Written by Lance Roberts, Clarity Financial
Two weeks ago, I addressed the “Money On The Sidelines” myth stating:
“No, this is not the ‘cash on the sidelines’ argument which I debunked previously. Following the pandemic, corporations drew down credit lines and hoarded cash due to economic uncertainty. Now, with expectations of recovery, corporations are once again beginning to deploy that cash.”
As I stated then, while the mainstream media hope is all this cash will be flowing back into the economy, the reality is that it will primarily go to stock buybacks. Again, while not necessarily bad, it is the “least best” use of the company’s cash. Instead of expanding production, increasing sales, acquiring competitors, or making capital investments, the money gets used for a one-time boost to earnings on a per-share basis.
This past week, share buybacks hit a new record.
Not surprisingly, the most prominent players in buybacks are the ones that need to subsidize their earnings the most to beat estimates; technology and financials.
Net Purchases
While share buybacks primarily are for the benefit of corporate insiders “cashing out,” it does have the effect of supporting asset prices as well. As I discussed in 2019, when stocks were hitting records amid record share repurchases:
“What is clear, is that the misuse, and abuse, of share buybacks to manipulate earnings and reward insiders has become problematic. As John Authers recently pointed out:
‘For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.’
In other words, between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their own shares, there have been effectively no other real buyers in the market.”
I bring this up for two reasons:
- The buybacks ARE SUPPORTIVE of asset prices in the short-term; and,
- We just had to “bailout” these companies because they couldn’t weather an economic downturn as they have spent years piling into debt and buying back shares.
While Janet Yellen is okay with the buybacks, as she thinks the banks are healthier now, why doesn’t anyone ask the question:
“If banks are so healthy, why do they need a constant monetary stimulus to remain in business and a bailout every time the economy declines?”
It doesn’t sound very healthy to me.
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