dividens and Buybacks

Every single year since 2009, the total money committed to dividends and buybacks has increased, and we believe that they will continue to grow at this crazy clip and could even gather momentum when negative rates finally debut in the U.S. Translation, this bull market is not going to hit a brick wall yet. This market will experience corrections along the way ranging from mild to strong, but each one will prove to be a buying opportunity. The amount of money that will continue to hit this market is going to increase in the years to come and not decrease.

On the psychological front, no bull market has ever ended without mass participation. The masses have not embraced this market and more importantly the sentiment is decidedly negative. Bull markets end on a note of joy and the masses are nowhere close to joyful at present. The latest AAII sentiment survey illustrates that 25% of investors are bullish. Our proprietary anxiety gauge also shows that investors are one step away from the hysteria zone.

Tactical Investor Anxiety Index 

The chart below illustrates how the payout ratios have been skyrocketing over the years and as of late they have been outpacing earnings. Companies have are making up for this shortfall by borrowing money.

Total Paytout Ratio

"Over the last few years payouts have exceeded earnings for the S&P 500, which is rare," Glionna observed. "It almost happened in 2014, when the total payout ratio was 99%. In 2015, it did happen. It will happen again in 2016, based on our estimates, as net income is likely to be less than $900 billion against $1 trillion of dividends and buybacks."

"Prior to 2015, companies in the S&P 500, in aggregate, had paid out more than they earned only six other times during the last 50 years," Glionna said.

Many experts will state that this is unsustainable. If you apply the rules of logic, that assumption would be pretty accurate. However, reality ceased to exist after the Fed decided to knock out any aspect of free market forces. The Feds control this market, and it will crash when the Fed stops supporting it. Chances of that taking place anytime soon are next to zero. You have better odds of finding Gold in your backyard then of the Fed allowing free market forces to exert their effects on this market. As we stated before, corporate debt is to soar to levels that will make those of today appear sane in nature. Easy money is addictive, and the corporate world is addicted to it; they are not going to stop unless someone forces them to stop. This is why the most hated bull market continues to trend higher despite all the evil thoughts thrown in its direction.

Conclusion

The crowd has not embraced this market, and sentiment is extremely negative; history clearly indicates that such developments usually occur during market bottoms and not tops; hence, the market is more likely to trend higher a year from today than it is to crash. The higher it trends, the more volatile the ride is expected to be; experts have been confusing volatility for the commencement of the next bear, and on each occasion, they have had their heads handed to them. Don't fight the Fed or the trend as you are bound to lose. Throw in the corporate world's love for share buybacks, and you have all the ingredients in place for this market to trend a lot higher. All sharp pullbacks have to be seen through a bullish lens; the stronger the deviation, the better the opportunity.

"A ***** has great influence on his own dunghill." ~ Publilius Syrus

by Sol Palha

www.tacticalinvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

© 2016 Copyright Sol Palha- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in