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The End Is Near, Part 3: Corporations Are The Ultimate Dumb Money

David Stockman just published a chart so compelling that he didn’t feel the need to add any commentary.

Share buybacks and dividends historical

But there are a few things to be said about the tendency of public companies to repurchase their shares at the very top:

“Peak buyback” is a sign that executives are seeing fewer opportunities to generate positive returns by building new factories or hiring new people, and so choose to give their free cash back to investors. This is NOT a good thing for the future of the business.

Low interest rates turbo-charge this process by making it profitable to buy back shares with cheap borrowed money. The result is soaring debt for the companies with the biggest repurchase programs. Here, for example, is a chart of IBM’s debt (blue) and equity (orange) compiled by Morningstar. As recently as 2012 Big Blue’s balance sheet was fairly solid, with about 40% equity. In two short years equity fell to less than 25%:

IBM debt and equity

Obviously this process is limited by the finite amount of equity outstanding. Another three years like the last two and IBM will have completed a leveraged buyout and become a private company.

The best data point on Stockman’s chart is 2008 when, one year after the achievement of peak buyback, companies not only stopped repurchasing shares but started issuing new shares — in a plunging market. In other words, public companies spent three years buying their own shares at ever-higher prices only to sell $99 billion of them back at a discount. This is typical dumb money behavior, akin to the margin calls that decimate individual brokerage accounts during bear markets.

The second best data point is 2014 when share repurchases exceeded their 2007 level. Now the question is which of the next few years will reprise 2008.

23 thoughts on "The End Is Near, Part 3: Corporations Are The Ultimate Dumb Money"

  1. Obama and Church Leaders PRAYED you’d never see this…

    Video:>> http://endof-days.com

    This short independent documentary has Obama on the edge of a nervous breakdown…

    Because it exposes the biggest cover up of his presidency…

    Something darker and more sinister than Sandy Hook and Benghazi combined…

    And it’s spreading like wild fire all over the internet.

    Analysts warn it’s going to devastate millions of families………

  2. Red Herring. The bond market is where the trouble lies. When that explodes it could get ugly.

  3. The whole damn deal is ready to blow up!
    Put away the charts & graphs,they just make the situation harder to understand.
    The main problem is that the 1% people believe that the middle class public is chained to them & can’t help itself,.. which is just one way of looking at things.A more accurate view may be that the Billionaires are chained to the middle class public & not the other way around.The middle class public is being stretched like a rubber band & when this rubber band snaps both the public & the 1% will go down the deflationary drain together!

  4. Is is nothing more than Corporate Greed at its finest. The maximization of shareholder value is a mission long lost on today’s Corporate Officers which has been replaced by ENRICH YOURSELF WHILE THE FED IS GIVING MONEY AWAY. All about goosing the stock prices, as temporary a feat as that will be in a declining revenue and economic environment, in order to feed at the corporate trough via STOCK OPTIONS GAINED THROUGH AN ALREADY EXCESSIVE COMPENSATION SCHEME. Since these stock options for the privileged few corporate officers have laddered strike prices at which they can be exercised, converted into common shares, and then sold in the open market, BUYING BACK STOCK TO TREASURY IS A PROVEN METHOD FOR GAMING THE MARKET AND LINING THEIR OWN POCKETS.

    Who cares it the corporate Balance Sheet goes to hell in a handbasket because they will be on to their next gig or the Hamptons when the crap hits the fan and even low-cost debt cannot be serviced because sales and cashflow have taken a 30% hit in the developing Obama Depression, Phase II. Crazy as foxes goes the saying. Stay out of asset classes where you do not have a fighting chance to beat the insiders! Got Gold? Got Silver? Got Diamonds?

  5. I have to disagree; this isn’t dumb behavior at all. It’s simply looting. The shareholders own the company, they let the company produce profits at the expense of workers who are no longer paid living wages (and whose wages are thus subsidized by taxpayers in the form of food stamps and other assistance), and at the expense of consumers who have to take on debt to buy shoddy products diminished by hidden inflation. The shareholders then loot the profits while firing workers (google “Dow fires 1,750 after boosting buyback program to $10 billion”). Most Americans don’t own any stocks at all and the vast majority of stocks are owned by the top few percent. And none of these elites gives a shit anymore about keeping any real economy going, this is just a greedy, grasping, last-minute-before-the-punchbowl-goes free-for-all. To describe it as stupid would be apt if they cared about preserving real production in any way, but here I think Catherine Austin Fitts may be right: They gave up on the West as far back as the 1980s. They’ve never had any intention of leaving anything left standing. It’s just loot more and produce less, trashing the place while they burglarize.

    And what do the common people think? That the social welfare recipients are getting too much money. Now there is some “dumb” for you. Send your average American back to late 18th-century France and they would take “let them eat cake” as a rallying cry. People seriously need to give some thought to who has the power and the money in this country. It ain’t the people living in the projects or in trailers.

    1. You make it sound like the majority share holders are the ones selling their stocks to the company. I don’t think so, at least not that much, not yet. The companies are buying shares off “the open market” from whoever or whatever will sell (i.e., minority share holders as investment funds, insurance companies, etc.) The looting will be when the majors unload their shares to the next greater fools, at least that might be their plan, but I don’t think it’s going to work out that way for them.

      1. I take your point, and obviously a great many different entities hold a stock like IBM or Dow. I was thinking of how the insider sell-to-buy ratio hit an all-time high at one point earlier this year. And, while majority stakeholders will be sure to remain majority holders while it suits them, they’re often holding a similar fraction of a shrinking pie (see above pie charts).

        Something I should have added is that they’re not just using profits to buy the stocks back, they’re also borrowing money to do it, but that’s just essentially stealing from future profits. They found a way to loot wealth that hasn’t even manifested itself yet. They’re sophisticated thieves.

    2. The elites think they’ll all be transhumanists and taking space ships to the Orion belt. Too bad for them the demonic entity draco’s will be waiting for them there.

    3. GOD BLESS Projects and Trailers!! Most folks will be LUCKY if they have one to live in!!

    1. People do see it that way because they can no longer distinguish a liquidity problem from a solvency problem.

  6. It’s not dumb actually.

    It is exactly what one would expect corporations to do when faced with the end of growth due to the end of cheaply extractable oil.

    his should be of no surprise to anyone since two prominent petroleum geologists predicted exactly this in 1998.

    THE END OF CHEAP OIL

    Global production of conventional oil will begin to decline sooner than most people think, probably within 10 years. Feb 14, 1998 |By Colin J. Campbell and Jean H. Laherrre

    http://www.scientificamerican.com/article/the-end-of-cheap-oil/

    THE PERFECT STORM (see p. 59 onwards)

    The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

    But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

    http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

    What we are experiencing with the never-ending financial crisis are the symptoms of expensive to extract oil.

    Essentially this is the last gasp of the industrial age. The last gasp of modern civilization.

    Oil was a curse because it allowed us to grow our population beyond the carrying capacity of the planet. And now we will pay the price.

    http://newsgarden.org/chatters/homepages/alllie/images/worldpopgr.gif

    1. No, it’s the symptom of ZIRP. And of pretending that these entities pursuing maximum return to shareholders, and basically shielded from any responsibility, will somehow result in a prosperous society.

        1. It doesn’t. It gives short term rewards to the company while kicking the can down the road.

    2. Yes, but isn’t it dumb in that the corporations will be holding a bunch of stocks that will, supposedly, soon become worth much less, or do you think they know something that we don’t?

      1. The thing is… it does not matter because when this apple cart tips over it will not matter if you hold stock or not — everything collapses in a heap of rubble

        The bigger picture is here:

        THE PERFECT STORM (see p. 59 onwards)

        The economy is a surplus energy equation, not a monetary
        one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

        But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

        http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

        This is – no hyperbole – the End of Civilization we are facing

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