Corporate share repurchases
have turned out to be a great mechanism for converting Federal Reserve easing
into higher consumer spending. Just allow public
companies to borrow really cheaply and one of the things they do with the
resulting found money is repurchase their stock. This pushes up equity prices,
making investors feel richer and more willing to splurge on the kinds of
frivolous stuff (new cars, big houses, extravagant vacations) that produce
rising GDP numbers.
For
politicians and their bureaucrats this is a win-win. But for the rest of us it’s
not, since the debts corporations take on to buy their own stock at market
peaks tend to hobble them going forward, leading eventually to bigger share
price declines than would otherwise be the case.
The ultimate loser? The
only people traditionally willing to buy in after corporations are finished
overpaying for their stock:Retail investors, of course.
Let’s
see how it’s playing out this time.
First, corporations spent
several years elevating stock prices with share repurchases. Note the near
perfect correlation between the two lines:
Now
they’re scaling back their purchases:
(Wall Street
Journal) – Companies in the S&P 500 are on pace to spend the least on
buybacks since 2012
Large
companies are repurchasing their shares at the slowest pace in five years, as
record U.S. stock indexes and an expanding economy propel more money out of
flush corporate coffers into capital spending and mergers.
Companies in
the S&P 500 are on pace to spend $500 billion this year on share buybacks,
or about $125 billion a quarter, according to data from INTL FCStone. That is
the least since 2012 and down from a quarterly average of $142 billion between
2014 and 2016.
Buyback
activity among top-rated nonfinancial debt issuers, many of which have
regularly borrowed money to finance share repurchases, declined for the third
straight quarter in the July-to-September period, according to Bank of America
Merrill Lynch. Meanwhile, mergers and acquisitions among that group of
companies had their biggest quarter of the year, analysts at the bank said.
Factors
including high stock price, historically high share valuations and uncertainty
over the future shape of the tax code mean that “companies may be less likely
to favor buybacks over other uses of cash in 2018,” analysts at Goldman Sachs
Group Inc. said in a report this week.
And
– here’s the really sad part – individual investors are taking up
the slack:
(CNBC)
– “The level of enthusiasm about the market … has been building.
We’re seeing more individuals come in,” said Liz Ann
Sonders, chief investment strategist at Charles Schwab.
Sonders said
she’s anecdotally seeing signs of more individuals putting money to work in the
stock market in the last several months, after years of skepticism and concerns
about “every variety of doom and gloom.”
She says she
is getting fewer investors asking about bubbles or about what’s the next shoe
to drop.
“I think it’s finally starting
to suck people in … emotionally, and actually it’s hard to judge why now all of
a sudden, but maybe it’s because of how persistent the move has been with so
little volatility on the upside and on the downside,” Sonders
said. “This year has been different. This kind of year pulls people in.”
Retail
brokers have been reporting an influx of accounts. Charles Schwab, in its
earnings release, said clients opened more than 100,000 new brokerage accounts
a month in the third quarter, making for a record-breaking 10-month streak of
new accounts topping 100,000. Its rival, TD Ameritrade, said on its earnings
call last month that new accounts, asset inflows and other indicators are at
the highest since the financial crisis.
What’s
frustrating about this is the repeating pattern of government
creating conditions in which smart money (that is, the guys who donate big to
political campaigns) is allowed to get in early, make huge profits, and then
hand the bag to regular people who aren’t connected or sophisticated enough to
see what’s happening. The rich, who are or will soon be shorting the hell out of this
market, get richer and the rest see their hopes for a decent (or any)
retirement dashed one more time.
And the political class wonders
why voters don’t like them anymore.