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Corporations – And Corporate Execs — Fall Out Of Love With Their Shares

by John Rubino ◆ August 16, 2016 8 Comments

It’s no secret that one of the main things propping up the US stock market has been corporations’ willingness to buy back their own shares with borrowed money. The following chart illustrates the rather amazing correlation between share repurchases and share prices.

Share repurchases Aut 16

This was obviously a short-lived strategy, one that would end when companies got so leveraged that borrowing more started to look pathological rather than wise. And that time may have come:

U.S. Buyback Announcements Tumble to a 2012 Low

(Bloomberg) – Stock buybacks appear to be slowing down, suggesting either corporate America’s outlook has dimmed, stock valuations have become prohibitively high or, most optimistically, that companies are starting to listen to investors and put funds toward other uses.

Buybacks announced for the second quarter’s earnings season between July 8 and August 15 totaled an average of $1.8 billion a day, the lowest volume in an earnings season since the summer of 2012, according to TrimTabs Investment Research.

Share repurchases have been a key driver of this year’s stock market rally, despite a notable deceleration relative to to the same period in 2015. In the first seven months of 2016, buybacks totaled $376.5 billion, according to TrimTabs. That’s down 21 percent from $478.4 billion in the first seven months of last year. Equity buybacks last week totaled just $2.6 billion, while record highs in U.S. stocks triggered an increase in new equity offerings.

“The reluctance to pull the trigger on share repurchases suggests corporate leaders are becoming less enthusiastic about what they see ahead,” David Santschi, chief executive officer of TrimTabs, said in a press release on Tuesday. That means “buybacks aren’t likely to provide as much fuel for the stock market as they have in the recent past.”

But wait, there’s more. It seems that corporate insiders understand the upward pressure they’ve exerted with all their leveraged buying – and that without it many stocks are sitting on some serious air pockets. So in the best tradition of the 1%, they’re sticking their remaining shareholders with that eventual bill by dumping their own shares at a record pace:

Corporate insider selling surges as market hits record

(CNBC) – Corporate insiders are taking profits as U.S. equities rise to record levels, according to the new Vickers Weekly Insider Report from Argus Research.

Based on data that examines the ratio between buying and selling among corporate executives, the rate of net insider selling reached the highest level since June 2015. That surge preceded a previous market high when the Dow was pushing over 18,000 for the first time ever, according to Richard Cuneo, senior vice president of operations at Argus Research.

A crucial sentence from the first article: “Equity buybacks last week totaled just $2.6 billion, while record highs in U.S. stocks triggered an increase in new equity offerings.” So not only are companies buying fewer shares, they, along with their insiders, are starting to sell.

The result of this change in the supply/demand calculus should, other things being equal, be lower share prices. Which would vindicate the lengthening list of heavy hitters (Gross, Soros, Icahn) who have gone bearish lately.

Comments

  1. PLCIndiana says

    August 17, 2016 at 11:20 am

    All this is true, however the bigger question is who is buying these stocks. Individual investors have been on the sidelines for a while now. Companies are not buying them with borrowed money. Insiders are sell so who is buying? If a heavy hitter with deep pockets was not buying stocks would have already crashed. I personally believe the FED is doing the buying in order to prop up the market until the election. Problem is with the secretive nature of the FED I can no0t prove it.

    Reply
    • thomas says

      August 21, 2016 at 1:22 am

      Agreed. The Japan central bank is open about it. They’re buying half of the available stock now.

      Reply

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  2. Corporations – And Corporate Execs — Fall Out Of Love With Their Shares | Patriot Money News says:
    August 17, 2016 at 7:34 am

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  3. Corporations – And Corporate Execs — Fall Out Of Love With Their Shares | Global Finance Blog says:
    August 17, 2016 at 10:36 am

    […] post Corporations – And Corporate Execs — Fall Out Of Love With Their Shares appeared first on […]

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  4. Troy Oz Silver | Corporations – And Corporate Execs – Fall Out Of Love With Their Shares says:
    August 17, 2016 at 12:33 pm

    […] Corporations – And Corporate Execs – Fall Out Of Love With Their Shares […]

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  5. Corporate buybacks are down to the lowest level since 2012 « Korelin Economics Report says:
    August 17, 2016 at 8:37 pm

    […] Click here to visit John’s site and read the article that spurred this conversation. […]

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  6. Folks, It’s Really Quite Simple, “YOU CANNOT SOLVE A PROBLEM BY MAKING IT BIGGER” !!! – Is 2016 the Year? says:
    August 27, 2016 at 11:40 pm

    […]           http://dollarcollapse.com/stock-prices/corporations-corporate-execs-fall-love-shares/ […]

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