Stock Buybacks and Margin Debt by Mike Whitney

[Crewleader]

April 01, 2014

"Frothy" Markets Climb Higher

Stock Buybacks and Margin Debt
by MIKE WHITNEY

Are you looking for signs of froth in the stock market? Then you might want to take a look at stock buybacks.

According to the Wall Street Journal, almost 20 percent of the total value of stocks today are stock buybacks, that is, corporations that purchase their own shares to push up prices. Here’s the scoop from Jason Zweig at the WSJ:

“Last year, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares—a 21% increase over 2012, calculates Rob Leiphart, an analyst at Birinyi Associates, a research firm in Westport, Conn. That brings total buybacks since the beginning of 2005 to $4.21 trillion—or nearly one-fifth of the total value of all U.S. stocks today.” (Will Stock Buybacks Bite Back?, Wall Street Journal)

“$4.21 trillion” is a heckuva lot of froth. It means that the market is overpriced by at least 20 percent. Corporate bosses have been aggressively pumping up prices to reward shareholders even though earnings and revenues are looking increasingly shaky. The reason buybacks have caught fire is because– up to now– they’ve been considered a reasonably safe bet. With interest rates locked at zero, and the Central Bank flooding the financial system with $55 billion every month, stocks have been following the path of least resistance which is up, up, and away. (As of Friday, the S and P was up 176 percent from its March 2009 lows.)

The point is, stock buybacks are a natural reaction to the Fed’s easy money policies. Corporations are just following the Fed’s lead. If the Fed didn’t want companies to engage in this kind of reckless behavior, it could either turn off the liquidity or raise rates. Either way, the buybacks would stop. The fact that the Fed keeps juicing the system just shows that the it’s real objective is to buoy stock prices regardless of the risks involved. And there are risks too. Keep in mind, that most of the money corporations use for buybacks is borrowed, which leaves them vulnerable to fluctuations in prices. If the market suddenly goes South, then over extended investors have to sell other assets to cover their bets. That leads to firesales, plunging prices and deflation.

http://www.counterpunch.org/2014/04/01/stock-buybacks-and-margin-debt/

[westerebus]

1. And the rich just keep on getting richer.

I tried to explain to my boss that raising the minimum wage is better than stock buy backs, because it puts money into the hands of those most likely to spend it which would in turn grows the economy.

His reply was where was the money going to come from? I suppose for him the idea that a profit is a good thing and a labor cost is a bad thing is ingrained some where in the bible. As in "the poor will always be with us" which is taken out of context in the first place.

I've never found any passage that states wealth used unjustly will be rewarded.

It just defies logic.

[Crewleader]

2. You said it my friend

[BadgerKid]

3. But the Fed is already winding down the juice.

Overvalued stocks are likely to drop substantially in the face of interest rate hikes, which are due about mid-2015.