Holding up our house of cards economy.
Big reason for stock boom? Companies buying back stocks
……………Every manner of company is caught up in the buying binge, including home-improvement chains, makers of farm equipment and jet engines, airlines, sellers of soft drinks and of hard liquor alike. Not one to miss a hot trend, Apple recently authorized as much as $50 billion of buybacks.
Investors like buybacks because they suggest companies think their stock is cheap. They also help reduce the number of shares outstanding, which automatically increases earnings per share. And higher earnings per share often, though not always, lead to rising stock prices.
But buybacks are also crucial to the rally for a reason that’s not widely known. Companies are one of the few big stock purchasers nowadays. Nearly every other big player in the stock market has been selling more than they’ve been buying.
Pension funds have been selling. Local and state governments have been selling. Investment brokerages have been selling. And, yes, until recently, even Main Street investors……………….
…………….However much they spend, each dollar of buybacks appears to be having a greater effect on raising the prices of certain stocks. That’s because fewer shares are changing hands each day. On Wall Street, it’s referred to as a “drying up” of liquidity. And like in any market, a purchase or sale when fewer people are trading can push prices up and down much more……………………..
……………..Instead of getting excited, though, some on Wall Street are worried.
Gregory Milano, CEO of consultancy Fortuna Advisors, has run studies showing that companies that spend the most on buying back their own stock tend to underperform because they don’t spend enough on opening new factories, research or otherwise building their business for the long term.
Andrew Smithers, who runs a London-based investment consultancy, thinks buybacks have pushed stocks more than 40 percent higher than they’re worth. In his book “The Great Deformation,” former U.S. budget director David Stockman says Corporate America is drunk on buybacks and that they’ve helped push stocks up too far, too.
Another problem is that buybacks can give investors a false sense of strength of the true earnings power of a company. Forty percent of the increase in the earnings per share of S&P 500 companies in the past 12 months came from reducing the number of shares through buybacks, estimates Barry Knapp, chief U.S. stock strategist at Barclays Capital.
Are you invested in this? …… Hope you can get your timing right when it’s time to get out.
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